As per IAS 36, the impairment amount of an asset is ascertained in comparison to the value carried on the entity’s books. If the entity tests for, and does not find, impairment, then the periodic impairment test must be true. Conversely, losses for impairment have to be recognised in accordance with the rules of IAS 36, where the recoverable amount unduly exceeds the carrying amount. As such, they should provide an accurate picture of the firm’s financial health. Accordingly, impairment testing will include the evaluation of applicable indicators of impairment, recoverable amounts, and recognization of impairment losses and reversals. It also identifies disclosure management under IAS 36 that are applicable to the whole entity engaged in the preparation of the financial statements. In addition, it outlines specific disclosure requirements under IAS 36 that apply to any entity involved in preparing its financial statements.
IAS 36 Impairment of Assets
IAS 36 Impairment of Assets prescribes the criteria for recognition and measurement of impairment of an asset. “It prohibits booking an eye-popping asset on a balance sheet. The company is required to perform an impairment test as per IAS 36 to identify whether there is the loss of value even if the asset’s impairment indicators show that the value of the asset is going down.
Identify and Measure Losses
According to IAS 36, on the event of excess carrying amount over recoverable amount of an asset, a company will identify its impairment loss. Under IAS 36, the recoverable amount is the higher of value in use and fair value less costs of disposal.
- Value In Use: The discounted value of an asset’s anticipated future cash flows.
- Fair Value Less Costs of Disposal: The amount that would be obtained, less the costs of disposal, from the asset in an orderly transaction between market participants at the measurement date.
The loss is recognized in the profit and loss statement. If the impairment concerns an asset evaluated, the loss is accounted against any surplus on the revaluation.
When to Use IAS 36 | Indications of Impairment
An entity should, at each reporting date, look to its assets to ascertain if there are indicators of impairment. External or internal, indicators may come in any one of several forms.
External Indicators
A drastic drop in an asset’s monetary market value.
Legal or economic environment changes.
A rise in market interest rates.
Internal Indicators
- Asset Destruction or Physical Asset Obsolescence
- Poor performance of the asset.
- Restructuring that is planned to affect the asset’s scope of use.
If any of these indicators exist, the entity shall test for impairment by IAS 36.
IAS 36 Impairment Test
The IAS 36 impairment test seeks to determine if the carrying amount of an asset differs from its recoverable amount, and when so, an impairment loss must be booked. The company should follow this approach in a manner that is like a self-governing procedure.
Identifying The Cash-Generating Unit
The IAS 36 cash-generating unit (CGU) test includes the asset, where cash flows are not generated independently. A CGU is the smallest identifiable group of assets that generates cash flows independently. This means assigning goodwill and corporate assets to CGUs before impairment testing.
Estimation of Recoverable Amount
Recoverable amount: more significant between the value in use and the fair value less costs of disposal of an asset.
| Component | Definition | Calculation Basis |
| Value in Use | Future cash flows are discounted to present value. | Net cash flows are projected over the asset’s useful life. |
| Fair Value Less Costs of Disposal | Price an asset can fetch minus selling costs. | Market-based valuation or recent transaction price. |
Impairment loss is recognized under IAS 36 when the recoverable amount is less than the carrying amount.
IAS 36 Goodwill Impairment
Goodwill impairment testing rules under IAS 36 state that impairment must be tested at least annually regardless of whether any signs of impairment exist. Goodwill is allocated to significant cash-generating units that benefit from the business combination. If the recoverable amount of an individual cash-generating unit is less than its carrying amount, then goodwill is the first to be impaired. If this loss exceeds goodwill, the other assets in that cash-generating unit will be impaired pro-rata.
IAS 36 Reversal of Impairments Provisions and Procedure
IAS 36 permits the subsequent reversal of impairment in cases where the conditions have been measurably improved, although impairment of goodwill may never be reversed.
When Can an Impairment Be Reversed?
The reversal of an impairment loss occurs if the cash-generating unit’s recoverable amount becomes higher because of:
- Improvements in market value.
- Benefits arise from favorable economic changes.
