IAS 36 regulates the impairment of Non Financial Assets.
An asset is impaired when its carrying amount exceeds its recoverable amount. Paragraphs 12-14 of IAS 36 describe some indications that an impairment loss may have occurred. If any of those indications is present, an entity is required to make a FORMAL ESTIMATE OF RECOVERABLE AMOUNT. Except as described in paragraph 10, IAS 36 does not require an entity to make a formal estimate of recoverable amount if no indication of an impairment loss is present.
Paragraph 9 states that an entity shall assess at the end of each reporting period whether there is any indication that an asset may be impaired. If any such indication exists, the entity shall estimate the recoverable amount of the asset.
As stated in paragraph 12, in assessing whether there is any indication that an asset may be impaired, an entity shall consider, as a minimum, the following indications :
EXTERNAL SOURCES OF INFORMATION
- during the period, an asset’s market value has declined significantly more than would be expected as a result of the passage of time or normal use;
- significant changes with an adverse effect on the entity have taken place during the period, or will take place in the near future, in the technological, market, economic or legal environment in which the entity operates or in the market to which an asset is dedicated;
- market interest rates or other market rates of return on investments have increased during the period, and those increases are likely to affect the discount rate used in calculating an asset’s value in use and decrease the asset’s recoverable amount materially;
- the carrying amount of the net assets of the entity is more than its market capitalisation
INTERNAL SOURCES OF INFORMATION
- evidence is available of obsolescence or physical damage of an asset;
- significant changes with an adverse effect on the entity have taken place during the period, or are expected to take place in the near future, in the extent to which, or manner in which, an asset is used or is expected to be used. These changes include the asset becoming idle, plans to discontinue or restructure the operation to which an asset belongs, plans to dispose of an asset before the previously expected date, and reassessing the useful life of an asset as finite rather than indefinite;
- evidence is available from internal reporting that indicates that the economic performance of an asset is, or will be, worse than expected
DIVIDEND FROM A SUBSIDIARY, JOINTLY CONTROLLED ENTITY OR ASSOCIATE
- for an investment in a subsidiary, jointly controlled entity or associate, the investor recognises a dividend from the investment and evidence is available that :
- the carrying amount of the investment in the separate financial statements exceeds the carrying amounts in the consolidated financial statements of the investee’s net assets, including associated goodwill; or
- the dividend exceeds the total comprehensive income of the subsidiary, jointly controlled entity or associate in the period the dividend is declared.
Further, paragraph 13 states that the list in paragraph 12 is not exhaustive. An entity may identify other indications that an asset may be impaired and these would also require the entity to determine the asset’s recoverable amount or, in the case of goodwill, perform an impairment test in accordance with paragraph 80-99 of IAS 36.
Evidence from internal reporting that indicates that an asset may be impaired, as stated within paragraph 14, includes the existence of :
- cash flows for acquiring the asset, or subsequent cash needs for operating or maintaining it, that are significantly higher than those originally budgeted;
- actual net cash flows or operating profit or loss flowing from the asset that are significantly worse than those budgeted;
- a significant decline in budgeted net cash flows or operating profit, or a significant increase in budgeted loss, flowing from the asset; or
- operating losses or net cash outflows for the asset, when current period amounts are aggregated with budgeted amounts for the future
As indicated in paragraph 10, IAS 36 requires an intangible asset with an indefinite useful life or not yet available for use and goodwill to be tested for impairment, at least annually (HRD).