CA Intermediate · Advanced Accounting

AS 28 Impairment of Assets: formula sheet

Full chapter guide

Key formulas

Recoverable amount: Recoverable amount = Higher of (Net selling price, Value in use); Take the higher figure because the enterprise will choose the better route, sale or use.
Net selling price: Net selling price = Selling price in arm's length sale − Costs of disposal; Costs of disposal are incremental costs such as legal costs and stamp duty. Finance costs and income tax expense are not counted.
Value in use: Value in use = Σ [Estimated future cash flow ÷ (1 + r)^n] including net disposal proceeds at the end of life; r is the discount rate, a pre-tax rate reflecting current market assessments of time value of money and risks specific to the asset.
Carrying amount: Carrying amount = Cost (or revalued amount) − Accumulated depreciation − Accumulated impairment losses; Always compare recoverable amount with the carrying amount after charging depreciation up to the date of testing.
Impairment loss: Impairment loss = Carrying amount − Recoverable amount (only if carrying amount is higher); If recoverable amount is equal or higher, there is no impairment loss and no entry.
Impaired asset: Asset is impaired if Carrying amount > Recoverable amount; Carrying amount is after depreciation and any earlier impairment loss.
Recoverable amount: Recoverable amount = Higher of (Net selling price, Value in use); Use the higher figure because the business would choose the better way to recover value.
Impairment loss: Impairment loss = Carrying amount − Recoverable amount; Only when carrying amount is higher. Otherwise there is no loss.
Review rule: At each balance sheet date: assess for any indication of impairment; If an indication exists, estimate recoverable amount. If none exists, no estimate is needed.
Mandatory annual test: Estimate recoverable amount every year for: intangible not yet available for use, and intangible amortised over more than 10 years; Done at least at each financial year end, with or without an indication. This includes goodwill amortised over more than 10 years. AS 26 presumes a life of up to 10 years, so a longer life must be justified (the presumption is rebutted).
Recoverable amount: Recoverable amount = Higher of (Net selling price, Value in use); If either figure exceeds the carrying amount, there is no impairment, so the other need not be computed.
Net selling price: Net selling price = Selling price (arm's length) − Costs of disposal; Costs of disposal exclude finance costs and income tax expense.
Value in use: Value in use = Σ [Net cash flow in year t × 1 ÷ (1 + r)^t], including net disposal proceeds in the last year; r is the pre-tax discount rate. Use the present value factors given in the question.
Net cash flow for a year: Cash inflows from continuing use − Cash outflows necessary to generate them (including overheads directly attributable or allocable on a reasonable basis); Exclude financing activities and income tax receipts or payments.
Impairment loss: Impairment loss = Carrying amount − Recoverable amount (if carrying amount is higher); Recognised as an expense in the statement of profit and loss unless the asset is carried at a revalued amount.
Cash flow exclusions and conditions: Exclude: future restructuring not yet committed, future capital expenditure that improves or enhances performance, financing flows, tax flows; Include future cash outflows needed to maintain the asset's expected performance.
Recoverable amount: Recoverable amount = Higher of (Net selling price, Value in use); Use the higher figure. If either one is above the carrying amount, there is no impairment, so you need not compute the other.
Impairment loss: Impairment loss = Carrying amount − Recoverable amount (only if carrying amount is higher); If recoverable amount is equal or higher, the loss is nil.
Treatment of loss on an asset at cost: Impairment loss → Statement of Profit and Loss immediately; Debit Impairment Loss A/c, credit the asset (or a provision for impairment).
Treatment of loss on a revalued asset: Loss first against Revaluation Surplus of that asset; excess → Statement of Profit and Loss; Surplus of other assets cannot be used.
Revised depreciation: Revised depreciation = (Revised carrying amount − Residual value) ÷ Remaining useful life; Applies from the period after the impairment. It is a prospective change.
Recoverable amount of a CGU: Recoverable amount = Higher of (Net selling price, Value in use); Use the CGU's own figures, not the sum of individual asset figures.
Impairment loss of a CGU: Impairment loss = Carrying amount of CGU − Recoverable amount (if carrying amount is higher); Carrying amount includes allocated goodwill and allocated corporate assets, where allocation is reasonable and consistent.
Order of allocating the loss: Step 1: reduce goodwill allocated to the CGU. Step 2: reduce other assets of the CGU pro rata to their carrying amounts.; Corporate assets allocated to the CGU are treated as part of the 'other assets'.
Share of loss for each other asset: Loss to asset = Remaining loss × (Carrying amount of asset ÷ Total carrying amount of the other assets); Use carrying amounts before the loss. Do not use values after the goodwill write-off.
Floor for each asset: An asset is not reduced below the highest of: its net selling price (if determinable), its value in use (if determinable), and zero; Any loss that cannot be given to that asset is allocated pro rata to the other assets of the unit.
Goodwill: bottom-up test: If goodwill can be allocated on a reasonable and consistent basis: compare recoverable amount of CGU with its carrying amount including goodwill. If not: test the CGU excluding goodwill, then test the smallest larger CGU to which goodwill can be allocated.; Recognise the loss at each step before moving on.
Corporate assets: bottom-up and top-down: If a portion of corporate assets can be allocated on a reasonable and consistent basis: test the CGU including that portion. If not: test the CGU excluding corporate assets, then test the smallest group of CGUs to which a portion can be allocated.; The larger group is compared with its carrying amount including the allocated corporate asset portion.
Ceiling on reversal: Maximum carrying amount after reversal = Carrying amount that would have existed (net of depreciation) had no impairment loss been recognised; Compare this with the recoverable amount. The asset is restated to the lower of the two.
Reversal amount: Reversal = Lower of (Recoverable amount, Ceiling) − Carrying amount before reversal; Both figures must be taken at the same date, after charging that year's depreciation. The ceiling (carrying amount without impairment, net of depreciation) and the recoverable amount are the only two limits. Do not compare the reversal with the original loss separately.
Goodwill rule: Impairment loss on goodwill: no reversal in a later period; Applies to goodwill only. Other assets can have losses reversed.
Depreciation after reversal: Revised depreciation = (Revised carrying amount − Residual value) ÷ Remaining useful life; Adjust depreciation in future periods only. Do not restate past years.
Cash generating unit reversal: Reversal allocated pro rata to assets of the unit other than goodwill, based on carrying amounts; Each asset is subject to its own limit: it may not be raised above the lower of its recoverable amount (if determinable) and the carrying amount it would have had, net of depreciation, without the loss. If an asset hits its limit, the excess is allocated pro rata to the other assets of the unit (other than goodwill).

