This Issue - Icwai

What is Impairment
IAS 36 impairment is a process of continuous
revaluation of assets to account for any loss or gain in
the value of an asset where carrying amount of an
asset in the books of account is greater than its
recoverable amount.
Impairment When
= Carrying Amount of Asset > than recoverable
amount and impairment loss taken in books of
account.
Recoverable Amount for individual Asset or Cash
GeneratingUnit = Greater of
▲
FINANCIAL FINANCIAL ACCOUNTING
ACCOUNTING
ACCOUNTING
▲
Value in Use Fair Value less Cost to Sell
The rationale behind taking the higher of the Value
in use or Fair Value less cost to sell is likely the
economic value of the asset. An making rational
choices would sell an Asset if the Fair Value less Cost
to Sell is more than Value in Use and would continue
to use the asset if Value in use if greater than Fair
Value less cost to sell.The economic value of the Asset
is meaning fully represented with reference to higher
of the above since the entity will either dispose or use
the asset based on what appears highest and best in
use.
Impairment Test on Whom
INDIVIDUAL ASSETS/CASH GENERATING
UNITS(CGU)—The recoverable is calculated for
individual Assets. However, if the Asset does not
generate cash inflows that is largely independent of
those from other Assets the recoverable is calculated
for the Cash Generating Unit to which the Asset
belongs.
Cash Generating Units is the smallest identifiable
group of assets that generate cash inflows that are
largely independent of the cash inflows from other
assets or group of Assets.
Value in Use
Value in Use = PV of future Cash Flows expected
from the Asset or CGU. As PV is to be calculated we
have two variables 1) Discount Rate 2) Cash Flows.
Cash Flow represents the future cash flows the entity
expects from the Asset/CGU and expectation about
possible variations in the amount and timing of the
cash flows. It should represent —
1. Management’s best estimate of the set of
economic conditions of the asset over its life.
2. Should be based on management assets of
current Budget,Cash flows, forecasts approved by
the management, any action like restructuring where
final decision is pending with the management should
not be factored in estimating the cash flows.
3. Should exclude borrowing costs, income tax
receipts or payments etc.
4. IAS 36 required that the previous estimates needs
to be compared with the actual cash flows as part of
establishing the reasonableness of the estimates/
assumptions.
Discount Rate—Normally the PreTax discount rate
is representative of the time value of money and risks
associated with the asset for which the future cash
flows have not been adjusted.
A Present Value can be calculated either by
‘Traditional’ or “Expected Cash Flow” Methodology.
Under Traditional method a single set of Cash flows and
a commensurate discount rate is used and the discount
rate also factoring in the Risk. The Expected Cash Flows
different Probabilities are assigned to different
expected cash flows in different scenarios and the PV is
calculated on the expected outcomes based on the
probabilities and expected cash flows. As also
indicated in IAS36, Expected Cash Flows, in many cases
gives a more effective tool than the Traditional method.
The calculation of the Value is subject to variables
and is not standardised which may lead lack of
congruity of the financial statement—the primary
objective of any standard.This means that companies,
though applying the same standards, may not be
calculating the valuation approaches or discount rate
in the same way. For example, Probabilities assigned
for different scenarios in calculating the Expected
Cash Flow may be different in two different comparable
companies leading to different standards of
impairment test being adopted by the companies.This
needs attention and a process needs to be standardised
and valuation standards established. International
Valuation Standards Council (IVSC) develops and
maintains the standards for reporting the valuation
and disclosure of valuations. Valuation Standards
exist in many countries but an effort is urgently
required for converging the valuation standards
similar to that of IFRS.
However, in the present day scenario, the
Management, for calculating the value in use, needs
to integrate its decision making process into other
business processes and should not keep an isolated
exercise only for arriving at the impairment.
Fair Value less Cost to Sell
Amount obtainable from sale of asset in an Arms
Length transaction between knowledgeable and
willing parties less cost to sell —
1. The Best evidence of Fair Value is a price in a
778 The Management Accountant |September 2011