ACCOUNTING STANDARD 28 - IMPAIRMENT OF ASSETS. Slide 2 AS 28 – IMPAIRMENT OF ASSETS Objective “ To prescribe the procedures that an enterprise applies

ACCOUNTING STANDARD 28 - IMPAIRMENT OF ASSETS

Slide 2

AS 28 – IMPAIRMENT OF ASSETSObjective

“ To prescribe the procedures that an enterprise applies to ensure that its assets are carried at no more than their recoverable amount”

Slide 3

Scope and Definitions

Accounting for Impairment

Indicators

Recognition & Measurement

Goodwill & Corporate assets

Treatment of Impairment Loss

Reversal

Disclosures

High Level Comparison with IAS & US GAAP

Matters for Discussion – Practical Challenges

AS 28 – IMPAIRMENT OF ASSETSOverview

Slide 4

Applies to all assets other than:

• Inventories ( AS-2)

• Assets arising from construction contracts (AS-7)

• Financial Assets including Investments(AS-13)

• Deferred tax assets (AS-22)

Asset i.e. Individual asset or Cash Generating Unit (CGU)

• May be carried at cost / revalued amount

AS 28 – IMPAIRMENT OF ASSETSScope

Slide 5

Applies to all assets other than:

• Inventories ( AS-2)

• Assets arising from construction contracts (AS-7)

• Financial Assets within the scope of AS-30

• Deferred tax assets (AS-22)

Accounting Standard will cover:

• Investment in Subsidiaries (AS-21), Associates (AS-23)

and Joint Ventures (AS-27)

AS 28 – IMPAIRMENT OF ASSETSScope – Changes when AS-30 becomes Mandatory

Slide 6

Carrying Amount (CA)

Recoverable Amount (RA)

Cash Generating Units (CGU)

Impairment loss

AS 28 – IMPAIRMENT OF ASSETSDefinitions

Slide 7

Is the higher of an asset’s :

• Net Selling Price (NSP)

OR

• Value in use.

AS 28 – IMPAIRMENT OF ASSETSRecoverable Amount (RA)

Slide 8

• Net Selling Price (NSP)

- amount obtainable in arm’s length transaction less costs of disposal;

- asset is traded in an active market then the market price; or

- the current bid price less costs of disposal

• Value in use.

- present value of estimated future cash flows from continuing use and ultimate disposal

AS 28 – IMPAIRMENT OF ASSETSRecoverable Amount (RA)

Slide 9

Pre-tax market discount rate

Short-term projections - maximum 5 years

• based on financial budgets approved by management• Estimation for the asset in its current condition

(restructuring & capital expenditure on the assets ignored)

Long term projections

• based on short term projections

• steady or declining growth

• growth rates exceeding long term average rates of the product, industry or economy discouraged

AS 28 – IMPAIRMENT OF ASSETSValue in Use – Cash Flow Considerations

Slide 10

Estimate recoverable amount for• the individual asset or, if not possible,• the asset’s cash generating unit

Apply cash generating unit concept when the asset does not generate cash flows which are independent from other assets

The smallest identifiable group of assets that generates cash flows from continuing use that are largely independent from other assets or groups of assets

AS 28 – IMPAIRMENT OF ASSETSCash Generating Units (CGU)

Slide 11

Assets may be bought/sold individually but they are often used in groups

Revenue and cash arise from use of various assets and cannot be attributed to the individual assets

Factors to consider:• How management monitors the enterprise’s operations• How management makes decisions about continuing or

disposing of the enterprise's assets and operations• Segment Reporting

AS 28 – IMPAIRMENT OF ASSETSCash Generating Units (CGU)(Contd.)

Slide 12

Example : 1A mining enterprise owns a private railway to support its mining activities. The private railway could be sold only for scrap value and 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

Q: What is the cash-generating unit?


A: The cash-generating unit is mine as a whole.

