Issues in Accounting Practices

IAS 36 Impairment of Assets

Submitted to : Sir Zaheer Swati

Submitted by : Shahnaz
COMSATS ABBOTTABAD
• Objective of IAS 36
• To ensure that assets are carried at no more
than their recoverable amount and to define
how recoverable amount is determined.
• Impairment loss
Amount by which carrying amount of an asset or cash generating
unit exceeds its recoverable amount.

• Carrying amount
The amount at which as asset is recognized after deducting any
accumulated deprecation and accumulated impairment losses
thereon.
Book value OR value displayed in balance sheet.
Recoverable amount
The amount which is expected to be recovered by use or sale of the asset, whichever
is higher.

• The recoverable amount of an asset is the greater of the two calculations shown
below:
• Recoverable Amount = Fair Value - Cost of Disposal
• Recoverable Amount = Value in Use

Fair value less costs to sell

Fair value is the price that would be received to sell an asset.
Costs to sell would include legal costs to selling and direct incremental costs e.g. costs
which would necessarily be incurred if the asset is sold
• Example: Company A
• Building purchased = $ 2 million ; using straight line deprecation
• Estimated life = 20 years
• Used years by building = 5 years
• Selling cost of building = $ 1 million
• Cost incurred = $ 50,000 or $ 0.05 million
• PV of net cash flows the building = $ 1.2 million ( alternatively )

• The basic rule is to recognize impairment if carrying amount exceeds the

recoverable amount.

• The building has a cost of $2 million, useful life of 20 years and is used for 5 years. The
accumulated depreciation is $2/20*5 or 0.5 million
• Carrying amount = building purchased – accumulated depreciation
• = 2 M – 0.5 M
• = $ 1.5 M
• Recoverable amount is the higher of fair value less costs to sell and value in use.
• Fair value less costs to sell = $1 million - $0.05 million
• = $0.95 million.
• OR
• Value in use is the present value of future cash flows = $1.2 million.

• Carrying amount is $1.5 million while recoverable amount is $1.2 million. An

impairment loss of $0.3 million is to be recognized. The journal entry would be:

Impairment loss 300,000

Accumulated impairment
loss 300,000
• Impairment loss

Carrying Recoverable Impairment

amount amount loss

• Indicators of Impairments

External Internal Impairment

factors factors loss
• External Factors • Internal Factors

• Significant decline in market • Physical damage of obsolescence

value of the asset of the asset.

• Changes in technological • Significant changes have taken

environment place or are likely to take place
which have an adverse affect on
• Changes in legal environment the entity or the manner of using
the assets.
• Cash Generating Unit ( CGU)

Capable of generating
Formed with cash flows
group of independently of
assets other CGU’s

Cash
Generating
Unit
• CGU’s examples

A bus operator acquires 4 licenses to operate buses in 4 different

routes. Of these routes, 3 are profitable routes and 1 is not
profitable route.
The government, to ensure that transport service is available at all
the routes for the public, has put a condition that all the routes
must be run together. Otherwise the bus operate cannot be
allowed to run any transport facilities.