CORPORATE FINANCIAL REPORTING

IND AS 36 ImpAIrmeNt of ASSetS

Objective of Ind AS 36
• Ensure that assets are not carried at more than their recoverable amount.
• If an asset’s carrying amount exceeds its recoverable amount, recognize an impairment loss.
• Goodwill and certain intangible assets require annual impairment testing.
• The standard also covers when impairment losses should be reversed and prescribes necessary
disclosures.

Scope of Ind AS 36
This standard applies to all assets except:
• Inventories (Ind AS 2)
• Contract assets (Ind AS 115)
• Deferred tax assets (Ind AS 12)
• Employee benefit assets (Ind AS 19)
• Biological assets (Ind AS 41)
• Insurance contracts (Ind AS 104)
• Non-current assets held for sale (Ind AS 105)
• Financial assets (Ind AS 109)
Exclusions are covered under other Ind AS that already include impairment assessments. For example,
Ind AS 2 ensures inventories are measured at the lower of cost and net realizable value, making
further impairment testing unnecessary.
This standard also applies to financial assets classified as:
• Subsidiaries (Ind AS 110)
• Associates (Ind AS 28)
• Joint ventures (Ind AS 111)
For other financial assets, impairment should be accounted for under Ind AS 109.

Identifying an Asset That May Be Impaired

Criteria Details
An asset is impaired when its carrying amount exceeds its recoverable
Formula amount.
Carrying Amount > Recoverable Amount = Impairment Loss
Annual • Intangible assets with indefinite useful life.
Impairment Test • Intangible assets not yet available for use.
Required For • Goodwill acquired in business combinations.
Impairment tests can be performed at any time during the year, but they must be
done at the same time every year.
If there are indications of impairment during the year, an additional test is
Timing of the required at that time.
Impairment Test Example: If intellectual property rights (IPR) with an indefinite useful life are
tested for impairment in the first quarter of one year, the same test should be
conducted in the first quarter of the next year. However, if impairment indicators
arise in the third quarter, an additional test must be performed.

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Indications of Impairment
Sources of Information Examples
• Significant decline in market value.
• Adverse changes in technology, market, or economy.
External
• Increased market interest rates.
• Carrying amount > Market capitalization.
• Obsolescence or physical damage.
• Change in asset use.
Internal
• Worse-than-expected performance (e.g., higher costs,
lower cash flows).
Investment in Dividend exceeds the carrying amount or comprehensive income
Subsidiary/Associate of the investee.

Measurement of Recoverable Amount [Q 1, 2, 3]

Recoverable
Details
Amount
Recoverable Amount = Higher of: Fair Value less Costs of Disposal or Value in
Use
Example
The carrying value of a building in the books of Sun Ltd. as at 31st March, 2011
is ₹300 lakh. As on that date the value in use is ₹250 lakh and fair value less cost
Formula of disposal is ₹238 lakh.
Recoverable Amount: Higher of Fair Value less Costs of disposal and Value in
Use
Fair Value less costs of disposal: Rs.250 lakh
Value in Use: Rs.238 lakh
Therefore, Recoverable value will be Rs.250 lakh
• If either Fair Value or Value in Use exceeds carrying amount, no need to
When Not
calculate both.
Necessary to
• If it's not possible to make a reliable estimate of Fair Value less Costs of
Calculate Both
Disposal, the recoverable amount is determined by Value in Use alone.
Determine recoverable amount for an individual asset unless it cannot generate
CGU Context independent cash flows. If it cannot generate independent cash flows, assess the
recoverable amount of CGU it belongs to.
Suppose an entity has recently constructed a new head office building. Due to a
sudden slump in property prices, the market value of the building falls below its
carrying amount on the balance sheet. This decline in value is an indicator that
the asset might be impaired and would typically trigger an impairment review.
Example 1
However, because the head office does not generate cash flows independently, its
recoverable amount may need to be assessed as part of the Cash-Generating Unit
(CGU) it belongs to. The head office might be part of a larger CGU, such as the
company’s overall administrative or operational segment.

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Recoverable
Details
Amount
In this scenario, even though the value of the head office itself has dropped, the
CGU (including the head office) may still be performing well and generating
sufficient cash inflows. As a result, when assessing the CGU as a whole, the
entity may find that the recoverable amount of the CGU exceeds its carrying
amount, indicating that no impairment exists for the CGU.
Thus, even though the market value of the individual asset (the head office) has
fallen, it may not be necessary to recognize an impairment loss, since the CGU as
a whole shows no signs of impairment.
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.
Example 2
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
scrap value. Therefore, the entity estimates the recoverable amount of the cash-
generating unit to which the private railway belongs, i.e., the mine as a whole.
A bus company provides services under contract with a municipality that requires
minimum service on each of seven separate routes. Assets devoted to each route
and the cash flows from each route can be identified separately. One of the routes
operates at a significant loss.
Example 3 Because the entity does not have the option to curtail any one bus route, the
lowest level of identifiable cash inflows that are largely independent of the cash
inflows from other assets or groups of assets is the cash inflows generated by the
seven routes together. The cash- generating unit for each route is the bus
company as a whole.

Fair Value Less Costs of Disposal

Fair Value: Price to sell an asset or transfer a liability in an orderly transaction. (Ind AS 113)
Costs of Disposal: Incremental costs directly attributable to the disposal, excluding finance and tax
costs. Examples: Legal fees, stamp duty, removal costs, transaction costs and direct incremental costs
to bring an asset into condition for its sale. However, termination benefits (as defined in Ind AS 19)
and costs associated with reducing or reorganising a business following the disposal of an asset are
not direct incremental costs to dispose of the asset.