Slide 13

Example : 2

A machine has suffered physical damage but is still working, although not as well as it used to. The net selling price of the machine is less than its carrying amount. The machine does not generate independent cash inflows from continuing use. The smallest identifiable group of assets that includes the machine and generates cash inflows from continuing use that are largely independent of the cash inflows from other assets is the production line to which the machine belongs. The recoverable amount of the production line shows that the production line taken as a whole is not impaired.


Slide 14

Example :

Case 1 (Assumption): Budgets/forecasts approved by management reflect no commitment of management to replace the machine.

Case 2 (Assumption): Budgets/forecasts approved by management reflect a commitment of management to replace the machine and sell it in the near future. Cash flows from continuing use of the machine until its disposal are estimated to be negligible.


Slide 15

Retail Store Chain

Store X belongs to a retail store chain M. Purchasing, pricing, marketing, advertising and human resource policies (except for hiring X’s cashiers & salesman) are decided by M. M also owns 5 other stores in same city as X (although in different neighbourhoods) and 20 other stores in other cities. All stores are managed in same way as X.

What is CGU ?


Slide 16

Plant for Intermediate Step in a Production Process

A significant raw material used for plant Y’s final production is

an intermediate product bought from plant X of the same

enterprise. X’s products are sold to Y at a transfer price that

passes all margins to X. 80% of Y’s final production is sold

to customers outside of the RE. 60% of X’s final production

is sold to Y and the remaining 40% is sold to customers

outside of the RE.


Slide 17

What is the CGU:

Case 1: X could sell the products it sells to Y in an active market.

Internal transfer prices are higher than market prices.

Case 2: There is no active market for the products X sells to Y.


Slide 18

Magazine Titles

A publisher owns 150 magazine titles (70 purchased and 80 self created). Cash inflows from direct sales and advertising are identifiable for each magazine title. Titles are managed by customer segments and level of advertising income for a magazine title depends on range of title in the customer segment to which it belongs. Management has a policy to abandon old titles before the end of their economic lives and replace them immediately with new titles for same customer segment.

What is the CGU?


Slide 19

Building - Rented & Own Use

A manufacturing company uses half of its headquarter building and rents out the other half to third parties on a 5 year lease.

What is the CGU?


Slide 20

Indication ofImpairment ?

Can Asset be assessed individually ?

IdentifyCGU

NoImpairment

Estimate Recoverable Amount

Recoverable Amount< Carrying Amount?

Calculate, Account &Disclose Impairment Loss

YES

YES

YES

NO

NO

NO

A

AS 28 – IMPAIRMENT OF ASSETSAccounting for Impairment

Slide 21

Identified CGU

Estimate Recoverable Amount of CGU

NoImpairment

Recoverable Amount< Carrying Amount?

Allocate Impairment Loss to Goodwill & Assets in CGU

Account & Disclose Impairment Loss

YESNO

A

AS 28 – IMPAIRMENT OF ASSETSAccounting for Impairment (Contd.)

Slide 22

Frequency of Impairment Testing: at each balance sheet date

• When an indicator is triggered

• Impairment to apply to individual assets as well as a Cash Generating Unit (CGU)

Specific rules for corporate assets and goodwill.

AS 28 – IMPAIRMENT OF ASSETSFrequency and Application of Impairment

Slide 23

External sources

• significant decline in market value

• technological, market, economic, legal environment

• changes in interest rates or rates of return

• net assets > market capitalisation Internal sources

• evidence of obsolescence or of physical damage

• discontinuance, disposal, restructuring plans

• asset performance declining or expected to decline

AS 28 – IMPAIRMENT OF ASSETSIndicators of Impairment

Slide 24

Entity S is the biggest local supermarket chain in a developing country.

Recently, the global chain M, has decided to set up operations in the country. Entity M is well known world-wide, intends to establish its shops close to entity S’s and to offer entity S’s customers a wider range of products and international brands. Management of entity S expects to retain most of its customer base.

