Transcript GENERAL CLARIFICATIONS ON AS

ACCOUNTING STANDARD 28 IMPAIRMENT OF ASSETS
AS 28 – IMPAIRMENT OF ASSETS
Objective
“ To prescribe the procedures that an enterprise applies to
ensure that its assets are carried at no more than their
recoverable amount”
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AS 28 – IMPAIRMENT OF ASSETS
Overview
 Scope and Definitions
 Accounting for Impairment
 Indicators
 Recognition & Measurement
 Goodwill & Corporate assets
 Treatment of Impairment Loss
 Reversal
 Disclosures
 High Level Comparison with IAS & US GAAP
 Matters for Discussion – Practical Challenges
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AS 28 – IMPAIRMENT OF ASSETS
Scope
 Applies to all assets other than:
• Inventories ( AS-2)
• Assets arising from construction contracts (AS-7)
• Financial Assets including Investments(AS-13)
• Deferred tax assets (AS-22)
 Asset i.e. Individual asset or Cash Generating Unit (CGU)
• May be carried at cost / revalued amount
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AS 28 – IMPAIRMENT OF ASSETS
Scope – Changes when AS-30 becomes Mandatory
 Applies to all assets other than:
• Inventories ( AS-2)
• Assets arising from construction contracts (AS-7)
• Financial Assets within the scope of AS-30
• Deferred tax assets (AS-22)
 Accounting Standard will cover:
• Investment in Subsidiaries (AS-21), Associates (AS-23)
and Joint Ventures (AS-27)
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AS 28 – IMPAIRMENT OF ASSETS
Definitions
 Carrying Amount (CA)
 Recoverable Amount (RA)
 Cash Generating Units (CGU)
 Impairment loss
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AS 28 – IMPAIRMENT OF ASSETS
Recoverable Amount (RA)
Is the higher of an asset’s :
• Net Selling Price (NSP)
OR
• Value in use.
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AS 28 – IMPAIRMENT OF ASSETS
Recoverable Amount (RA)
• Net Selling Price (NSP)
- amount obtainable in arm’s length transaction less costs
of disposal;
- asset is traded in an active market then the market
price; or
- the current bid price less costs of disposal
• Value in use.
- present value of estimated future cash flows from
continuing use and ultimate disposal
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AS 28 – IMPAIRMENT OF ASSETS
Value in Use – Cash Flow Considerations
 Pre-tax market discount rate
 Short-term projections - maximum 5 years
• based on financial budgets approved by management
• Estimation for the asset in its current condition
(restructuring & capital expenditure on the assets
ignored)
 Long term projections
• based on short term projections
• steady or declining growth
• growth rates exceeding long term average rates of the
product, industry or economy discouraged
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AS 28 – IMPAIRMENT OF ASSETS
Cash Generating Units (CGU)
 Estimate recoverable amount for
• the individual asset or, if not possible,
• the asset’s cash generating unit
 Apply cash generating unit concept when the asset does not
generate cash flows which are independent from other
assets
 The smallest identifiable group of assets that generates
cash flows from continuing use that are largely independent
from other assets or groups of assets
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AS 28 – IMPAIRMENT OF ASSETS
Cash Generating Units (CGU)(Contd.)
 Assets may be bought/sold individually but they are often
used in groups
 Revenue and cash arise from use of various assets and
cannot be attributed to the individual assets
 Factors to consider:
• How management monitors the enterprise’s operations
• How management makes decisions about continuing or
disposing of the enterprise's assets and operations
• Segment Reporting
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AS 28 – IMPAIRMENT OF ASSETS
Cash Generating Units (CGU)(Contd.)
Example : 1
A mining enterprise owns a private railway to support its
mining activities. The private railway could be sold only for
scrap value and the private railway does not generate
cash inflows from continuing use that are largely
independent of the cash inflows from the other assets of the
mine
Q: What is the cash-generating unit?
A: The cash-generating unit is mine as a whole.
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AS 28 – IMPAIRMENT OF ASSETS
Cash Generating Units (CGU)(Contd.)
Example : 2
A machine has suffered physical damage but is still
working, although not as well as it used to. The net selling
price of the machine is less than its carrying amount.
