ACCOUNTING STANDARD 28

CA. M. P. SARDA
Deloitte Haskins & Sells
MEANING
The dictionary meaning of the word to
impair is
to weaken or to damage

The phrase impairment of asset
therefore implies a damage to the value
of the asset or say decline in the value of
the asset.

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OVERVIEW
Applicability
Scope
Objective
Computation
Accounting Treatment
Disclosure
Transitional Provisions

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APPLICABILITY

LEVEL 1 ENTERPRISES

LEVEL 2 ETERPRISES
LEVEL 3 ENTERPRISES
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LEVEL I ENTERPRISES
(LARGE)

Applicable w.e.f. 01/04/2004

1. All listed enterprises
2. Enterprises under process of listing
3. Other enterprises exceeding turnover Rs.50
crores
4. Financial institution, banks, insurance co.
5. Commercial enterprises having
borrowings more than Rs. 10 crores.

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LEVEL II ENTERPRISE
(MEDIUM)

Applicable w.e.f. 01/04/2006

1. Turnover (Rs. 40 Lakhs to Rs. 50 Crores)
2. Borrowings (Rs. 1 Crore to Rs. 10 Crores)

LEVEL III ENTERPRISES
(SMALL)

Applicable w.e.f. 01/04/2008
To all remaining Enterprises
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AS-28 applies to all assets other than
following:

1. Inventories(AS-2)
2. Assets arising from construction
contract (AS-7)
3. Financial assets/Investments(AS-13)
4. Deferred tax assets(AS-22)
SCOPE
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OBJECTIVE
To identify the assets which are sick
or unhealthy.

To ensure that enterprise assets are
carried at not more than their
recoverable amount.
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INDICATIONS
FOR IMPAIRMENT
Assessment should be made at each Balance
Sheet date whether an asset is impaired on
the basis of following factors:

Internal Sources of Information
Physical damage or obsolescence of an asset
Significant changes having adverse effect on
the enterprise
Internal reporting indicating poor economic
performance of an asset

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External Sources of Information

Significant decline in the market value of an
asset due to passage of time or normal use.
Change in technology, market, economic or
legal environment in which the enterprise
operates.
Increase in Market interest rate affecting
discount rate used in calculation of value in
use.
Carrying amount of the net assets of the
enterprise is more than its market
capitalization.


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IMPAIRMENT LOSS
If carrying amount < Recoverable amount:
Asset is not impaired

If carrying amount > Recoverable amount:
Asset is impaired

Impairment Loss = Carrying Amount
Recoverable
Amount
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RECOVERABLE AMOUNT
Recoverable amount is the higher of
net selling price and its value in use.

Net selling price = The assets market
price less cost of disposal.

Value in use = Present Value of
estimated future net cash flows
arising from use of the asset and its
ultimate disposal.
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CASH GENERATING UNIT
If it is not possible to estimate cash
flow of an individual asset same is
grouped under a cash-generating unit
to which the asset belongs.

A cash generating unit is the
smallest identifiable group of assets
that generates cash inflow from
continuing use that are largely
independent of the cash inflow from
other assets or group of assets.
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EXAMPLE OF CGU
A mining enterprise owns a private railway to
support its mining activities. The private railway
could be sold only for scrap value & the private
railway does not generate cash inflows from
continuing use that are largely independent of the
cash inflows from the other assets of the mine.
It is not possible to estimate the recoverable
amount of the private railway because the value
in use of the private railway cannot be determined
& it is probably different from the scrap value.
Therefore the enterprise estimates the recoverable
amount of the CGU to which the private railway
belongs i.e. the mine as a whole.
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FUTURE CASH FLOW
Future cash flow should be based on
financial budgets/forecasts approved
by management (not more than 5
years).

Extrapolation of data may be used
beyond the period of approved budget.

Steady or declining growth rate may be
used for the purpose of extrapolation.
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COMPOSITION OF
FUTURE CASH FLOW
Future cash flow shall include:
Cash inflows from continuing use of
the asset
Cash outflows necessarily incurred to
generate the cash inflows, including
cash outflows to prepare the asset for
use
Net cash flows to be received for the
disposal of the asset
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COMPOSITION OF FUTURE
CASH FLOW (CONTD)
Future cash flow shall exclude:
Cash inflows or outflows from
financing activities
Income tax receipts or payments
Cash flow arising from future
restructuring except when the same is
committed
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DISCOUNT RATE
Weighted average cost of capital for
the enterprise.
Incremental borrowing rate for the
enterprise.
Other market borrowing rate.
Should be pretax rate.
Should reflect current market
assessments of the time value of
money and the risk specific to the
asset.
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TREATMENT OF
IMPAIRMENT LOSS
1. An impairment loss should be recognized
against the revaluation reserve, if any, and
balance, if any, as an exp. in the P/L A/c.
2. Impairment loss for a Cash Generating
Unit should be allocated in the following
order :
a) Goodwill, if any.
b) Balance, if any, to individual assets
in proportion to their carrying cost.
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TREATMENT OF
IMPAIRMENT LOSS (CONTD..)

3. After the recognition of impairment
loss the depreciation charge for the
asset should be adjusted in future
periods to allocate the revised
carrying amount, less its residual
value, on a systematic basis over its
remaining useful life

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REVERSAL OF AN
IMPAIRMENT LOSS
At any balance sheet date if management
assess that the impairment loss considered in
prior accounting periods may no longer exist
or decreased the loss may be reversed
After reversal carrying amount of individual
asset/CGU should not exceed carrying
amount if no impairment would have been
recognised in the past.
Reversal is not required if value in use
increases in subsequent year merely due to
pattern of cash flow but not due to increase in
the earning potential of the asset
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DISCLOSURE
The amount of impairment loss charged to
P/L for each class of asset;
The reversal of impairment loss considered in
P/L for each class of asset;
The amount of impairment loss adjusted
against revaluation surplus;
The reportable segment to which the asset
belongs;
The reasons for changing the Cash Generating
Unit for an asset and the description of the
earlier & the changed Cash Generating Unit;
The discount rate used in reckoning of value in
use.
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On the date this Standard becomes
mandatory, an enterprise should assess
whether there is any indication that an
asset may be impaired.

If any such indication exists, the
enterprise should determine impairment
loss, if any and recognise the loss so
determined against the opening balance
of revaluation reserve/revenue reserves.
TRANSITIONAL
PROVISIONS
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IMPACTS OF AS-28
1. Valuation of assets
No up-ward revaluation is permitted
(Only to the extant of impairment loss
recognized in earlier years)
2. Notes to Accounts
Fixed assets are valued at their
historical cost less depreciation no
more required to mention.

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CRITERIA FOR
GROUPING OF ASSETS
If an active market exists for the output
produced by an asset or group of assets, this
asset or group of assets should be identified
as a separate cash generating unit, even if
some or all the output is used internally.

When the outputs are used for captive
consumption the sale value of output in an
active market should be considered in cash
flow. Like wise value of inputs also
considered.

Common assets on a reasonable and
consistent basis.
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THANKS
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