In this example, entity M’s market entry is an impairment indicator. Management should perform impairment tests, estimating the recoverable of its assets, based on the best available information

AS 28 – IMPAIRMENT OF ASSETSIndicators of Impairment - Example

Slide 25

Entity Q produces mousetraps and has for some time been the market leader. Its chief competitor, entity R, has recently developed a new product that is widely acknowledged as being superior to that of entity Q.

Entity Q’s management has not performed an impairment review on its plant on the grounds that annual production and sales are ahead of budget

Entity Q should review its plant and equipment for impairment. The change in the market for its product can have a significant impact on the equipment’s value based on the economic benefit to be obtained from its continued use.

The existence of a conflicting indicator (sales ahead of budget) is not sufficient to negate the need for an impairment review.


Slide 26

An entity is in the business of manufacturing cassette tape players. Industry forecasts indicated a decrease in demand for the entity’s product over the next five years due to growth in demand for competing products such as MP3 players.

Management should consider this trend in assessing impairment. External trends as well as discrete events may indicate that an asset is impaired.

Trends such as overcapacity in a particular industry, or a change in the demand for a product due to technological, market or other conditions, should be considered in assessing impairment. Management’s ability and plans to reverse negative trends should be considered in assessing impairment.


Slide 27

Asset to be reduced to recoverable amount only if :

- RA < CA

The reduction is an impairment loss = CA - RA

Impairment loss to be recognised:

• As an expense in the P&L Account, immediately, otherwise

• As a revaluation decrease (if carried at revalued amount)

AS 28 – IMPAIRMENT OF ASSETSRecognition & Measurement of Loss

Slide 28

Value in Use

Net Selling Price (NSP)

Recoverable Amount

(RA)

Carrying Amount (CA1)

Impairment Carrying Amount (CA 2 – after impairment)

900 1100 1100 1000 No 1000

900 800 900 1000 100 900

960 920 960 1000 40 960

AS 28 – IMPAIRMENT OF ASSETSExample 1

Slide 29

After the recognition of an impairment loss:

• adjust depreciation (amortization) charge for the asset in future periods

• allocate the asset's revised carrying amount, less its residual value (if any), on a systematic basis over its remaining useful life.

AS 28 – IMPAIRMENT OF ASSETSRecognition & Measurement of Loss (Contd.)

Slide 30

Perform following steps for a ‘bottom-up’ test:

Identify if goodwill or corporate asset can be allocated on a

reasonable & consistent basis to the CGU under review

Compare RA of cash generating unit (CGU) to its

CA(including goodwill or corporate asset) and recognise

impairment loss.

AS 28 – IMPAIRMENT OF ASSETS‘Bottom-Up’ Test – Goodwill and Corporate Assets

Slide 31

AS 28 – IMPAIRMENT OF ASSETSExample

An enterprise called ER is a wholly owned subsidiary and has 3 divisions (CGU) A, B and C. There are indications that B is impaired and ER has estimated its recoverable amount to be Rs. 230cr. The value of ER has been estimated, by the ultimate holding company, to be Rs. 1,380cr. The goodwill held in the group accounts in respect of ER can be allocated on a reasonable and consistent basis.

Cash generating unit A B C Total Rs. cr. Rs. cr. Rs. cr. Rs. cr.

Net assets directly involved in theactivities in the unit 350 150 250 750Goodwill 210 90 150 450

560 240 400 1,200

The goodwill has been apportioned in the ratio that the directly attributed assets bear to each other. The carrying value that would be compared to the recoverable amount is Rs. 240cr. Application of the “bottom-up” test

Rs. cr.Carrying amount 240Recoverable amount (230)Impairment loss 10

Slide 32

If goodwill cannot be allocated on a reasonable basis then perform ‘top down’ test by applying following steps:

Identify smallest CGU that includes the CGU under review and to which goodwill or corporate asset can be allocated on a reasonable basis

Then compare RA of the above CGU to its CA (including goodwill or corporate asset) and recognise impairment loss.

AS 28 – IMPAIRMENT OF ASSETS‘Top-Down’ Test – Goodwill and Corporate Assets

Slide 33

Cash generating unit A B C TotalRs. cr. Rs. cr. Rs. cr. Rs. cr.

