IAS 36 Impairment of Assets


This is sometimes described as the future cash flow the asset would expect to generate in continued business operations. Impairment losses are not usually recognized for low-cost assets, since it is not worth the time of the accounting department to conduct impairment analyses for these items. Thus, impairment losses are usually confined to high-cost assets, and the amount of these losses can be correspondingly large. Furthermore, you need to use a proxy rate in case a market-determined rate for the specific asset is not available. Such a rate must reflect the time value of money over the asset’s life as well as currency risk, price risk, country risk, and cash flow risk. In future periods, the asset will be reported at its lower carrying value.

Individuals often find impairment loss and depreciation confusing, leading to inaccurate preparation of financial statements. One must understand the critical differences between these two concepts to eliminate such confusion. For assets accounted for using the revaluation model in IAS 16 ‘Property, Plant and Equipment’ or IAS 38 ‘Intangible Assets’, the impairment loss is treated in the same way as a downward revaluation in accordance with those standards. Accordingly any impairment is recognised in other comprehensive income to the extent it does not exceed a previous revaluation surplus. Further, the impairment is recognized as an expense in the profit and loss statement. However, if the impairment loss pertains to a revalued asset, the impairment loss is treated as a revaluation decrease.

As part of the same entry, a $50,000 credit is also made to the building’s asset account, to reduce the asset’s balance, or to another balance sheet account called the “Provision for Impairment Losses.” Depreciation schedules allow for a set distribution of the reduction of an asset’s value over its lifetime, unlike impairment, which accounts for an unusual and drastic drop in the fair value of an asset. Unlike impairment of an asset, impaired capital can naturally reverse when the company’s total capital increases back above the par value of its capital stock.

Thus, in order to calculate the impairment loss, you need to determine the fair value of the asset to be impaired and subtract the costs of disposal from it. The impairment of an asset has an adverse impact on the financial statements of your business. Therefore, it is important for you to test the assets for impairment periodically. In case an asset indicates impairment, you need to write off the difference between the fair value and the carrying value of the asset.

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There is the possibility of needing to account for impairment losses in the future, based on what the owner chooses to do with those assets next. You record asset impairment losses on your balance sheet at the end of the current period. The part of loss allowance that relates to undrawn loan commitments, or to financial guarantees, is presented as a provision as there is no asset that the loss allowance could be credited against.

Recording an Impairment Loss in Your Business

This is irrespective of whether or not there is any indication of impairment or not. So, stakeholders like financial statement users, regulators, and accounting bodies raise concerns about the lack of precision in following the guidelines and making disclosures in the financial statements. A fixed asset is a long-term tangible asset that a firm owns and uses to produce income and is not expected to be used or sold within a year.

Such an uncertain event leads to a decrease in the fair value of the asset well below its carrying amount. The carrying value of an asset refers to the amount at which the asset is recorded in the balance sheet after deducting accumulated depreciation and accumulated impairment losses. IAS 36 Impairment of Assets seeks to ensure that an entity’s assets are not carried at more than their recoverable amount (i.e. the higher of fair value less costs of disposal and value in use). Whenever a fixed asset undergoes a significant change that may reduce the company’s gross future cash flow to an amount below the asset’s carrying value, apply an impairment test. An asset’s carrying value, or book value, equals the cost to acquire the asset minus accumulated depreciation.

How To Calculate Impairment Loss?

On 1 January 20X3, Entity A acquires this bond for $5,000 as it believes that Entity X will be able to partially repay the face value on redemption date. Entity A expects to receive $8,000 on 31 December 20X6, but it does not expect to receive any coupon payments. ECL take into account the amount and timing of payments, therefore a credit loss arises even if the entity expects to be paid in full but later than when contractually due (IFRS 9.B5.5.28). Provision matrix is specifically referred to in paragraph IFRS 9.B5.5.35 and Example 12 (IFRS 9.IE74-77) as an example of a simplified approach to ECL measurement for trade receivables, contract assets and lease receivables. Let us look at this impairment loss calculation example to understand the concept better. As most businesses brace for an economic downturn, tech and telecom could see new prospects.

Impairment can occur as the result of an unusual or one-time event, such as a change in legal or economic conditions, a change in consumer demand, or damage that impacts an asset. If the testing reveals a loss, the asset must be noted as impaired unless it is excluded from such designation by the IRS or GAAP regulations. Asset impairment can occur from a one-time incident or a succession of events. Assets should be regularly evaluated for impairment to prevent overvaluation on the balance sheet. Some diseases affect vision through the central nervous system, while others directly affect the anatomy of the eye.

  • Some people with impaired vision are born with it or develop it at a young age.
  • Also, the asset’s balance on the balance of Hightech Express gets reduced by $1,250,000.
  • Generally, tax authorities try to tax business income as close to the cash base as possible instead of the accrual base.
  • Initially, Microsoft recognized goodwill related to the acquisition of Nokia in the amount of $5.5 billion, plus another $4.5 billion in other intangible assets.

The carrying cost is the acquisition cost minus the total depreciation. You need to divide the acquisition cost by the number of years to get the depreciation rate. It can result from unexpected sources like a market crash or natural disaster.