Example

Jupiter Ltd, a leading manufacturer of steel is having a furnace, which is carried in the balance
sheet on 31st March, 2011 at ₹250 lakh. As at that date the value in use and fair value is ₹200
lakh. The cost of disposal is ₹13 lakh.
Calculation of Impairment Loss:

Calculation of Impairment loss Rs. In lakhs

Recoverable Amount = 200
Higher of,
Fair Value less Cost of Disposal (200 -13) 187

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Or
Value in Use 200
Impairment Loss = Carrying Amount – Recoverable Amount = 250 –200 50

Value in Use [Q 4, 5, 6, 7]
Key Steps Details
Step 1:
Estimate
Include cash inflows/outflows from the asset’s use and disposal.
Future Cash
Flows
Step 2:
Apply appropriate discount rate to future cash flows.
Discount Rate
Terminal For periods beyond the forecast, calculate terminal value using the formula:
Value (Cash Flow of Final Year × (1 + Growth Rate)) ÷ (WACC − Growth Rate)
• Cash inflows from the continuing use of the asset.
Included in • Cash outflows needed to generate cash inflows.
Cash Flows • Net cash flows expected from the disposal of the asset at the end of its
useful life.
• Independent cash inflows (e.g., receivables).
• Cash flows related to obligations already recognized as liabilities.
Excluded
• Future cash inflows/outflows from uncommitted restructurings.
• Cash flows from financing activities or income tax payments.
Foreign • Cash flows should be estimated in the currency in which they will be
Currency generated.
Cash Flows: • Use an appropriate discount rate and convert using the spot exchange rate.
Saturn India Ltd is reviewing one of its business segments for impairment. The
carrying value of its net assets is 40 million. Management has produced two
computations for the value-in-use of the business segment. The first value of ₹36
million excludes the benefit to be derived from a future reorganization, but the
second value of ₹44 million includes the benefits to be derived from the future
Example reorganization. There is not an active market for the sale of the business segments.
The benefit of the future reorganization should not be taken into account in
calculating value-in- use. Therefore, the net assets of the business segment will be
impaired by Rs.4 million because the value-in-use of 36 million is lower than the
carrying value of Rs.40 million. The value-in-use can be used as the recoverable
amount as there is no active market for the sale of the business segment.

Discount Rate
Criteria Details
Pre-Tax
Reflects the time value of money and risks specific to the asset.
Rate
Derived
Weighted average cost of capital (WACC) of similar assets.
From

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Criteria Details
Adjust for specific risks, avoid double-counting risks already reflected in cash flows,
Guidelines
and ensure independence from capital structure.

Recognizing and Measuring Impairment Loss [Q 8, 9, 10, 11, 12]

Individual Asset Details
Recognition Reduce the asset’s carrying amount to its recoverable amount.
Revalued Asset Impairment loss treated as a revaluation decrease (Ind AS 16).
Depreciation Adjustment Future depreciation adjusted based on the revised carrying amount.
Deferred Tax [Q 20] Impairment affects deferred tax, as per Ind AS 12.

Goodwill and Cash-Generating Units (CGUs) [Q 13, 14, 15]

Aspect Details
A CGU is the smallest identifiable group of assets generating largely
independent cash inflows. If the recoverable amount of an individual asset
cannot be determined, assess the recoverable amount of the CGU to which the
asset belongs.
Examples:
CGU Identification
• A mining company’s private railway cannot be independently valued,
so its recoverable amount is based on the entire mine (CGU).
• A bus company with multiple routes identifies the entire operation as
a single CGU since individual routes do not generate independent
cash inflows.
Goodwill is allocated to CGUs benefiting from the synergies of a business
combination and cannot be tested independently for impairment.
Goodwill Allocation Example:
A mining company allocates goodwill across mines and smelting operations,
which benefit from shared cost savings.
Goodwill allocated to a CGU must be tested for impairment, when there is an
Impairment Testing
indication that the CGU may be impaired
- If the recoverable amount of the CGU (including goodwill) exceeds its
Impairment
carrying amount, there is no impairment.
Outcome
- If not, an impairment loss must be recognized.
If assets within a CGU (which contains goodwill) are tested for impairment,
Testing Assets
test the assets first.
Within CGU
If CGUs within a group are tested, test individual CGUs first.
If goodwill related to a CGU cannot be directly allocated to that unit, the unit
must be tested for impairment whenever there is an indication (excluding
Unallocated
goodwill from the test).
Goodwill
If the CGU includes an intangible asset with an indefinite life or one not yet
available for use, it must be tested for impairment annually.

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Aspect Details
Corporate Assets
Corporate assets (e.g., head office) do not generate independent cash inflows
and CGUs [Q 16,
and must be tested for impairment within the relevant CGU.
17]
Allocating Impairment loss is first allocated to reduce goodwill and then to other assets
Impairment Loss within the CGU. No individual asset’s carrying amount can be reduced below
for CGUs its fair value less costs of disposal, value in use, or zero.

