Impairment of an asset occurs when the carrying amount of an asset on the balance sheet exceeds its recoverable amount. The recoverable amount is the higher of an asset’s fair value less costs to sell and its value in use. Impairment indicates that the asset’s value has declined significantly and may not be recoverable in the future.
Ind AS 36, “Impairment of Assets,” provides guidance on how to assess and account for impairments of assets. Here’s how impairment is treated in accounting under Ind AS 36, along with an example:
Treatment of Impairment in Accounting (Ind AS 36):
Identify Impairment: Determine if there are any indicators of impairment for the asset. Indicators could include a significant decline in the asset’s market value, changes in the asset’s physical condition, changes in the economic environment, and more.
Recoverable Amount: Calculate the asset’s recoverable amount. This involves estimating either the fair value less costs to sell or the value in use, depending on the circumstances.
Compare with Carrying Amount: Compare the recoverable amount with the asset’s carrying amount (original cost minus accumulated depreciation and any accumulated impairment losses).
Recognize Impairment Loss: If the recoverable amount is less than the carrying amount, an impairment loss is recognized. The impairment loss is the difference between the carrying amount and the recoverable amount.
Adjust Carrying Amount: Reduce the carrying amount of the asset by the amount of the impairment loss. The reduction is recognized as an expense in the income statement.
Impairment Reversal: In subsequent periods, if the conditions that led to the impairment have improved, and the recoverable amount increases, an impairment loss recognized in prior periods can be reversed, but only up to the original carrying amount.
Example of Impairment :
Suppose a company owns a building that was purchased for Rs. 10,00,000 and has accumulated depreciation of Rs. 2,00,000. The company assesses the recoverable amount of the building, considering its fair value less costs to sell and value in use, and determines that it is only Rs. 6,50,000.
Carrying Amount = Rs. 10,00,000 – Rs. 2,00,000 = Rs. 8,00,000
Recoverable Amount = Rs. 6,50,000
Since the recoverable amount (Rs. 6,50,000) is less than the carrying amount (Rs. 8,00,000), there is an impairment loss.
Impairment Loss = Carrying Amount – Recoverable Amount = Rs. 8,00,000 – Rs. 6,50,000 = Rs. 1,50,000
The company would recognize an impairment loss of Rs. 1,50,000 in its income statement and adjust the carrying amount of the building to Rs. 6,50,000.
Note: This is done at “Cash generating unit” level
