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Subject: Fundamentals of Accounting

Topic: AS:28-Accounting
for Impairment losses

Scope of Learning :
 Concept & applicability
 Internal & External Indicators of Impairment
 Impairment Vs. Depreciation
 Few terminologies
 Measurement of Impairment losses

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Concept of Impairment
 AS-28 came into effect in respect of accounting period commenced on or after 1-4-2004 and is mandatory in nature from
that date.
 This standard prescribes the procedures to be applied to ensure that the assets of an enterprise are carried at an amount
not exceeding their recoverable amount (amount to be recovered through use or sale of the asset).
 An enterprise is required to assess at each balance sheet date whether there is an indication that an enterprise’s assets
may be impaired.
 If such an indication exists, the enterprise is required to estimate the recoverable amount and the impairment loss, if
any, should be recognized in the profit and loss account.
 The standard also lays down principles for reversal of impairment losses and prescribes certain disclosures in respect of
impaired assets.
 There are chances that the provision on account of impairment losses may increase sickness of companies and potentially
sick companies may actually become sick.
 Applicability:
 Enterprises whose equity or debt securities are listed on a recognized stock exchange in India, and enterprises that are in
the process of issuing equity or debt securities that will be listed on a recognized stock exchange in India as evidenced by the
board of directors’ resolution in this regard.
 All other commercial, industrial and business reporting enterprises, whose turnover for the accounting period exceeds
Rs.50 crores.
 In respect of all other enterprises, the Accounting Standard came into effect in respect of accounting periods commenced
on or after 1-4-2005 and is mandatory in nature from that date.
 The standard should be applied in accounting for impairment of all assets except-
Inventories (AS 2); Assets arising under construction contracts (AS 7); Financial assets including investments covered under
(AS 13); Deferred tax assets (AS 22).

Indicators of Impairment

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Impairment Vs. Depreciation

Few terminologies regarding Impairment

 An Impairment Loss=> [Carrying amount of an Asset - its Recoverable Amount]
 Recoverable amount=> is the higher of an asset’s Net Selling Price(NSP) and it’s value in use(VIU).
 Net Selling Price=> the amount obtainable from the sale of an asset in an arm’s length transaction between
knowledgeable, willing parties, less the costs of disposal.
 Costs of Disposal=> incremental costs directly attributable to the disposal of an asset, excluding finance costs
and income tax expense.
 Value In Use=> the present value of estimated future cash flows expected to arise from the continuing use of
an asset and from its disposal at the end of its useful life.
Estimating the future cash inflows and outflows arising from continuing use of the asset and from its ultimate
disposal and
Applying the appropriate discount rate to these future cash flows.
 Carrying Amount=> the amount at which an asset is recognized in the balance sheet after deducting any
accumulated depreciation (amortisation) and accumulated impairment losses thereon.
 Depreciation (Amortisation)=> systematic allocation of the depreciable amount of an asset over its useful life.
 Depreciable amount=> [cost of an asset (amount substituted for cost in the financial statements) - Residual
value]
 Residual value=> an asset is the estimated amount that an enterprise would currently obtain from disposal
of the asset, after deducting the estimated costs of disposal.
 Useful life => either/or-
• The period of time over which an asset is expected to be used by the enterprise
• The number of production or similar units expected to be obtained from the asset by the enterprise

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Few terminologies regarding Impairment

 Situation-I
If there is no reason to believe that an asset’s value in use(VIU) > its net selling price(NSP), the asset’s
recoverable amount may be taken to be its net selling price. => for asset that is held for disposal.
 Otherwise, if it is not possible to determine the selling price=> value in use of assets (recoverable amount)
 It is not always necessary to determine both an asset’s net selling price and its value in use.
 E.g. if either of VIU & NSP > asset’s Carrying Amount=> not impaired and it is not necessary to estimate the
other amount.
 It may be possible to determine NSP , even if an asset is not traded in an active market.
 However, sometimes it will not be possible to determine NSP => no basis for making a reliable estimate of the
amount obtainable from the sale of the asset in an arm’s length transaction between knowledgeable and willing
parties.
 In this case, the Recoverable Amount of the asset => Value In Use.
 Situation-II
 Recoverable amount is determined for an individual asset, unless the asset does not generate cash inflows from
continuing use that are largely independent of those from other assets or groups of assets.
 If this is the case, Recoverable amount is determined for the cash-generating unit to which the asset belongs,
unless either:
• The asset’s Net Selling Price is higher than its Carrying Amount; or
• The asset’s Value In Use can be estimated to be close to its Net Selling Price and Net Selling Price can be
determined.

