IAS 36 Impairment of Assets Explained (FR)

IAS 36 Impairment of Assets Explained (FR)

IAS 36 Impairment of Assets is an accounting standard that ensures a company's assets are not carried at more than their recoverable amount. The recoverable amount is the higher of an asset's fair value less costs of disposal and its value in use. If the carrying amount exceeds the recoverable amount, the asset is impaired.

Why this actually matters

When you're juggling a full-time job and studying, you need to know what to focus on. IAS 36 is frequently tested, and getting it wrong means losing easy marks. This guide gives you a reliable method to identify impairment, calculate the loss, and present the answer exactly as an examiner expects.

Structured breakdown

Understanding IAS 36 involves a clear, logical process. Here is the structure to follow every time you face an impairment question:

• Objective of IAS 36: The core principle is to ensure that assets are not overstated on the statement of financial position. An asset is impaired when its carrying amount is greater than its recoverable amount.
• Impairment Indicators: You don't test every asset every year. First, you look for a reason to test. Indicators can be external (e.g., fall in market value, negative economic changes) or internal (e.g., physical damage, obsolescence, evidence the asset is underperforming).
• Recoverable Amount: This is the key calculation. It is the higher of an asset's:

1. Fair Value less Costs of Disposal (FVLCD): The price in an orderly transaction, minus the direct costs to sell it (like legal fees or delivery costs).
2. Value in Use (VIU): The present value of the future net cash flows expected to be derived from the asset, including its eventual disposal.

• Calculating the Impairment Loss: The calculation is straightforward once you have the figures: Impairment Loss = Carrying Amount - Recoverable Amount.
• Accounting for the Impairment:
  • For an asset carried under the cost model, the impairment loss is recognised immediately in profit or loss.
• For an asset carried under the revaluation model (per IAS 16), the impairment is first treated as a revaluation decrease. Any loss exceeding the revaluation surplus for that specific asset is then recognised in profit or loss.
• Cash-Generating Units (CGUs): Sometimes it's impossible to identify the cash flows for a single asset. In this case, you assess impairment for the smallest group of assets that generates independent cash flows, known as a Cash-Generating Unit.
• Reversal of an Impairment Loss: If the recoverable amount of an asset later increases, the previous impairment loss can be reversed. The reversal is limited, ensuring the new carrying amount does not exceed what it would have been if the original impairment had never been recognised.

Worked example

A company has an asset with a carrying amount of $100,000 at 31 December 20X4. Following a significant downturn in the market for the products made using this machine, management has conducted an impairment review.

• Fair Value: It is estimated the asset could be sold for $75,000.
• Costs of Disposal: Legal fees and removal costs would amount to $2,000.
• Future Cash Flows: The asset is expected to generate net cash inflows of $30,000 per year for the next 3 years.
• Discount Rate: The appropriate discount rate is 10%.

Required: Calculate the impairment loss, if any, and state the journal entry to record it.

Step 1: Determine the Carrying Amount

• Carrying Amount = $100,000 (given)

Step 2: Calculate Fair Value less Costs of Disposal (FVLCD)

• FVLCD = Fair Value - Costs of Disposal
• FVLCD = $75,000 - $2,000 = $73,000

Step 3: Calculate Value in Use (VIU)

• VIU is the present value of future cash flows.
• Year 1: $30,000 / (1.10)^1 = $27,273
• Year 2: $30,000 / (1.10)^2 = $24,793
• Year 3: $30,000 / (1.10)^3 = $22,539
• Total VIU = $27,273 + $24,793 + $22,539 = $74,605

Step 4: Determine the Recoverable Amount

• Recoverable Amount is the higher of FVLCD and VIU.
• Higher of $73,000 and $74,605 is $74,605.

Step 5: Calculate the Impairment Loss

• Impairment Loss = Carrying Amount - Recoverable Amount
• Impairment Loss = $100,000 - $74,605 = $25,395

Answer The impairment loss is $25,395.

The new carrying amount of the asset will be $74,605.

Journal Entry

• Dr Impairment Loss (Profit or Loss) $25,395
• Cr Accumulated Impairment (or Accumulated Depreciation) $25,395

Marking Logic

• 1 mark for calculating FVLCD correctly.
• 2 marks for calculating the present value of future cash flows (VIU).
• 1 mark for correctly identifying the recoverable amount as the higher of the two.
• 1 mark for the final impairment loss calculation.
• 1 mark for the correct journal entry.

If you're working full-time

Your time is limited. Don't try to read the entire IAS 36 standard. Focus your 1-2 hour weekday session on mastering the calculation steps. Use the weekend for a slightly longer session to practice two or three exam-kit questions from start to finish. The structure is always the same: find carrying amount, find recoverable amount (the higher of VIU and FVLCD), compare them. That's it. Master the pro forma in the worked example; it is your key to efficiency.

Common mistakes

• Mixing up the recoverable amount rule: Students often incorrectly add FVLCD and VIU, or simply pick the lower one. It is always the higher of the two.
• Forgetting to deduct costs of disposal: Fair value is not the same as FVLCD. Forgetting to subtract selling costs will lead to an incorrect recoverable amount.
• Errors in discounting: Simple mistakes with the present value calculation (using the wrong number of years or wrong discount factor) are common under exam pressure.
• Ignoring impairment indicators: Not mentioning why an impairment review is needed. In a scenario question, you must identify the trigger (e.g., damaged asset, new competition).
• Incorrectly booking the loss: Forgetting to debit Profit or Loss (for an asset at cost) or failing to check for a revaluation surplus first (for a revalued asset).
• Confusing a CGU with a single asset: Applying single-asset rules to a CGU scenario, especially when allocating the impairment loss.
• Botching the reversal calculation: Increasing the asset's value beyond what its depreciated carrying amount would have been without any impairment.

How examiners think

Examiners want to see if you can apply the rule methodically. They are not trying to trick you with complex numbers. The marks are in the structure.

• What scores marks: Laying out your answer clearly, just like the worked example. Have subheadings for FVLCD, VIU, and Recoverable Amount. Show your workings for the present value calculation. A final, clearly stated impairment loss figure is essential.
• What doesn't score marks: Long paragraphs of text explaining the theory of impairment. Examiners know the theory; they want to see if you can do the calculation. Don't write out the definition of VIU. Calculate it.
• Easy marks: Stating the rule for recoverable amount ("the higher of...") and showing the comparison of the two numbers is a simple, guaranteed mark.
• Professional presentation: Quoting "IAS 36 Impairment of Assets" shows you know the relevant standard. The journal entry is another easy professional mark.

FAQ

Calm summary

To pass questions on IAS 36, you do not need to be a theoretical expert. You need a reliable, repeatable calculation method.

This week, take these concrete steps:

1. Memorise the pro forma: Write down the worked example structure on a flashcard: Carrying Amount, FVLCD, VIU, Recoverable Amount, Impairment Loss. Look at it before each study session.
2. Practice the VIU calculation: Find three questions and only do the present value table. This isolates the most common area for error.
3. Explain it back: Verbally explain to someone (or yourself) the difference between FVLCD and VIU, and how to choose the recoverable amount. This will cement the core rule.

Focus on the process, not just the answer. This builds the certainty you need to perform under pressure.