Reversing an Impairment Loss [Q 19]

Criteria Details
Assess each reporting period for potential reversal of impairment loss
General Rule
(except goodwill).
Goodwill Impairment of goodwill cannot be reversed.
Reversal if there is a change in the estimates used to calculate recoverable
amount.
Example of Changes:
Conditions for • Change in the basis for recoverable amount (e.g., fair value vs value
Reversal in use).
• Change in the timing or amount of cash flows.
• Change in the components used to estimate fair value less costs of
disposal.
External Sources:
• Observable increase in asset value.
• Favourable changes in market, technology, economy, or legal
environment.
Indications for
• Decrease in market interest rates that increase the recoverable
Reversal
amount.
Internal Sources:
• Changes that improve how the asset is used or expected to be used.
• Better-than-expected economic performance of the asset.
• Carrying Amount Limit: The increased carrying amount from
reversal should not exceed what the asset’s carrying amount would
have been if no impairment had been recorded.
Reversal for an
• Recognition: Reversal of impairment is recognized in profit or loss
Individual Asset
unless the asset is revalued (then treated as a revaluation increase).
• Depreciation: After reversal, adjust future depreciation or
amortization to reflect the revised carrying amount.
• Allocation: Reversal of impairment for a CGU (excluding goodwill)
is allocated pro-rata to the assets of the CGU.
Reversal for a Cash-
• Limit on Increase: The carrying amount of an asset cannot be
Generating Unit
increased above the lower of:
(CGU)
1. Recoverable amount.
2. Carrying amount if no impairment had been recognized.

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Disclosure Requirements
General: Disclose impairment losses/reversals and the line items where they are recognized in
profit/loss or OCI.
Segment Reporting: Disclose impairment losses/reversals for each reportable segment (Ind AS 108).
CGUs with Significant Goodwill: Disclose the basis for recoverable amount (value in use or fair
value), key assumptions, growth rates, and discount rates used.

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Question 1 [ICMAI Material]

A Ltd. Has a machine whose original cost was ₹45,000. The accumulated depreciation on the
machine is ₹15,000. Similar machine has recently been sold in the same locality at ₹25,000
with selling expenses ₹2,000. Management determined the entity specific present value of
future cash flows of the machine as ₹28,000. Find

(a) Fair value less cost to sell

(b) Recoverable amount

(c) Impairment loss

(d) Carrying amount of the machine after impairment.

Solution

a) Fair value less cost to sell = Rs.25,000 – Rs.2,000 = Rs.23,000

b) Recoverable amount is the higher of the fair value less cost to sell and value in use i.e.
higher of Rs.23,000 and Rs.28,000 i.e. Rs.28,000
c) Impairment loss is the carrying amount before impairment less the recoverable amount
= Rs. (45,000 – 15,000) - Rs.28,000 = Rs.2,000
d) Carrying and after impairment = Rs.30,000 – Rs.2,000 = Rs.28,000 (equal to
recoverable amt.)
If the machine were revalued and there remains any revaluation profit accumulated balance as
OCI under other equity, that should be used first and then profit and loss a/c will be used to
close the impairment loss a/c.

Question 2

Mars Ltd. gives the following estimates of cash flows relating to property, plant and equipment
on 31st March, 2014. The discount rate is 15%
Year Cash Flow (₹ in lakh)
2014-2015 2,000
2015-2016 3,000
2016-2017 3,000
2017-2018 4,000
2018-2019 2,000
st
Residual Value at 31 March, 2019 500
Property, plant & equipment was purchased on 1 st April, 2011 for ₹20,000 lakh
Useful Life was - 8 Years

Residual Value estimated at the end of 8 years = ₹500 lakh

Fair value less cost to disposal = ₹10,000 lakh
Calculate impairment loss, if any on the property, plant and equipment. Also calculate the
revised carrying amount and revised depreciation of property, plant and equipment.

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Solution

a) Calculation of Carrying Amount on 31st March, 2014 (Rs. in lakh)

Particulars Amount
Original Cost on 1st April, 2011 20,000
(20,000-500) *3
8 (7,313)
Less: Depreciation
Carrying Amount 12,687

b) Calculation of Value in Use

Year Cash Flows P.V. Amount
2014-2015 2,000 .870 1,740
2015-2016 3,000 .756 2,268
2016-2017 3,000 .658 1,974
2017-2018 4,000 .572 2,288
2018-2019 (including residual value) 2,500 .497 1,243
Total 9,513

c) Calculation of Recoverable Amount

Particulars Amount
Value in Use 9,513
Fair value less costs of disposal 10,000
Recoverable Amount 10,000

d) Calculation of Impairment Loss

Carrying Amount – Recoverable Amount 12,687 – 10,000 = 2,687

e) Calculation of Revised Carrying Amount

Particulars Amount
Carrying Amount 12,687
Less: Impairment Loss (2,687)
Revised Carrying Amount 10,000

f) Calculation of Revised Depreciation

Revised Carrying Amount – Residual Value Remaining Life
10,000- 500
5 = Rs.1,900

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Question 3

Venus Ltd. has an asset, which is carried in the Balance Sheet on 31 st March, 2011 at ₹500
lakh. As at that date the value in use is ₹400 lakh and the fair value less costs to sells is ₹375
lakh.
From the above data:
(a) Calculate impairment loss.
(b) Prepare journal entries for adjustment of impairment loss.

Solution

According to Ind AS 36, Impairment of Assets, impairment loss is the excess of ‘Carrying
amount of the asset’ over ‘Recoverable Amount’.