Recognition and Measurement of an Impairment Loss

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Case-Study on Impairment of loss

A company operates a mine in a country where legislation requires that the owner must restore the site on
completion of its mining operations. The cost of restoration includes the replacement of the overburden, which must
be removed before mining operations commence. A provision for the costs to replace the overburden was
recognized as soon as the overburden was removed. The amount provided was recognized as part of the cost of
the mine and is being depreciated over the mine’s useful life.

The Carrying Amount of the provision for restoration costs is Rs. 50,00,000, which is equal to the present
value of the restoration costs. The enterprise is testing the mine for impairment. The cash-generating unit for the
mine is the mine as a whole. The enterprise has received various offers to buy the mine at a price of around
Rs.80,00,000; this price encompasses the fact that the buyer will take over the obligation to restore the
overburden. Disposal costs for the mine are negligible. The Value In Use of the mine is
approximately Rs. 1,20,00,000 excluding restoration costs. The Carrying Amount of the mine is Rs. 1,00,00,000.

The Net Selling Price for the cash-generating unit is Rs. 80,00,000. This amount considers restoration costs that
have already been provided for. As a consequence, the Value In Use for the cash-generating unit is determined
after consideration of the restoration costs and is estimated to be Rs.70,00,000 (Rs.1,20,00,000 less Rs.
50,00,000). The Carrying Amount of the cash-generating unit is Rs. 50,00,000, which is the Carrying Amount of
the mine (Rs. 1,00,00,000) less the Carrying Amount of the provision for restoration costs (Rs. 50,00,000).

X Ltd. purchased a Property, PlantCase-Study on

and Equipment four Impairment
years ofand
ago for Rs. 150 lakhs loss
depreciates it at 10% p.a. on straight
line method. At the end of the fourth year, it has revalued the asset at Rs. 75 lakhs and has written off the loss on
revaluation to the profit and loss account. However, on the date of revaluation, the market price is Rs. 67.50 lakhs and
expected disposal costs are Rs. 3 lakhs.
What will be the treatment in respect of impairment loss on the basis that fair value for revaluation purpose is
determined by market value and the value in use is estimated at Rs. 60 lakhs ?

 Solution:-
 Treatment of Impairment Loss
As per para 57 of AS 28 “Impairment of Assets-
 If the Recoverable Amount (higher of Net Selling Price(i.e. 64.50 Lakh and its Value In Use 60 Lakhs) of an asset > Carrying
Amount (Rs.75 Lakh, the Carrying Amount of the asset should be reduced to its Recoverable Amount.

 In the given case, Net Selling Price is Rs. 64.50 lakhs (Rs. 67.50 lakhs – Rs. 3 lakhs) and Value In Use is Rs. 60 lakhs.
Therefore, Recoverable Amount will be Rs. 64.50 lakhs.

 Impairment Loss= Rs. 10.50 lakhs [ Rs. 75 lakhs (Carrying Amount) after revaluation Less Rs. 64.50 lakhs (Recoverable
Amount)].

 Thus Impairment loss of Rs. 10.50 lakhs [ Rs. 75 lakhs – 64.50 Lakhs] (recognized as an expense)=> STATEMENT OF PROFIT
AND LOSS
(since there was downward revaluation of asset which was already charged to Statement of Profit and Loss)

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Case-Study on Impairment of loss

Working Note:
Calculation of carrying amount of the Property, Plant and Equipment at the end of the fourth year on
revaluation

(` in lakhs)
Purchase price of a Property, Plant and 150.00
Equipment
Less: Depreciation for four years [(150 lakhs / (60.00)
10 years) x 4years]
Carrying value at the end of fourth year 90.00
Less: Downward revaluation charged to profit (15.00)
and loss account
Revalued Carrying Amount 75.00