The machine does not generate independent cash inflows
from continuing use. The smallest identifiable group of
assets that includes the machine and generates cash
inflows from continuing use that are largely independent of
the cash inflows from other assets is the production line to
which the machine belongs. The recoverable amount of
the production line shows that the production line taken as a
whole is not impaired.
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AS 28 – IMPAIRMENT OF ASSETS
Cash Generating Units (CGU)(Contd.)
Example :
Case 1 (Assumption): Budgets/forecasts approved by
management reflect no commitment of management to
replace the machine.
Case 2 (Assumption): Budgets/forecasts approved by
management reflect a commitment of management to
replace the machine and sell it in the near future. Cash
flows from continuing use of the machine until its disposal are
estimated to be negligible.
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AS 28 – IMPAIRMENT OF ASSETS
Cash Generating Units (CGU)(Contd.)
Retail Store Chain
Store X belongs to a retail store chain M. Purchasing,
pricing, marketing, advertising and human resource policies
(except for hiring X’s cashiers & salesman) are decided by M.
M also owns 5 other stores in same city as X (although in
different neighbourhoods) and 20 other stores in other cities.
All stores are managed in same way as X.
What is CGU ?
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AS 28 – IMPAIRMENT OF ASSETS
Cash Generating Units (CGU)(Contd.)
Plant for Intermediate Step in a Production Process
A significant raw material used for plant Y’s final production is
an intermediate product bought from plant X of the same
enterprise. X’s products are sold to Y at a transfer price that
passes all margins to X. 80% of Y’s final production is sold
to customers outside of the RE. 60% of X’s final production
is sold to Y and the remaining 40% is sold to customers
outside of the RE.
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AS 28 – IMPAIRMENT OF ASSETS
Cash Generating Units (CGU)(Contd.)
What is the CGU:
Case 1: X could sell the products it sells to Y in an active market.
Internal transfer prices are higher than market prices.
Case 2: There is no active market for the products X sells to Y.
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AS 28 – IMPAIRMENT OF ASSETS
Cash Generating Units (CGU)(Contd.)
Magazine Titles
A publisher owns 150 magazine titles (70 purchased and 80
self created). Cash inflows from direct sales and advertising
are identifiable for each magazine title. Titles are managed
by customer segments and level of advertising income for a
magazine title depends on range of title in the customer
segment to which it belongs. Management has a policy to
abandon old titles before the end of their economic lives and
replace them immediately with new titles for same customer
segment.
What is the CGU?
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AS 28 – IMPAIRMENT OF ASSETS
Cash Generating Units (CGU)(Contd.)
Building - Rented & Own Use
A manufacturing company uses half of its headquarter
building and rents out the other half to third parties on a 5
year lease.
What is the CGU?
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AS 28 – IMPAIRMENT OF ASSETS
Accounting for Impairment
YES
Indication of
Impairment ?
Can Asset be assessed
individually ?
NO
Identify
CGU
YES
Estimate
Recoverable Amount
NO
NO
A
Recoverable Amount
< Carrying Amount?
YES
No
Impairment
Calculate, Account &
Disclose Impairment Loss
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AS 28 – IMPAIRMENT OF ASSETS
Accounting for Impairment (Contd.)
A
Estimate Recoverable
Amount of CGU
Identified
CGU
NO
Recoverable Amount
< Carrying Amount?
YES
Allocate Impairment Loss to
Goodwill
& Assets in CGU
No
Impairment
Account & Disclose
Impairment Loss
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AS 28 – IMPAIRMENT OF ASSETS
Frequency and Application of Impairment
 Frequency of Impairment Testing: at each balance sheet
date
• When an indicator is triggered
• Impairment to apply to individual assets as well as a Cash
Generating Unit (CGU)
 Specific rules for corporate assets and goodwill.
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AS 28 – IMPAIRMENT OF ASSETS
Indicators of Impairment
 External sources
• significant decline in market value
• technological, market, economic, legal environment
• changes in interest rates or rates of return
• net assets > market capitalisation
 Internal sources
• evidence of obsolescence or of physical damage
• discontinuance, disposal, restructuring plans
• asset performance declining or expected to decline
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AS 28 – IMPAIRMENT OF ASSETS
Indicators of Impairment - Example
Entity S is the biggest local supermarket chain in a developing
country.