In the present case, the impairment loss can be computed in the following manner:

Step 1: Fair value less costs to sell: Rs.375 lakh

Step 2: Value in use: Rss.400 lakh

Step 3: Recoverable amount, i.e., higher of ‘fair value less costs to sell’ & ‘value in use’. Thus,
recoverable amount is Rs.400 lakh

Step 4: Carrying amount of the asset Rs.500 lakh

Step 5: Impairment loss, i.e., excess of amount computed in step 4 over amount computed in
Step 3. Rs.100 lakh (being the difference between Rs.500 lakh and Rs.400 lakh).

According to Ind AS 36, an impairment loss should be recognized as an expense in the

statement of profit and loss immediately, unless the asset is carried at revalued amount in
accordance with another Accounting Standard. Assuming, that the asset is not carried at
revalued amount, the impairment loss of 100 lakh will be charged to Profit & Loss Account.

Journal Entries

Date Particulars Dr. Cr.

31.3.2011 Impairment Loss A/c Dr. 100

To Assets A/c 100

(Being impairment loss on an asset recognised)

31.3.2011 Statement of Profit & Loss Dr. 100

To Impairment Loss A/c

100
(Being impairment loss transferred to statement of profit and loss)

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Question 4
A Ltd. purchased a machinery of ₹100 crore on 1 st April, 2011. The machinery has a useful
life of 5 years. It has nil residual value. A Ltd. adopts straight line method of depreciation for
depreciating the machinery. Following information has been provided as on 31 st March, 2012:

Financial year Estimated future cash flows (₹ in crore)

2012-2013 15
2013-2014 30
2014-2015 40
2015-2016 10
Discount rate applicable: 10%
Fair value less costs to sell as on 31st March, 2012: ₹70 crore
Calculate the impairment loss, if any.

Solution

Value in use of the machinery as on 31st March, 2012 can be calculated as follows:

Financial Estimated cash flows (in Present value factor @ Present

year crore) 10% value
2012-2013 15 0.9091 13.64
2013-2014 30 0.8264 24.79
2014-2015 40 0.7513 30.05
2015-2016 10 0.6830 6.83
75.31
The recoverable amount of the machinery is 75.31 crore (higher of value in use of 75.31 crore
and fair value less costs to sell of 70 crore). The carrying of the machinery is 80 crores (after
providing for one year depreciation @ 20 crore). Therefore, the impairment loss of 4.69 crore
should be provided in the books. Further, the impaired carrying value of Rs.75.31 crore will
be depreciated, on a straight-line basis, over the remaining four years.

Question 5
Cash flow is ₹100, ₹200 or ₹300 with probabilities of 10%, 60% and 30%, respectively.
Calculate expected cash flows.

Solution
Cash flows Probability Expected cash flow

100 10% 10

200 60% 120

300 30% 90

Total 220

The expected cash flow is Rs.220.

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Question 6
Cash flow of ₹1,000 may be received in one year, two years or three years with probabilities
of 10%, 60% and 30%, respectively. Calculate expected cash flows assuming applicable
discount rate of 5%, 5.25% and 5.5% in year 1, 2 and 3, respectively.

Solution
Year Cash flows P.V.F. Present value Probability Expected cash flows

1 1,000 0.95238 952.38 10% 95.24

2 1,000 0.90273 902.73 60% 541.64

3 1,000 0.85161 851.61 30% 255.48

Total 892.36

The expected present value is Rs.892.36.

Question 7
On 31st March, 2011, XYZ Ltd. makes following estimate of cash flows for one of its assets
located in USA:

Year Cash Flows

2011-2012 US $ 80
2012-2013 US $ 100
2013-2014 US $ 20

Following information has been provided:

Particulars India USA

Applicable discount rate 15% 10%

Exchange rates are as follows:

As on Exchange rate
st
31 March, 2011 ₹ 45/US $

As on Expected Exchange rate

st
31 March, 2012 ₹ 48/US $
st
31 March, 2013 ₹ 51/US $
31st March, 2014 ₹ 55/US $
Calculate value in use as on 31st March, 2011.

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Solution

Year Cash flows (US $) Present value factor @ 10% Discounted cash flows (US $)

2011-2012 80 0.9091 72.73

2012-2013 100 0.8264 82.64

2013-2014 20 0.7513 15.03

Total Discounted cash flows in US $ 170.40

Exchange rate as on 31st March, 2011, i.e., date of calculating value in use 45/US $

Value in use as on 31st March, 2011 7,668

Question 8 [ICMAI Material]

An entity has a machinery on 01.04.2017 with carrying amount of ₹28,00,000 after annual
depreciation of ₹3,00,000 with remaining useful life of 9 years and residual value of ₹1,00,000.
Depreciation is charged on straight line method. In 31.03.2018 the machine is revalued at
₹29,00,000. On 31.03.2020 the machine has fair value less cost to sell ₹20,00,000 and value
in use ₹21,00,000. Show how the transactions would be reflected in the financial statements
of the entity as on 31.03.18, 31.03.19, 31.03.20 and 31.03.21.

