ACCOUNTING STANDARD-28

IMPAIRMENT OF ASSETS
 AS-28 IMPAIRMENT OF ASSETS
OVERALL VIEW
- Applicability
- Objective
- Scope
- Concept
- Identification of asset to be impaired - indications
- Recoverable amount of an asset - Net selling price of value
in use
- Recognition & measurement of an impairment loss
- Cash generating unit
- Reversal of impairment loss
- Disclosures
- Transitional provisions
- Certain issues
 AS-28 IMPAIRMENT OF ASSETS

APPLICABILITY
Accounting periods : - Companies which are
on or after 01.04.2004 listed or in the process
of listing
- Enterprises having
turnover exceeding
50 crores
on or after 01.04.2005 : All other enterprises -
Corporate or non-
corporate
 AS-28 IMPAIRMENT OF ASSETS

OBJECTIVE.

- To ensure that the assets are carried at no more than

recoverable amount
- Recoverable amount not to exceed the amount to be
recovered through use or sale of the asset
- Impaired loss to be recognised in the financial
statement
- Impaired loss may be reversed in certain
circumstances
- To make certain disclosures for impaired assets.
 AS-28 IMPAIRMENT OF ASSETS

SCOPE

* To be applied in accounting for impairment of all

assets, other than :-
- Inventories as per (AS-2)
- Assets arising from construction contracts as per
(AS-7)
- Financial assets including investments as per (AS-13)
- Deferred tax assets as per (AS-22)
* Applicable to assets valued at cost or at revalued
amount
 AS-28 IMPAIRMENT OF ASSETS

CONCEPT
Impairment loss - is the amount by which the carrying
amount of an asset exceeds its
recoverable amount
Carrying amount- is the amount at which an asset is
recognised in the balance sheet
(W.D.V.)
Recoverable - is the higher of an asset’s net selling
amount price and its value in use
 AS-28 IMPAIRMENT OF ASSETS

CONCEPT
Net selling price - Sale price - costs of
disposal in an arm’s
length transaction
Value in use - Present value of estimated
future cash flows expected
from the use of an asset &
from its disposal at the end
of its useful life
 AS-28 IMPAIRMENT OF ASSETS

Identifying an asset that may be impaired

Whether at each balance sheet date, recoverable
amount of each asset to be estimated ?

NO
To see whether there is any indication that an asset
may be impaired

IF YES

recoverable amount to be estimated

 AS-28 IMPAIRMENT OF ASSETS

Indications for estimating recoverable amount

External sources
- Decline in market value significantly

- Significant changes with an adverse effect on the enterprise

due to technological, market, economic or legal environment

- Decrease in assets value in use due to adjustment in the

discount rate as a result of increase in market interest rate or
other market rates of ROI

- Carrying amount of the net assets of the enterprise is more

than its market capitalisation
 AS-28 IMPAIRMENT OF ASSETS

INTERNAL SOURCES
- Obsolescence or physical damage of an asset
- Significant changes with an adverse effect on the
enterprise, regarding use of asset e.g. - plans to
discontinue or restructuring the operation or disposal
of asset at an earlier date.
- Decline in the economic performance of asset

- list is not exhaustive

- concept of materiality
 AS-28 IMPAIRMENT OF ASSETS

Recoverable amount
Net selling price
or Whichever is higher
Value in use

Whether both to be determined - No

If either of these amounts exceeds the asset’s carrying

amount, the asset is not impaired and it is not necessary to
estimate the other amount
 AS-28 IMPAIRMENT OF ASSETS

Net Selling Price

Selling Price - How to estimate ?

