The standard IAS 36 – Impairment of Assets ensures that the assets of the organization are carried not at their carrying value or historical cost as they should be valued at their respective recoverable value which is the amount that can be obtained if the asset is sold in the existing condition. The recoverable value is the higher of the value in use and fair value less cost to sell. The difference between the carrying amount and the recoverable value is termed as impairment which is charged as an expense in the financial statements as well as deducted from the value of asset to ensure the value stands at the recoverable value.
The standard got initiated with the exposure draft in May 1997 and finally got reviewed over the aspect of goodwill and intangible assets which were addressed thus leading to the reissue of the standard in March 2004 with perspective allotment over the period starting on or after 31 March 2004.
The scope of IAS 36 implies that it is not applicable to all classes of transactions as there are certain exceptions where it should not be confused with the other applicable standards. The first asset to which the application of IAS 36 is out of the scope is the treatment of inventory which is to be treated and complied according to the IAS 2 Inventory. The contractual-based transactions should be treated as per the IAS 11 which has been updated to the IFRS 5. Other assets excluded from the scope of IAS 36 are deferred tax assets, assets held for sale, investment property, employee benefits, insurance contracts and agricultural products.
The impairment loss is also applicable to the cash generating units (CGUs) where the carrying value of a particular CGU is contrasted to the recoverable value and thus the impairment is then charged first to the obvious impaired assets, then goodwill and lastly to all other assets on pro-rata basis. The carrying amount is the value of the asset after the deduction of the accumulated depreciation, accumulated losses from the cost figure.
The fair value of the asset is derived from the active market that would be received by selling the asset or paid for transferring the liability between the market participants at a particular measurement date. The value in use is the discounted cash-flows at present value expected to be derived from an asset or a cash-generating unit (CGU).
The assessment of the impairment test is essential to be performed by the entity at the end of every accounting year to ensure that the assets are recorded at their real terms value with the assessment based on the grounds of internal or external factors. The internal factors can include obsolescence, physical damage and idle asset, worsen economic conditions, restructuring issues whereas the external factors comprise of market value diminishing, change in technology, laws or markets, increased interest rates and market capitalization lower in value.
Reversal of impairment and appropriate disclosures should also be applied over the guidelines provided by IAS 36.