IAS 36 Impairment of Assets: Safeguarding Asset Values
Bilal Ahmad
Fractional CFO for Startups | Financial Modeling to Drive Growth and Profitability | Empowering Founders with Data-Driven Financial Leadership
IAS 36, "Impairment of Assets," is an essential standard in financial reporting, ensuring that assets are not carried at more than their recoverable amount. It establishes procedures that an entity must follow to ensure its assets are carried at no more than their recoverable value, and it outlines how to measure and recognize impairment losses.
Key aspects of IAS 36 include:
- Purpose and Scope: IAS 36 seeks to ensure that assets are not overstated on the balance sheet. It applies to most assets, including property, plant and equipment, intangible assets, and goodwill.
- Identification of Impairment: An entity is required to assess at each reporting date whether there are any indicators that an asset may be impaired. This involves considering external and internal sources of information.
- Calculation of Recoverable Amount: The recoverable amount is the higher of an asset's fair value less costs to sell and its value in use. If the carrying amount exceeds the recoverable amount, the asset is considered impaired.
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- Impairment Testing for Goodwill and Intangible Assets: Goodwill acquired in a business combination and certain intangible assets are required to be tested for impairment annually, regardless of whether there are any indications of impairment.
- Impairment Losses: If an impairment loss is identified, it must be recognized immediately in profit or loss. The loss is measured as the amount by which the carrying value of the asset exceeds its recoverable amount.
- Reversal of Impairment Losses: An impairment loss recognized in prior periods for an asset other than goodwill should be reversed if there has been a change in the estimates used to determine the asset’s recoverable amount.
- Disclosure Requirements: IAS 36 requires entities to disclose the circumstances leading to impairment losses or reversals, the method of calculating the recoverable amount, and the impact of impairment on the financial statements.
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