- Enhanced usage of the asset.
| Scenario | Reversal Allowed? | Example |
| Goodwill impairment | No | N/A |
| Recoverable amount increases | Yes | Market value rise |
| Internal asset improvement | Yes | Enhanced asset efficiency |
However, the asset’s revised carrying amount cannot exceed what might have been recorded had the impairment never been mentioned.
How Reversal is Measured?
Suppose a reversal of impairment loss takes place. In that case, the increase is recognized as profit or loss unless it pertains to revalued assets, which will be treated as an increase in revaluation surplus.
Extract of IAS 36 Disclosure Requirements
Disclosures under IAS 36 Also ensure that the items make it to the financial statements. Companies need to disclose information on impairment in their external financial statements.
Required Disclosures
- Recognized or reversed impairment loss.
- The asset or CGUs affected.
- The explanation for impairment or reversal.
- The method applied to establish recoverable amounts.
Key assumptions used in value-in-use calculations. Such disclosures allow investors and stakeholders to gauge the financial well-being of companies.
Relevance to ACCA Syllabus
IAS 36 Impairment of Assets is important in both the ACCA syllabus Financial Reporting (FR) and Strategic Business Reporting (SBR) papers. It enables candidates to evaluate and recognize asset impairment, thereby promoting accurate financial reporting. Proficiency in IAS 36 is vital for analyzing financial statements, conducting impairment assessments, and comprehending goodwill distribution in consolidated financial statements. A better understanding of asset impairment, for example, can help with decision making in mergers and acquisitions as well as with economic analysis.
IAS 36 Impairment of Assets ACCA Questions
Q1: What is the main purpose of IAS 36 Impairment of Assets?
A) The expensing of depreciation over an asset’s useful life
B) Such that assets are not carried in excess of their recoverable amount
C) For the purpose of measuring the fair value of financial instruments
D) Distinguish between current and non-current assets
Ans: B) To get that assets are not carried more than its recoverable amount
Q2: How does an entity determine the recoverable amount of an asset in accordance with IAS 36?
A) Higher of fair value less costs of disposal and value in use
B) The carrying amount and fair value at the lower
B) The present value of expected cash flows and residual value combined
D) The asset at its historical cost adjusted for inflation
Ans: A) The higher of the fair value less costs of disposal and value in use
Q3: Why an entity perform an impairment test under IAS 36?
A) When the asset has completely depreciated
B) Once a year for goodwill and when impairment indicators arise
C) When management determines that an asset is possibly impaired
D) For all assets, at the end of each financial year
Ans: B) Once in a year for goodwill and whenever there are indications of impairment
Q4: Which is NOT an external indicator of impairment?
A) Decline in the market value of the asset
B) A change in government regulation regarding the asset’s use
C) The internal reordering of the company’s workings
D) An increase in market interest rates will affect discount rates
Ans: C) Restructuring the company’s operations internally
Q5. The accounting treatment of an impairment loss in financial statements
A) Expensed immediately in profit or loss
B) Offset against retained earnings straight on
C) Spread over the unexpired useful life of the asset
D) Triggered automatically upon recovery of market value
Ans: A) Immediately recognized in profit or loss as an expense
Relevance to US CMA Syllabus
In the US CMA syllabus, IAS 36 Impairment of Assets is part of Financial Reporting and Decision Analysis. A basic knowledge of asset impairment informs CMAs in reading financial statements, analyzing investment decisions and assessing the financial health of corporations. It is also pivotal to cost management, strategic planning, and performance evaluation, as it ensures accurate representation of asset values in financial statements.
IAS 36 Impairment of Assets US CMA Questions
Q1: Which aspect of financial reporting is IAS 36 predominantly concerned with?
A) Aligning revenues with expenses over time
B) Recording assets at fair market value
C) Stopping the overstatements of assets in financial statements
D) Asset recognition of intangibles at fair value
Ans: (C) Overstatement of an asset in a financial statement
Q2. Which of the following is the correct formula for the recoverable amount of an asset?
A) Carrying amount — Depreciation
B) The higher of: fair value, less costs to sell, and value in use
C) Inflation adjusted fair value
D) Historical cost restated for expected future cash flows
Ans: (B) Higher fair value less costs to sell and value in use
Q3: Which assets are subject to the annual impairment test per IAS 36?