Net assets directly involved in the activities 350 150 250 750 of the unitGoodwill 450

1,200Step 1Application of the “bottom-up” test B

Rs. cr.Carrying amount 150Recoverable amount (230)Impairment loss - Step 2Application of the “top-down” test ER (the next smallest CGU)

Rs. cr.Carrying amount 1,200Recoverable amount (1,380)Impairment loss -

AS 28 – IMPAIRMENT OF ASSETS‘Top-Down’ Test – Example

Slide 34

Order of the allocation :

• Goodwill ( if any )

• Other assets on a pro-rata basis based on the carrying

amount

AS 28 – IMPAIRMENT OF ASSETSImpairment Loss for a Cash Generating Unit

Slide 35

The carrying amount of an asset (which is part of CGU) should

not be reduced below the highest of:

(a) its net selling price (if determinable);

(b) its value in use (if determinable); and

(c) zero

Unabsorbed impairment loss allocated to other assets in

CGU.

AS 28 – IMPAIRMENT OF ASSETSTreatment of Impairment Loss for a CGU

Slide 36

Assess each year whether accumulated impairment loss may no longer exist or may have decreased

Reverse if there has been a change in estimates (not simply because of increase in PV of cash flows I.e with passage of time)

Increased amount not to exceed the carrying amount that would otherwise exist if no impairment loss had been recognised

AS 28 – IMPAIRMENT OF ASSETSReversal of Impairment of Loss

Slide 37

Allocate reversal for CGU’s to:

• First, pro rata to assets other than goodwill

• Second, to goodwill allocated to the CGU

• i.e., reverse order to allocation of the loss But, impairment losses for goodwill should not be reversed

unless:

• Loss was caused by a specific non recurring external event, and

• Subsequent external events have occurred that reverse the effect of that event

AS 28 – IMPAIRMENT OF ASSETSReversal of Impairment of Loss

Slide 38

For each class of assets, the financial statements should disclose:

(a) amount of impairment losses

(b) line item(s) of the income statement in which those impairment losses are included

(c) amount of reversals of impairment losses

(d) line item(s) of the income statement in which those impairment losses are reversed

(e) amount of impairment losses recognized directly against revaluation surplus

(f) amount of reversals of impairment losses recognized directly against revaluation surplus

AS 28 – IMPAIRMENT OF ASSETSDisclosure

Slide 39

Enterprise should disclose:• Events and circumstances• Amount of loss or reversal recognised• Nature of asset/CGU• Reported segment of asset/CGU• CGU – if grouping has changed, describe current and

former grouping and reasons for the change in grouping• Recoverable amount – net selling price or value in use.

Describe basis etc Main classes of assets affected by impairment losses or

reversals Main events and circumstances that led to loss/reversal

AS 28 – IMPAIRMENT OF ASSETSDisclosure –Material Loss or Reversal

Slide 40

AS 28 – IMPAIRMENT OF ASSETSComparison between Indian v/s IAS v/s US GAAP

Particulars IAS US GAAP Indian GAAP

Calculation of Value in Use

Discounted Cash Flows

Undiscounted Cash Flows but fair value concept is present/ measurement using discounted cash flows

Similar to IAS

Reversal of Impairment Loss

Permitted under certain circumstances except impairment loss for Goodwill is not reversed.

Prohibited Similar to IAS except impairment of Goodwill can also be reversed in certain situations

Slide 41

Impairment Indicators

Identification of CGU’s

Cash Flow Estimation and review In present condition of the assets CGU will have assets with different useful lives

Determining Net Selling Price

Discount Rate

AS 28 – IMPAIRMENT OF ASSETSMatters for Discussion – Practical Challenges

Slide 42

THANK YOU

Documents

ACCOUNTING STANDARD 28 - IMPAIRMENT OF ASSETS. Slide 2 AS 28 – IMPAIRMENT OF ASSETS Objective “ To prescribe the procedures that an enterprise applies