Solution

Working Note 1:

Particulars Amount
Carrying Amount on 01.04.2017 28,00,000
Less: Depreciation during 2017-18 3,00,000
25,00,000
Add: Revaluation Profit (`29,00,000 – `25,00,000) 4,00,000
Carrying out on 31-03-2018 29,00,000
Less Depreciation during 2019-2020 = (`29,00,000 – `1,00,000)/8 3,50,000
Carrying and on 31-03-19 25,50,000
Less Depreciation during 2020-2021 3,50,000
Carrying out on 31-03-20 22,00,000
Less Impairment loss 1,00,000
(Carrying amt less recoverable amount. # = 2200000 - 2100000)
Carrying amt on 31.03.2020 21,00,000
Less Depreciation during 2020-2021 = (`21,00,000 – `1,00,000)/6 3,33,333
Carrying Amount on 31.3.21 17,66,667

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# (Recoverable amount is higher of fair value less cost to sell Rs.20,00,000 and Value-in-use
Rs.21,00,000)
*: Higher of the fair value less cost to sell and value-in-use
#: Carrying Amount — Recoverable amount when carrying amount > Recoverable amount
otherwise NIL.
$: Carrying Amount — Impairment loss.
Statement of Profit & Loss: 31.03.18 31.03.19 31.03.20 31.03.21
Depreciation (–) 3,00,000 (–) (–) (–)
3,50,000 3,50,000 3,33,333
Other comprehensive Income:
Revaluation Profit + 4,00,000
For Annual realization of revaluation Profit through
depreciation transfer from Revaluation profit to retained
earnings [Note 2]
Revaluation Profit (OCI) (–) (–) (–)
50,000 50,000 33,333
Retained Earnings + 50,000 + 50,000 + 33,333
Impairment loss charged against revaluation profits (–)
1,00,000
(Amount in Rs.)
Balance Sheet: 31.03.18 31.03.19 31.03.20 31.03.21
PPE – Machinery 29,00,000 25,50,000 21,00,000 17,66,667
Revaluation Profit under Other equity [Note 3] 4,00,000 3,50,000 2,00,000 1,66,667
Note 2: Revaluation profit subsequent transfer to P & L
31-03-19 4,00,000 ÷ 8= Rs.50,000
31-03-20 4,00,000 ÷ 8 = Rs.50,000
31-03-21 2,00,000 ÷ 6 = Rs.33,333
Note 3: Revaluation Profit under Other equity (Amount in Rs.)
Particulars Rs.
Revaluation profit (OCI) under other equity carrying amount on 31.03.18 4,00,000
Transfer to Retained Earnings (P & L) for 2018-2019 (50,000)
For 2019-2020 (50,000)
3,00,000
Less Impairment loss on 31.03.20 1,00,000
Carrying amount on 31.03.20 2,00,000
Less Transfer to P & L 33,333
Carrying amount on 31.03.20 1,66,667

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Question 9

From the following details of an asset, find out:

(a) Impairment loss and its treatment.
(b) Current year depreciation for the year end.
Particulars of assets:
Cost of asset ₹ 56 lakh
Useful life 10 years
Salvage value Nil
Carrying value at the beginning of the year ₹ 27.30 lakh
Remaining useful life 3 years
Recoverable amount at the beginning of the year ₹ 12 lakh
Upward revaluation done in last year ₹ 14 lakh

Solution

Impairment loss

Impairment loss = Carrying amount of the asset – Recoverable amount

=Rs.27.30 lakh –12 lakh =Rs.15.30 lakh

Treatment of impairment loss

As per Ind AS 36, impairment loss (whether of an individual asset of a CGU) is recognized in
the following manner:

a) Impairment loss of a revalued asset: It is recognized in other comprehensive income to

the extent that the impairment loss does not exceed the amount held in the revaluation
surplus for that same asset. The balance, if any, is recognized as an expense in the
statement of profit and loss.
b) Impairment loss of other assets: Impairment loss of any other asset should be
recognized as an expense in the statement of profit and loss.
Since, the asset in question has been revalued upwards, the impairment loss will be adjusted
first against the revaluation surplus of 14 lakh. The balance amount of 1.30 lakh will be
recognized as an expense in the profit and loss account.

Current year depreciation

Revised carrying amount (after recognizing impairment loss) 12 lakh

Remaining useful life 3 years

Salvage value Nil

Annual depreciation (12/3) 4 lakh

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Question 10
PQR Ltd. is the company which has performed well in the past but one of its major assets, an
item of equipment, suffered a significant and unexpected deterioration in performance.
Management expects to use the machine for a further four years after 31 st March 2016, but at
a reduced level. The equipment will be scrapped after four years. The financial accountant for
PQR Ltd. has produced a set of cash-flow projections for the equipment for the next four years,
ranging from optimistic to pessimistic. CFO thought that the projections were too
conservative, and he intended to use the highest figures each year. These were as follows:
₹ ʼ000
st
Year ended 31 March 2017 276
st
Year ended 31 March 2018 192
Year ended 31st March 2019 120
st
Year ended 31 March 2020 114
The above cash inflows should be assumed to occur on the last day of each financial year. The
pre-tax discount rate is 9%. The machine could have been sold at 31 st March 2016 for
₹6,00,000 and related selling expenses in this regard could have been ₹96,000. The machine
had been revalued previously, and at 31 st March 2016 an amount of ₹36,000 was held in
revaluation surplus in respect of the asset. The carrying value of the asset at 31 st March, 2016
was ₹6,60,000. The Indian government has indicated that it may compensate the company for
any loss in value of the assets up to its recoverable amount.
Calculate impairment loss, if any and revised depreciation of asset. Also suggest how
Impairment loss, if any would be set off and how compensation from government be accounted
for?