Intangible assets with indefinite useful lives (A)
B) Deposit, all property, plant, and equipment
C) Inventories Cost method or net realizable value
D) Trade receivables
Ans: A) Intangible assets with indefinite useful lives
Q4 When is impairment loss recognised if at all?
A) reduce the carrying amount of the asset and recognize a loss in the income statement
B) The impairment loss is recognized as a liability
C) The asset is adjusted to a new valuation, and depreciation is adjusted
D) The impairment is amortized over several years evenly
Ans: A) The carrying value of the asset is reduced, with a loss recognized in the income statement
Q5: What financial metric changes when an impairment loss is taken?
A) Gross profit
B) Operating income
C) Inventory turnover
D) Tax payable
Ans: B) Operating income
Relevance to US CPA Syllabus
IAS (International Accounting Standard) 36 and US CPA Syllabus Almost all the accounting institution publish their syllabus under Financial Accounting and Reporting (FAR) claimed that IAS 36 is one of the major focused area. This ensures compliance with international and US GAAP standards while also helping CPAs evaluate the appropriate valuation of assets and impairment adjustments. Having an understanding of what impairment really means, helps the accuracy of financial statements, audit procedures and assessment of risk in terms of how assets are valued.
IAS 36 Impairment of Assets US CPA Questions
Q1: In accordance with IAS 36, which of the following is an indication of impairment?
a) Increased production capacity
B) a Substantial decline in the price of an asset in the market
C) Stable assets and cash flows
A) Stronger than expected future earnings
Ans: B) Substantial Fall in market price of an asset
Q2: Why else would recognising an impairment loss affect the financial statement of an asset?
A) Increases asset value
B) Reduces total equity
C) Increases future depreciation expense
D) Reduces liability balances
Ans: B) Reduces total equity
Q3: What is the primary comparison when performing an impairment test under IAS 36?
A) Carrying amount vs recoverable amount
B) Present value vs. historical cost
C) Depreciation expense and net income
D) Net realisable value versus book value
Ans: A). Carrying amount v/s recoverable_amount
Q4: Is it possible to reverse an impairment loss under IAS 36?
A) Yes, for all assets, including goodwill
B) Yes, except for goodwill
C) No, impairment losses are permanent
D) If auditors approve it
Ans: B) Yes other than goodwill.
Q5: What the most common type of asset covered under IAS 36?
A) Cash and cash equivalents
B) Accounts receivable
C) Goodwill and other intangible assets
D) Short-term investments
Ans: C) Goodwill and intangible assets
Relevance to CFA Syllabus
What You Need To Know IAS 36 is included in the CFA curriculum under Financial Reporting and Analysis. It aids kickstart in a signature event in assessment of the hard cash moves while collecting cash. Understanding impairment helps when performing investment analysis and risk assessment and in evaluating corporate financial health.
IAS 36 Impairment of Assets CFA Questions
Q1: What does IAS 36 do in terms of financial analysis?
A) To enhance asset valuation
B) To avoid inflated values of the assets and confirm recoverability
C) In claiming tax benefits on depreciable assets
D) They want to measure at historical cost
Ans: B) Avoid inflated asset values and ensure recoverability
Q2. The reason impairment losses are considered when conducting a valuation is because:
A) They affect net income and financial ratios
B) They provide growth of cash from operating aktivnosti
C) They reduce liabilities
D) It improves the credit rating of an organization
Ans: A) Their effects are on net income and financial ratios
Q3: What is a usual method of evaluating an asset’s worth?
A) Discounted cash flow approach
B) Historical cost method
C) Market comparison approach
D) Straight-line depreciation
Ans: A) Discounted cash flow method
Q4: What is the financial impact of an impairment loss?
A) Retained earnings would have increased
B) Carrying amount of the asset decreased
C) Higher taxable income
D) Lower dividend payout
Ans: B) Decreased carrying amount of assets
Q5: Why should investors care about goodwill impairment?
A) It is directly related to revenue
B) It indicates trouble in mergers or future income
C) It creates a tax Write-off / Write-off.
D) It causes the prices of stocks to rise
Ans: B) It indicates potential problems in acquisitions or coming earnings