- Binding sale agreement

- Market price
- Current bid price
- Price of the most recent transaction
- Based upon best information available
 AS-28 IMPAIRMENT OF ASSETS

Value in use
- Estimating the future cash inflows and outflows arising from
continuing use of the asset and from its ultimate disposal
and
Applying the appropriate discount rate to these future cash
flows
- While estimating future cash flows, the following factors to be
considered
- effect of price increase due to general inflation
- for the asset in its current condition
- adjustment of associated risk factors
- not to include cash inflows or outflows from
financing activities.
- Pre-tax inflows or outflows to be considered.
 AS-28 IMPAIRMENT OF ASSETS

- Discount rate - To be pre tax rate

- That reflects time value of money
and the risks specific to the asset
as per current market assessments
unless risk factors have been
adjusted while estimating future
cash flows
 AS-28 IMPAIRMENT OF ASSETS

Value in use - Certain issues

- While estimating cash outflows, whether repayment of
installment of borrowings (against those assets) and
interest cost thereof, to be taken into account.
- While estimating cash outflows, whether following costs
to be taken into account :-
- Corporate office costs
- Interest cost of working capital
- Depreciation of assets
- Why pre-tax cash flows are required to be considered?
- Why income tax expense, which is a cash outflow of
variable nature, is not being considered?
 AS-28 IMPAIRMENT OF ASSETS

Recognition & Measurement of an impairment loss

* If the recoverable amount of an asset is less than its
carrying amount, the carrying amount of the asset
should be reduced to its recoverable amount
* That reduction is an impairment loss
* Impairment loss to be recognised as an expense in the
profit and loss account
* Adjustment against revaluation reserve if existing
against the same asset
* Depreciation for future periods to be adjusted as per
revised carrying amount
 AS-28 IMPAIRMENT OF ASSETS

Cash Generating Units

- At the first instance, to determine impairment loss, the
recoverable amount to be estimated for the individual
asset
- If it is not possible to estimate the recoverable amount of
the individual asset, to determine the recoverable amount
of the cash generating unit to which the asset belongs.
- A cash generating unit is the smallest identifiable group of
assets that generates cash inflows from continuing use
that are largely independent of the cash inflows from
other assets or group of assets
- Allocation of goodwill and corporate assets to cash
generating unit
 AS-28 IMPAIRMENT OF ASSETS

- Impairment loss for a cash generating unit to be

allocated for individual assets in the following order
- first to goodwill allocated to the cash generating
unit, if any, and
- then, to the other assets of the unit on pro-rate basis
based on the carrying amount of each asset in the
unit
 AS-28 IMPAIRMENT OF ASSETS

Reversal of impairment loss

- If there are indications, that an impairment loss no
longer exists, the enterprise should estimate the
recoverable amount of the asset
- In case recoverable amount is higher than asset’s
carrying amount, the impairment loss earlier
recognised may be reversed
- The increased carrying amount of an asset due to a
reversal of an impairment loss should not exceed the
carrying amount that would have been determined
(net of depreciation) had no impairment loss been
recognised for the asset in prior accounting periods.
 AS-28 IMPAIRMENT OF ASSETS

Disclosures
- For each class of asset, the financial statements should
disclose:-
- the amount of impairment loss and the reversal, if any
recognised in profit and loss account
- the amount of impairment loss and its reversal, if any,
recognised against revaluation surplus
- For each segment as per AS-17, separate information to be
given
- The events and circumstances that led to the recognition or
reversal of the impairment loss
- The nature and basis of recoverable amount determined for
recognising (reversing) impairment loss
- Other disclosures
 AS-28 IMPAIRMENT OF ASSETS

Transitional Provision
In the first year of applicability of this
standard, if there is any impairment loss in
the beginning of the year, the same to be
recognised and adjusted against opening
balance of revenue reserves or revaluation
reserve as the case may be.
 AS-28 IMPAIRMENT OF ASSETS
CERTAIN ISSUES
- Most of the calculations in the standard are based upon
estimates and projections. What is the reliability of the same.
- Whether auditors are bound to rely upon management’s
estimates and projections.
- Net selling price of a particular asset is less than its carrying
amount but value in use of cash generating unit (of which this
asset is a part) is higher. Whether asset is required to be
impaired.
- In case a particular asset becomes idle which was earlier part
of cash generating unit and now not in use, whether its value
to be determine separately or still as part of cash generating
unit.
- Impairment loss is a timing difference as per AS-22 and
deferred tax asset may be created for the same subject to the
principle of prudence.
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