Solution
Carrying amount of asset on 31st March 2016 = Rs.6,60,000

Calculation of Value in Use:

Year ended Cash flow Discount factor @ 9% Amount

31st March, 2017 2,76,000 0.9174 2,53,202

31st March, 2018 1,92,000 0.8417 1,61,606

31st March, 2019 1,20,000 0.7722 92,664

31st March, 2020 1,14,000 0.7084 80,758

Total (Value in Use) 5,88,230

Calculation of Recoverable amount:

Particulars Amount

Value in use 5,88,230

Fair value less costs of disposal (6,00,000 – 96,000) 5,04,000

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Recoverable amount 5,88,230

(Higher of value in use and fair value less costs of disposal)

Calculation of Impairment loss:

Particulars Amount

Carrying amount 6,60,000

Less: Recoverable amount (5,88,230)

Impairment loss 71,770

Calculation of Revised carrying amount:

Particulars Amount

Carrying amount 6,60,000

Less: Impairment loss (71,770)

Revised carrying amount 5,88,230

Calculation of Revised Depreciation:

Revised carrying amount – Residual value

Remaining life = (5,88,230 - 0) / 4 = 1,47,058 per annum

Set off of Impairment loss:

The impairment loss of Rs.71,770 must first be set off against any revaluation surplus in
relation to the same asset. Therefore, the revaluation surplus of Rs.36,000 is eliminated against
impairment loss, and the remainder of the impairment loss 35,770 (Rs,71,770 –

36,000) is charged to profit and loss.

Treatment of Government compensation:

Any compensation by the government would be accounted for as such when it becomes
receivable. At this time, the government has only stated that it may reimburse the company
and therefore credit should not be taken for any potential government receipt.

Question 11
On 1 January Year 1, Entity Q purchased a machine costing ₹2,40,000 with an estimated useful
life of 20 years and an estimated zero residual value. Depreciation is computed on straight-
line basis. The asset had been re-valued on 1 January Year 3 to ₹2,50,000, but with no change
in useful life at that date. On 1 January Year 4 an impairment review showed the machine’s
recoverable amount to be ₹1,00,000 and its estimated remaining useful life to be 10 years.
Calculate:

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a) The carrying amount of the machine on 31 December Year 2 and the revaluation surplus
arising on 1 January Year 3.
b) The carrying amount of the machine on 31 December Year 3 (immediately before the
impairment).
c) The impairment loss recognised in the year to 31 December Year 4 and its treatment thereon
d) The depreciation charge in the year to 31 December Year 4.

Note: During the course of utilization of machine, the company did not opt to transfer part of
the revaluation surplus to retained earnings.

Solution

a) Calculation of Carrying amount of machine at the end of Year 2

Cost of machine 2,40,000

Accumulated depreciation for 2 years [2 years × (2,40,000 ÷ 20)] (24,000)

Carrying amount of the machine at the end of Year 2 2,16,000

b) Calculation of carrying amount of the machine on 31 December Year 3

Carrying amount at the beginning of Year 3 2,16,000

Revaluation done at the beginning of Year 3 2,50,000

Revaluation surplus 34,000

c) Calculation of Impairment loss at the end of Year 4

When machine is revalued on 1 January Year 3, depreciation is charged on the revalued
amount over its remaining expected useful life.

Valuation at 1 January (re-valued amount) 2,50,000

Accumulated depreciation in Year 3 (2,50,000 / 18) (13,889)

Carrying amount of the asset at the end of Year 3 2,36,111

On 1 January Year 4, recoverable amount of the machine 1,00,000

Impairment loss (2,36,111 – 1,00,000) 1,36,111

An impairment loss of Rs.34,000 will be taken to other comprehensive income

(reducing the revaluation surplus for the asset to zero)

The remaining impairment loss of Rs.1,02,111 (1,36,111 – 34,000) is recognized in the

Statement of Profit and Loss for the Year 4.

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d) Calculation of depreciation charge in the Year 4

Carrying value of the machine at the beginning of Year 4 1,00,000

Estimated remaining useful life 10 years

Depreciation charge is (1,00,000 / 10 years) 10,000

Question 12 [December 23]

KOEL Ltd. acquired a machine on 1st April, 2017 for 14 crores that had an estimated useful
life of 7 years. The machine is depreciated on straight line basis and does not carry any residual
value. On 1st April, 2021, the carrying value of the machine was reassessed at 10.20 crores
and the surplus arising out of the revaluation being credited to revaluation reserve. For the
year ended March 2023, conditions indicating an impairment of the machine existed and the
amount recoverable ascertained to be only 1.58 crores. The company had followed the policy
of writing down the revaluation surplus by the increased charge of deprecation resulting from
the revaluation.

You are required to calculate the loss on impairment of the machine and show how this loss is
to be treated in the books of KOEL Ltd.

Question 13 [ICMAI Material]

An entity has the following assets with relevant data on the reporting data: (₹ in Lakhs)

Assets Carrying Amount Fair value less cost to sell Value-in-use

A 280 300 250
B 460 400 390
C 220 240 270
D 180 150 170
E 100 80 --
Assets C and D were revalued before. The carrying amounts of revaluation surplus are ₹40
Lakhs and ₹30 Lakhs respectively. Asset E falls in the cash generating unit consisting of
goodwill ₹50 Lakhs and intangible asset 90. The fair value less cost to sell of the CGU is ₹
180 Lakhs and value-in-use is ₹170 Lakhs.

Determine impairment loss and revised carrying amount of all the assets stated above. Show
the accounting treatment.

