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Unit 7 : Accounting Standard 28 Impairment of Assets

Overview

  • Definition of key terms related to asset impairment.
  • Processes for identifying and measuring impairment in assets.
  • Scope and applicability of AS 28.
  • In-depth assessment methodologies for impairment indicators.
  • Measuring recoverable amounts and understanding cash-generating units.
  • Goodwill classification and impairment assessment.
  • Guidelines for reversing impairment losses and disclosure requirements.

Key Topics

Key Definitions

  • Recoverable Amount: The higher of an asset’s net selling price and value in use.
  • Value in Use: Present value of expected future cash flows from an asset.
  • Net Selling Price: Amount obtainable from selling an asset minus costs of disposal.
  • Impairment Loss: Amount by which the carrying amount of an asset exceeds its recoverable amount.

Deep Dive

  • Recoverable amount must be calculated regularly as per balance sheet dates.
  • Value in Use calculations involve future cash inflow estimates, thus requiring diligent forecasting techniques.
  • Factors influencing impairment include environmental changes, technological advancements, and internal operational issues.

Scope & Applicability of AS 28

  • AS 28 is applicable for enterprises with significant assets exceeding prescribed thresholds as of April 1, 2004.
  • Mandatory for companies listed on stock exchanges and those with turnover above ` 50 crores from April 1, 2005.
  • It does not apply to inventories, construction contracts, financial assets, and deferred tax assets.

Deep Dive

  • AS 28 falls under the larger framework of accounting standards issued by the Institute of Chartered Accountants of India.
  • Compliance with AS 28 can impact the financial status of companies, particularly highlighting potential financial distress.

Identification of Impairment

  • Enterprises must assess for indicators of impairment at each balance sheet date.
  • External indicators include significant market value declines, adverse market changes, and increased interest or market rates.
  • Internal indicators include obsolescence, physical damage to assets, and subpar asset performance.

Deep Dive

  • Effective identification can help in timely adjustments affecting financial records and distributions to shareholders.
  • A comprehensive internal audit systems strengthen the identification process.

Measurement of Recoverable Amounts

  • Impairment loss recognized when the carrying amount exceeds recoverable amount.
  • Recoverable amount is determined based on net selling price or value in use.
  • Value in Use must include future cash inflows, outflows, and an appropriate discount rate.

Deep Dive

  • The discount rate must reflect the asset-specific risks and the time value of money, influencing the value in use calculations.
  • Projections must be based on the most recent, reliable budget estimates.

Cash-Generating Units (CGUs)

  • CGUs are groups of assets that generate independent cash inflows.
  • Impairment assessment may require analysis at the CGU level if an asset is not identifiable for independent cash inflows.
  • Identification must be consistent across reporting periods unless justification is provided.

Deep Dive

  • Identifying CGUs is critical during mergers or acquisitions to evaluate goodwill and integration risks.
  • CGUs may change based on business strategy adjustments to streamline operations.

Goodwill Assessment

  • Goodwill must be assessed at the CGU level as it cannot independently generate cash flows.
  • Identifying impairment requires bottom-up and top-down tests compared to CGUs.
  • Allocation of goodwill must be consistent and reasonable to avoid errors in financial reporting.

Deep Dive

  • Impairment in goodwill is irreversible unless caused by extraordinary circumstances, highlighting the fragility of valuation methods.
  • Regular re-evaluations of goodwill can assist in aligning values with market conditions.

Reversal of Impairment Losses

  • Enterprises must reassess impairment at each balance sheet date for potential reversals.
  • Impairment losses must be reversed to the extent of previous recognition and not exceed the carrying amount it would have been if no impairment had occurred.
  • The reversal should be attributable to changes in cash inflows, outflows, or discount rates.

Deep Dive

  • Reversals can restore an asset’s carrying value effectively, often leading to more favorable financial reporting.
  • Monitoring market conditions can provide early indicators for potential reversal opportunities.

Disclosure Requirements

  • Financial statements must include impairment losses recognized and any reversals.
  • Disclosure of impairment methods and the rationale behind valuation estimates is mandated.
  • Material impairment losses or reversals must be transparently reported, explaining context and effects.

Deep Dive

  • Effective disclosure enhances transparency and understanding for investors and stakeholders regarding asset health.
  • Proper documentation and evidence backing assumptions used in disclosures can play a crucial role in audits.

Summary

In summary, Accounting Standard 28 (AS 28) on Impairment of Assets provides significant guidance on the recognition and measurement of asset impairment in corporate accounting. Understanding the definitions of key terms such as recoverable amount, value in use, and impairment loss is critical in assessing asset value comprehensively. The standard applies primarily to enterprises exceeding set thresholds while excluding specific assets like inventories and financial instruments. Regular assessment for impairment indicators is vital, demanding both external and internal analyses, and measurement is centered on determining recoverable amounts through methods like cash flow forecasting. Special attention is required for cash-generating units as well as goodwill, as they are often deeply interwoven with an enterprise’s valuation and can significantly impact financial performance. Reversal of impairment losses and stringent disclosure requirements enhance transparency and accountability in financial reporting.