Quick revision

Impairment loss = carrying amount − recoverable amount, when carrying amount is higher.
Recoverable amount = higher of net selling price and value in use.
Net selling price = selling price less costs of disposal.
Value in use = present value of estimated future cash flows from continuing use and final disposal.
If either net selling price or value in use exceeds carrying amount, there is no impairment and the other need not be measured.
Impairment loss on a cost-model asset goes to the statement of profit and loss.
Impairment loss on a revalued asset is first set off against the revaluation surplus for that asset, and any excess goes to profit and loss.
After impairment, depreciation is revised over the remaining useful life using the new carrying amount.
In a CGU, allocate the loss first to goodwill, then to other assets pro rata on carrying amount.
Reversal is allowed only if estimates used to find recoverable amount have changed, and the reversed carrying amount cannot exceed what it would have been without the earlier loss, net of depreciation.
Impairment loss on goodwill is not reversed in a later period, in line with AS 28.
Disclose the loss recognised, the reversal, and the class of assets and segment affected.

Common mistakes

Taking the lower of net selling price and value in use as recoverable amount. Fix: Recoverable amount is always the higher of the two, because the enterprise can choose the better option.
Not deducting costs of disposal from selling price. Fix: Always check for disposal costs and deduct them to get net selling price.
Testing every asset every year by computing recoverable amount. Fix: Only assess for indications each year. Estimate recoverable amount only if an indication exists, except for the mandatory annual test cases.
Forgetting the mandatory annual test for intangibles not yet available for use or amortised over more than 10 years. Fix: Keep a one-line memory: intangibles not in use or amortised over more than 10 years are tested every year.
Taking the lower of net selling price and value in use as recoverable amount. Fix: Recoverable amount is always the higher of the two, because the owner will choose the better route. Say this in one line in the answer.
Not deducting costs of disposal from the selling price. Fix: Always write Selling price − Disposal costs. Remember that finance costs and income tax expense are not disposal costs.
Comparing carrying amount with only net selling price, or only value in use. Fix: Always take the higher of the two as recoverable amount before comparing.
Taking carrying amount as original cost. Fix: Deduct depreciation up to the date of testing and any earlier impairment loss first.
Allocating the loss pro rata across all assets including goodwill. Fix: Remember the order: goodwill is reduced first, and only the balance is shared pro rata among the other assets.
Testing each asset separately when it does not generate independent cash inflows. Fix: If the asset's recoverable amount cannot be determined individually, identify the CGU and test the CGU as a whole.

Exam tips

Learn the definitions word for word in your own short form. Theory questions often ask you to define recoverable amount, value in use or CGU for a few marks.
In numerical questions, show carrying amount, net selling price, value in use and recoverable amount as separate lines. Each line can earn a step mark even if the final figure goes wrong.
Look for traps: an inventory or investment in the question, disposal costs, or accumulated depreciation not yet deducted.
For MCQs, remember that recoverable amount is the higher figure and impairment loss can never be negative. There is no negative marking, so always attempt every MCQ.
Write the journal entry for the loss even if the question only asks for the amount.
In MCQs, watch for the word "indication". If a fact lists a market, legal, technology or performance problem, the answer is usually that a test is needed.
Always tag indicators as external or internal in written answers. It shows structure and earns step marks.
State the rule first, then apply the facts, then conclude. This provision-facts-conclusion format suits AS 28 case questions.