Solution

Asset Recoverable Amount Impairment Loss Revised Carrying Amount

A 300 — 280
B 400 60 400
C 270 — 220
D 170 10 β 170

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CGU 180 60 180

Goodwill 50@ NIL
Intangible asset 4.74 85.26
E 5.26 94.74

Working Note:
CGU consist of: (Rs. in lakhs)
Goodwill 50
In-Tangible 90
Asset E 100
Carrying Amount 240
Recoverable Amount 180

@: First goodwill is reduced by the impairment loss of the CGU & Next other assets are
reduced.
β: Impairment Loss is charged against revaluation surplus first.

Question 14

Entity A acquires Entity B for ₹50 million, of which ₹35 million is the fair value of the
identifiable assets acquired and liabilities assumed. The acquisition of B Ltd. is to be integrated
into two of Entity A’s CGUs with the net assets being allocated as follows:
₹ in million

CGU 1 CGU 2 Total

Fair value of acquired identifiable tangible and intangible assets 25 10 35
In addition to the net assets acquired that are assigned to CGU 2, the acquiring entity expects
CGU 2 to benefit from certain synergies related to the acquisition (e.g. CGU 2 is expected to
realise higher sales of its products because of access to the acquired entity’s distribution
channels). There is no synergistic goodwill attributable to other CGUs.
Entity A allocated the purchase consideration of the acquired business to CGU 1 and CGU 2
as ₹33 million and ₹17 million respectively. Determine the allocation of goodwill to each
CGU?

Solution

If goodwill is allocated to the CGUs based on the difference between the purchase
consideration and the fair value of net assets acquired i.e. direct method, the allocation would
be as follows: (All figures are in million)
Particulars CGU 1 CGU 2 Total
Allocation of Purchase consideration 33 17 50
Less: Acquired identifiable tangible and intangible assets (25) (10) (35)
Goodwill assigned to CGUs 8 7 15

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Question 15

XYZ Limited has a cash-generating unit ‘Plant A’ as on 1st April, 2011 having a carrying
amount of ₹1,000 crore. Plant A was acquired under a business combination and goodwill of
₹200 crore was allocated to it. It is depreciated on straight line basis. Plant A has a useful life
of 10 years with no residual value. On 31st March, 2012, Plant A has a recoverable amount of
₹600 crore. Calculate the impairment loss on Plant A. Also, prescribe its allocation as per Ind
AS 36.

Solution (Rs. In crores)

Particulars Goodwill Identifiable asset Total

Historical cost 200 1,000 1,200

Depreciation (2011-2012) - (100) (100)

Carrying amount 200 900 1,100

Since, the recoverable amount is 600 crores, there is an impairment loss of 500 crore. The
impairment loss of 500 crore should be allocated to goodwill first, and then to the other
identifiable assets, i.e., 200 crores to goodwill and 300 crores to identifiable assets of Plant A.

(in crore)

Particulars Goodwill Identifiable assets Total

Impairment loss (200) (300) (500)

Carrying amount after

impairment loss - 600 600

Question 16
Earth Infra Ltd has two cash-generating units, A and B. There is no goodwill within the units’
carrying values. The carrying values of the CGUs are CGU A for ₹20 million and CGU B for
₹30 million. The company has an office building which it is using as an office headquarter
and has not been included in the above values and can be allocated to the units on the basis of
their carrying values. The office building has a carrying value of ₹10 million. The recoverable
amounts are based on value-in-use of ₹18 million for CGU A and ₹38 million for CGU B.
Determine whether the carrying values of CGU A and B are impaired.

Solution

The office building is a corporate asset which needs to be allocated to CGU A and B on a
reasonable and consistent basis:

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Particulars A B Total
Carrying value of CGUs 20 30 50
Allocation of office building 4 6 10
(office building is allocated in the ratio of Carrying value of CGU’s)

Carrying value of CGU after Allocation of corporate asset 24 36 60

Recoverable Amount 18 38 56
Impairment Loss 6 -

The impairment loss will be allocated on the basis of 4/24 against the building (Rs.1 million)
and 20/24 against the other assets (Rs.5 million).

Question 17
ABC Ltd. has three cash-generating units: A, B and C, the carrying amounts of which as on
31st March, 2011 are as follows:
(₹ in crore)
Cash-generating units Carrying amount Remaining useful life
A 500 10
B 750 20
C 1,100 20
ABC Ltd. also has two corporate assets having a remaining useful life of 20 years.

(₹ in crore)
Corporate Carrying Remarks
asset amount
X 600 The carrying amount of X can be allocated on a reasonable
basis (i.e., pro rata basis) to the individual cash-generating
units.
Y 200 The carrying amount of Y cannot be allocated on a
reasonable basis to the individual cash- generating units.

Recoverable amount as on 31st March, 2011 is as follows:

Cash-generating units Recoverable amount (₹ in crore)
A 600
B 900
C 1,400
ABC Ltd. 3.200

Calculate the impairment loss, if any. Ignore decimals.

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Solution

Allocation of corporate assets

The carrying amount of X is allocated to the carrying amount of each individual cash-
generating unit. A weighted allocation basis is used because the estimated remaining useful
life of A’s cash-generating unit is 10 years, whereas the estimated remaining useful lives of B
and C’s cash-generating units are 20 years.