How to Record Impairment Loss on Your Balance Sheet

Value in use means how much money the asset can potentially bring in for the remainder of its lifespan. When reviewing actual cash flows, the car has the potential to help you tangibly bring in $3000 a year. The value in use for the remaining 7 years of its useful life is $14000.

Businesses can subtract the difference if the latter is more than the former. As a result, the asset’s value will decrease on their financial statements. If, for an individual asset within an impaired CGU, it is possible to measure FVLCOD but not VIU (and therefore not possible to determine the individual asset’s recoverable amount), then the floor is the higher of FVLCOD and zero. Under this scenario no impairment loss is recognised for the individual asset if the asset’s CGU is not impaired, even if the asset’s FVLCOD is less than its carrying amount. Also, the asset’s balance on the balance of Hightech Express gets reduced by $1,250,000.

This article explains what is the impairment of assets, the difference between depreciation and impairment, various requirements for impairment accounting, and how impairment loss is calculated. For impairment of an individual asset or portfolio of assets, the discount rate is the rate the entity would pay in a current market transaction to borrow money to buy that specific asset or portfolio. However, the accounting is a bit more complicated when goodwill must also be accounted for on the balance sheet. Goodwill is an intangible asset, whether something like your company’s brand name or reputation, or in M&A, assets that are not separately identifiable. Asset impairment is often confused with asset depreciation, which is a predictable and expected occurrence as an asset ages or incurs wear and tear over the course of normal use. Most people use “low vision” and “visual impairment” with separate definitions, but some medical professionals use them interchangeably.

Even if the impaired asset’s market value returns to the original level, GAAP states the impaired asset must remain recorded at the lower adjusted dollar amount. Under GAAP rules, the total dollar value of an impairment is the difference between the asset’s carrying value and its fair market value. Under International Financial Reporting Standards , the total dollar value of an impairment is the difference between the asset’s carrying value and the recoverable value of the item.


Though both terms may seem similar, impairment relates more to a sudden and irreversible decrease in the value of an asset, for example, the breakdown of a machine due to an accident. We undertake various activities to support the consistent application of IFRS Standards, which includes implementation support for recently issued Standards. We do this because the quality of implementation and application of the Standards affects the benefits that investors receive from having a single set of global standards. Evidence is available from internal reporting that indicates the economic performance of an asset is, or will be, better than expected.

Overview of the three approaches to impairment

An impairment loss meaning‘s carrying value, also known as its book value, is the value of the asset net of accumulated depreciation that is recorded on a company’s balance sheet. Impairment is most commonly used to describe a drastic reduction in the recoverable value of a fixed asset. The impairment may be caused by a change in the company’s legal or economic circumstances or by a casualty loss from an unforeseeable disaster. For example, a warehouse damaged by a hurricane is impaired through no fault of leadership.

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DTTL (also referred to as “Deloitte Global”) and each of its member firms are legally separate and independent entities. Not be larger than an operating segment determined in accordance with IFRS 8 Operating Segments. Success with that tactic, of course, is highly dependent on a company’s ability to identify those triggering events and rally a prompt response. Asset impairment occurs when the net carrying amount, or book value, cannot be recovered by the owner. What you lose may be things intangible that are the most precious in life. The Board revised IAS 36 in March 2004 as part of the first phase of its business combinations project.


If you keep a contra asset account for the value of the impairment to preserve the historical cost of the asset, it would be reported directly below the asset on your balance sheet. A contra asset account has a natural balance that is opposite that of a standard asset account, a credit. The book value of goodwill from the Nokia purchase, and therefore assets as a whole, reported on Microsoft’s balance sheet were deemed to be overstated when compared to the true market value. Because Microsoft had not been able to capitalize on the potential benefits in the cellphone business, the company recognized an impairment loss in the amount of $7.6 billion, including the entirety of the $5.5 billion in goodwill. Measurement of interest income on credit-impaired financial assets is covered in a separate section. 12-month ECL are a portion of lifetime ECL and represent the lifetime ECL resulting from a default occurring in the 12 months after the reporting date weighted by the probability of that default occurring.

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That is, any enhancements or expenditures to improve the asset in the future should not be considered. Also, the estimated cash flows should not include cash inflows and outflows from financial activities, income tax receipts, or payments. Impairment loss should be determined for an individual asset if possible. However, if it is not possible to determine impairment loss for an individual asset, then impairment loss must be determined for the asset’s CGU.

In either case, businesses must estimate the asset’s recoverable amount. If any impairment exists, the accountant writes off the difference between the fair value and the carrying value. Fair value is normally derived as the sum of an asset’s undiscounted expected future cash flows and its expected salvage value, which is what the company expects to receive from selling or disposing of the asset at the end of its life. Impairment, also called writing down, represents the period during which the market value of an asset is less than the valuation entered on an organization’s balance sheet.

Impairment losses are either recognized through the cost model or the revaluation model, depending on whether the debited amount was changed through the new, adjusted fair market valuation described above. Even when impairment results in a small tax benefit for the company, the realization of impairment is bad for the company as a whole. The first step Your business is required to assess whether there is an indication of an asset impairment at the end of each accounting period.

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