Recently, the global chain M, has decided to set up operations
in the country. Entity M is well known world-wide, intends to
establish its shops close to entity S’s and to offer entity S’s
customers a wider range of products and international brands.
Management of entity S expects to retain most of its customer
base.
In this example, entity M’s market entry is an impairment
indicator. Management should perform impairment tests,
estimating the recoverable of its assets, based on the best
available information
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AS 28 – IMPAIRMENT OF ASSETS
Indicators of Impairment - Example
Entity Q produces mousetraps and has for some time been the
market leader. Its chief competitor, entity R, has recently
developed a new product that is widely acknowledged as being
superior to that of entity Q.
Entity Q’s management has not performed an impairment
review on its plant on the grounds that annual production and
sales are ahead of budget
Entity Q should review its plant and equipment for impairment.
The change in the market for its product can have a significant
impact on the equipment’s value based on the economic benefit
to be obtained from its continued use.
The existence of a conflicting indicator (sales ahead of budget)
is not sufficient to negate the need for an impairment review.
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AS 28 – IMPAIRMENT OF ASSETS
Indicators of Impairment - Example
An entity is in the business of manufacturing cassette tape
players. Industry forecasts indicated a decrease in demand for
the entity’s product over the next five years due to growth in
demand for competing products such as MP3 players.
Management should consider this trend in assessing
impairment. External trends as well as discrete events may
indicate that an asset is impaired.
Trends such as overcapacity in a particular industry, or a
change in the demand for a product due to technological,
market or other conditions, should be considered in assessing
impairment. Management’s ability and plans to reverse
negative trends should be considered in assessing impairment.
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AS 28 – IMPAIRMENT OF ASSETS
Recognition & Measurement of Loss
 Asset to be reduced to recoverable amount only if :
- RA < CA
 The reduction is an impairment loss = CA - RA
Impairment loss to be recognised:
•
As an expense in the P&L Account, immediately, otherwise
•
As a revaluation decrease (if carried at revalued amount)
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AS 28 – IMPAIRMENT OF ASSETS
Example 1
Value
in Use
Net
Recoverable Carrying Impairment
Selling Amount
Amount
Price
(CA1)
(RA)
(NSP)
Carrying
Amount (CA 2
– after
impairment)
900
1100
1100
1000
No
1000
900
800
900
1000
100
900
960
920
960
1000
40
960
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AS 28 – IMPAIRMENT OF ASSETS
Recognition & Measurement of Loss (Contd.)
 After the recognition of an impairment loss:
• adjust depreciation (amortization) charge for the
asset in future periods
• allocate the asset's revised carrying amount, less its
residual value (if any), on a systematic basis over its
remaining useful life.
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AS 28 – IMPAIRMENT OF ASSETS
‘Bottom-Up’ Test – Goodwill and Corporate Assets
 Perform following steps for a ‘bottom-up’ test:
 Identify if goodwill or corporate asset can be allocated on a
reasonable & consistent basis to the CGU under review
 Compare RA of cash generating unit (CGU) to its
CA(including goodwill or corporate asset) and recognise
impairment loss.
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AS 28 – IMPAIRMENT OF ASSETS
Example
An enterprise called ER is a wholly owned subsidiary and has 3 divisions (CGU) A, B and C.
There are indications that B is impaired and ER has estimated its recoverable amount to be
Rs. 230cr. The value of ER has been estimated, by the ultimate holding company, to be Rs.
1,380cr. The goodwill held in the group accounts in respect of ER can be allocated on a
reasonable and consistent basis.
Cash generating unit
Net assets directly involved in the
activities in the unit
Goodwill
A
Rs. cr.
B
Rs. cr.
C
Rs. cr.
Total
Rs. cr.
350
210
560
150
90
240
250
150
400
750
450
1,200
The goodwill has been apportioned in the ratio that the directly attributed assets bear to each
other. The carrying value that would be compared to the recoverable amount is Rs. 240cr.
Application of the “bottom-up” test
Rs. cr.
