Non-current assets are usually measured in the financial statements at cost or a revalued amount, which is depreciated over the asset’s useful economic life.
Sometimes the carrying amount of the non-current asset is not the same as the recoverable amount of these assets.
Under IAS 36 – Impairment of Assets, assets should be carried (or recorded) in the financial statements at no more than their recoverable amount.
Now when I say the recoverable amount of an asset, this is defined as the higher of its:
- fair value minus costs of disposal, and
- value in use.
Fair Value Minus Costs of Disposal
An asset’s fair value less costs of disposal is the amount obtainable from the sale of an asset in an arm’s length transaction between knowledgeable, willing parties, less the costs of disposal.
Value In Use
Value in use is the present value of future cash flows from using an asset, including its eventual disposal.
In the case where the recoverable amount is greater than the carrying amount, there is no consequence
Recoverable Amount > Carrying Amount
But where the carrying amount is greater than the recoverable amount, the entity has an impairment in relation to that asset.
Carrying Amount > Recoverable Amount
So how should this impairment be accounted for?
IAS 36 – Impairment of Assets seeks to
- prescribe procedures an entity applies to ensure assets are carried at no more than the recoverable amount
- specified how to measure the recoverable amount
- specifies when an entity should reverse an impairment loss, and
- prescribes disclosures.
Exclusions to Impairment of Assets
IAS 36 Impairment of Assets applies to all assets, with the exception of:
- inventories (IAS 2 – Inventories)
- construction contracts (IAS 11 – Construction Contracts)
- deferred tax assets (IAS 12 – Income Taxes)
- assets arising from employee benefits (IAS 19 – Employee Benefits)
- investment property held at fair value (IAS 40 – Investment Property)
- non-current assets classified as held for sale (IFRS 5 – Non-current assets held for sale and discontinued operations).
Assets – Individual and cash generating units
When we look at IAS 36 – Impairment, we refer to impairment of assets and cash generating units intermittently.
If an entity cannot identify the recoverable amount for a specific asset, it may be able to pool assets together into cash generating units, and assess the recoverable amount at that level instead.
A cash-generating unit is the smallest identifiable group of assets that generates cash inflows largely independent from the cash inflows from other assets or group of assets.
Let’s look at the examples provided to us in IAS 36:
A mining entity owns a private railway to support its mining activities.
The private railway could be sold only for scrap value and it does not generate cash inflows that are largely independent of the cash inflows from the other assets of the mine.
It is not possible to estimate the recoverable amount of the private railway because its value in use cannot be determined and is probably different from the scrap value.
Therefore, the entity estimates the recoverable amount of the cash-generating unit to which the private railway belongs, ie the mine as a whole.