Recognising and Measuring Impairment Loss under Ind AS 36

Understand Recognising and Measuring Impairment Loss

Key rules to remember

Recoverable amount

Recoverable amount = higher of (Fair value − Costs of disposal) and Value in use

If either amount exceeds the carrying amount, there is no impairment.

Impairment loss

Impairment loss = Carrying amount − Recoverable amount (when carrying amount is higher)

Carrying amount is after depreciation and any earlier impairment.

Asset at cost

Dr Impairment loss (P&L) ; Cr Asset (or accumulated impairment)

Whole loss goes to profit or loss.

Revalued asset

Dr Revaluation surplus (OCI) up to surplus held for that asset ; Dr P&L for the excess ; Cr Asset

Treated as a revaluation decrease under Ind AS 16.

Depreciation after impairment

New annual depreciation = (Revised carrying amount − Residual value) ÷ Remaining useful life

Applied prospectively from the period after impairment.

Floor on individual asset

Do not reduce the asset below the highest of: fair value less costs of disposal, value in use, zero

Any excess loss is allocated to other assets of the unit.

How to solve Recognising and Measuring Impairment Loss questions

1. 1Find the carrying amount at the date of testing: cost or revalued amount, less accumulated depreciation and earlier impairment. Depreciate up to the test date first.
2. 2Compute fair value less costs of disposal: fair value minus direct selling costs.
3. 3Compute value in use, usually by discounting cash flow forecasts. Skip it if fair value less costs of disposal already exceeds the carrying amount.
4. 4Take the higher of the two as the recoverable amount.
5. 5Compare with the carrying amount. If the recoverable amount is higher, state that no loss arises.
6. 6If a loss arises, check the model: cost model goes to profit or loss; revaluation model goes first to the revaluation surplus of that asset, then to profit or loss.
7. 7Pass the journal entry.
8. 8Recompute depreciation on the revised carrying amount over the remaining life, and show the revised carrying amount at the next reporting date.

Quickest way: Four-line impairment check

Common mistakes in Recognising and Measuring Impairment Loss

• Comparing the carrying amount with fair value without deducting costs of disposal.

  Students remember fair value but forget the 'less costs of disposal' part of the definition.

  Fix: Always subtract direct selling costs before comparing, as the recoverable amount uses the net figure.

• Taking the lower of fair value less costs of disposal and value in use as recoverable amount.

  Confusion with the 'lower of cost and NRV' rule for inventories.

  Fix: Recoverable amount is always the higher of the two.

• Charging the whole loss on a revalued asset to profit or loss.

  Students apply the cost-model treatment to every asset.

  Fix: Set it off against the revaluation surplus of the same asset first; only the excess goes to profit or loss.

• Not charging depreciation up to the test date before computing the carrying amount.

  Students use the opening book value from the question.

  Fix: Bring depreciation up to the date of impairment test, then compare.

• Continuing the old depreciation charge after impairment.

  The original depreciation rate looks fixed.

  Fix: Depreciation is revised prospectively using the revised carrying amount, residual value and remaining life.

• Reducing the asset below its own fair value less costs of disposal when the unit loss is allocated.

  Pro rata allocation is applied mechanically.

  Fix: Apply the floor and reallocate any excess to the other assets of the unit.

Worked examples