Carrying amount
240
Recoverable amount
(230)
Impairment loss
10
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AS 28 – IMPAIRMENT OF ASSETS
‘Top-Down’ Test – Goodwill and Corporate Assets
 If goodwill cannot be allocated on a reasonable basis then
perform ‘top down’ test by applying following steps:
 Identify smallest CGU that includes the CGU under
review and to which goodwill or corporate asset can be
allocated on a reasonable basis
 Then compare RA of the above CGU to its CA (including
goodwill or corporate asset) and recognise impairment
loss.
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AS 28 – IMPAIRMENT OF ASSETS
‘Top-Down’ Test – Example
Cash generating unit
A
B
Rs. cr. Rs. cr.
Net assets directly involved in the activities
of the unit
Goodwill
Step 1
Application of the “bottom-up” test
Carrying amount
Recoverable amount
Impairment loss
Step 2
Application of the “top-down” test ER
Carrying amount
Recoverable amount
Impairment loss
350
C
Rs. cr.
150
250
Total
Rs. cr.
750
450
1,200
B
Rs. cr.
150
(230)
(the next smallest CGU)
Rs. cr.
1,200
(1,380)
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AS 28 – IMPAIRMENT OF ASSETS
Impairment Loss for a Cash Generating Unit
 Order of the allocation :
• Goodwill ( if any )
• Other assets on a pro-rata basis based on the carrying
amount
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AS 28 – IMPAIRMENT OF ASSETS
Treatment of Impairment Loss for a CGU
 The carrying amount of an asset (which is part of CGU) should
not be reduced below the highest of:
(a) its net selling price (if determinable);
(b) its value in use (if determinable); and
(c) zero
Unabsorbed impairment loss allocated to other assets in
CGU.
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AS 28 – IMPAIRMENT OF ASSETS
Reversal of Impairment of Loss
 Assess each year whether accumulated impairment loss
may no longer exist or may have decreased
 Reverse if there has been a change in estimates (not
simply because of increase in PV of cash flows I.e with
passage of time)
 Increased amount not to exceed the carrying amount
that would otherwise exist if no impairment loss had been
recognised
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AS 28 – IMPAIRMENT OF ASSETS
Reversal of Impairment of Loss
 Allocate reversal for CGU’s to:
• First, pro rata to assets other than goodwill
• Second, to goodwill allocated to the CGU
• i.e., reverse order to allocation of the loss
 But, impairment losses for goodwill should not be reversed
unless:
• Loss was caused by a specific non recurring
external event, and
• Subsequent external events have occurred that
reverse the effect of that event
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AS 28 – IMPAIRMENT OF ASSETS
Disclosure
For each class of assets, the financial statements should
disclose:
(a) amount of impairment losses
(b) line item(s) of the income statement in which those
impairment losses are included
(c) amount of reversals of impairment losses
(d) line item(s) of the income statement in which those
impairment losses are reversed
(e) amount of impairment losses recognized directly against
revaluation surplus
(f) amount of reversals of impairment losses recognized
directly against revaluation surplus
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AS 28 – IMPAIRMENT OF ASSETS
Disclosure –Material Loss or Reversal
 Enterprise should disclose:
•
•
•
•
•
Events and circumstances
Amount of loss or reversal recognised
Nature of asset/CGU
Reported segment of asset/CGU
CGU – if grouping has changed, describe current and
former grouping and reasons for the change in grouping
• Recoverable amount – net selling price or value in use.
Describe basis etc
 Main classes of assets affected by impairment losses or
reversals
 Main events and circumstances that led to loss/reversal
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AS 28 – IMPAIRMENT OF ASSETS
Comparison between Indian v/s IAS v/s US GAAP
Particulars
IAS
US GAAP
Indian GAAP
Calculation of
Value in Use
Discounted
Cash Flows
Undiscounted
Cash Flows but
fair value concept
is present/
measurement
using discounted
cash flows
Similar to IAS
Reversal of
Impairment
Loss
Permitted under Prohibited
certain
circumstances
except
impairment loss
for Goodwill is
not reversed.
Similar to IAS
except
impairment of
Goodwill can
also be reversed
in certain
situations
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AS 28 – IMPAIRMENT OF ASSETS
Matters for Discussion – Practical Challenges
 Impairment Indicators
 Identification of CGU’s
 Cash Flow Estimation and review
 In present condition of the assets
 CGU will have assets with different useful lives
 Determining Net Selling Price
 Discount Rate
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THANK YOU
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