(in crore)

Particulars A B C Total

Carrying amount 500 750 1,100 2,350

Useful life 10 years 20 years 20 years —

Weight based on useful life 1 2 2 —

Carrying amount (after assigning

weight) 500 1,500 2,200 4,200

Pro-rata allocation of X 12% 36% 52% 100%

(500/4,200) (1,500/4,200) (2,200/4,200)

Allocation of carrying amount of X 72 216 312 600

Carrying amount (after allocation of X) 572 966 1,412 2,950

Calculation of impairment loss

Step I: Impairment losses for individual cash-generating units and its allocation

Impairment loss of each cash-generating units

(in crore)

Particulars A B C

Carrying amount (after allocation of X) 572 966 1,412

Recoverable amount 600 900 1400

Impairment loss - 66 12

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Allocation of the impairment loss between cash-generating units and corporate asset X, on a
pro rata basis, as follows

(in crore)

Allocation to B C

X 15 (66 x 216/966) 3 (12 x 312/1,412)

Other assets in cash-

generating units 51 (66 x 750/ 966) 9 (12 x 1,100/ 1,412)

Impairment loss 66 12

Step II: Impairment losses for the larger cash-generating unit, i.e., ABC Ltd. as a whole

(in crore)

Particulars A B C X Y ABC Ltd.

Carrying amount 500 750 1,100 600 200 3,150

Impairment loss (Step I) - (51) (9) (18) - (78)

Carrying amount (after Step I) 500 699 1,091 582 200 3,072

Recoverable amount 3,200

Impairment loss for the ‘larger’ cash-generating unit Nil

Question 18
A Ltd. purchased an asset of ₹100 lakh on 1st April, 2010. It has useful life of 4 years with no
residual value. Recoverable amount of the asset is as follows:

As on Recoverable amount
st
31 March, 2011 ₹60 lakh
st
31 March, 2012 ₹40 lakh
st
31 March, 2013 ₹28 lakh
Calculate the amount of impairment loss or its reversal, if any, on 31 st March, 2011, 31st March,
2012 and 31st March, 2013.

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Solution

As on 31st March,2011

Particulars Amount
Carrying amount of the asset (opening balance) 100 lakhs
Depreciation (100 lakh /4 years) 25 lakhs
Carrying amount of the asset (closing balance) 75 lakhs
Recoverable amount (given) 60 lakhs
Therefore, an impairment loss of 15 lakh should be recognized as on 31st March, 2011.
Depreciation for subsequent years should be charged on the carrying amount of the asset (after
providing for impairment loss), i.e., 60 lakhs.

As on 31st March,2012

Particulars Amount
Carrying amount of the asset (opening balance) 60 lakhs
Depreciation (60 lakh /3 years) 20 lakhs
Carrying amount of the asset (closing balance) 40 lakhs
Therefore, no impairment loss should be recognized as on 31st March, 2012.

As on 31st March, 2013

Particulars Amount
Carrying amount of the asset (opening balance) 40 lakhs
Depreciation (40 lakh / 2 years) 20 lakhs
Carrying amount of the asset (closing balance) 20 lakhs
Recoverable amount (given) 28 lakhs
Since, the recoverable amount of the asset exceeds the carrying amount of the asset by 8 lakh,
impairment loss recognized earlier should be reversed. However, reversal of an impairment
loss should not exceed the carrying amount that would have been determined (net of
amortization or depreciation) had no impairment loss been recognized for the asset in prior
years.

Carrying amount as on 31st March, 2013 had no impairment loss being recognized would have
been Rs.25 lakh. Therefore, the reversal of an impairment loss of Rs.5 lakh should be done as
on 31st March, 2013.

Question 19 [June 24]

Y Ltd. is developing a new distribution system of its material. Following are the costs incurred
at different stages of R&D.

Year 2019-20 2020-21 2021-22 2022-23 2023-24

Phase Research Research Development Development Development
Cost (in cr.) 16 20 60 72 80

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On 31.03.2024, the company identified the level of cost savings at 32 crore p.a. expected to
be achieved by the new system over a period of five years. In addition, the system developed
can be marketed by way of consultancy which will earn additional cash flow of 20 crore p.a.
over the five-year period. The fair value net of cost of disposal is 190 crore.

Y Ltd. demonstrated that the new system met the criteria for asset recognition on 01.04.2021.
The system shall be available for use from 01.04.2024. For testing for impairment, 10%
discount factor can be taken.

Determine:

(i) The amount chargeable as expense.

(ii) The amount to be capitalized as intangible asset up to 31.03.2024.

(iii) Impairment loss to be recognized for 2023-24.

(iv) The final carrying amount of the intangible on 31.04.2024 after recognizing the
impairment loss.

[Given, PVIFA (10%, 5) = 3.79]

Question 20 (Involve concept of Ind AS 12)

Mercury Ltd. has an identifiable asset with a carrying amount of ₹1,000. Its recoverable
amount is ₹650. The tax rate is 30% and the tax base of the asset is ₹800. Impairment losses
are not deductible for tax purposes. What would be the impact of impairment loss on related
deferred tax asset / liability against the revised carrying amount of asset?

Solution

The effect of impairment loss is as follows:

Identifiable assets Impairment Identifiable assets

Particulars
before impairment loss loss after impairment loss
Carrying amount 1,000 (350) 650
Tax Base 800 - 800
Taxable (deductible) 200 (350) (150)
temporary difference
Deferred tax liability 60 (105) (45)
(asset) at 30%
In accordance with Ind AS 12, the entity recognises the deferred tax asset to the extent that it
is probable that taxable profit will be available against which the deductible temporary
difference can be utilised.

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