AS 26 Intangible Assets: Impairment, Retirement, Disposal and Disclosures

Understand Impairment, Retirement, Disposal and Disclosures

Key rules to remember

Gain or loss on disposal

Gain or (loss) = Net disposal proceeds − Carrying amount

Net disposal proceeds are sale price less selling costs. Show the result in the Statement of Profit and Loss.

Carrying amount

Carrying amount = Cost − Accumulated amortisation − Accumulated impairment losses

Amortise up to the date of disposal before you work out the gain or loss.

Recoverable amount (AS 28)

Recoverable amount = Higher of (Net selling price, Value in use)

Net selling price is selling price less costs of disposal. Value in use is the present value of estimated future cash flows.

Impairment loss (AS 28)

Impairment loss = Carrying amount − Recoverable amount, if carrying amount is higher

If recoverable amount is higher, there is no impairment loss.

Derecognition trigger

Derecognise on disposal OR when no future economic benefits are expected from use or disposal

Both triggers lead to removal from the books.

Amortisation after impairment (straight-line method)

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

This applies to the straight-line method. The depreciable amount is the revised carrying amount less any residual value, which is normally assumed to be zero under AS 26. If another method is used, it follows the pattern of benefits.

How to solve Impairment, Retirement, Disposal and Disclosures questions

1. 1Read the question and mark what is asked: gain or loss, impairment loss, journal entry or disclosure.
2. 2List cost, date of acquisition, useful life and amortisation method.
3. 3Compute amortisation up to the date of disposal or the balance sheet date, whichever is relevant.
4. 4Find the carrying amount: cost less accumulated amortisation less any impairment already booked.
5. 5For impairment, find net selling price and value in use. Take the higher as recoverable amount. Compare with carrying amount.
6. 6For disposal, find net proceeds after selling costs. Subtract the carrying amount to get the gain or loss.
7. 7Write the journal entry or the extract of the Statement of Profit and Loss.
8. 8If disclosures are asked, list them class-wise and add the reconciliation of carrying amounts.

Quickest way: Carrying amount first, then compare

Common mistakes in Impairment, Retirement, Disposal and Disclosures

• Using original cost instead of carrying amount to compute gain or loss.

  Students forget to deduct accumulated amortisation up to the disposal date.

  Fix: Always write the carrying amount working first, including amortisation for the part of the year up to disposal.

• Taking the lower of net selling price and value in use as recoverable amount.

  Prudence is confused with the AS 28 definition.

  Fix: Recoverable amount is the higher of the two. Repeat this until it is automatic.

• Ignoring selling costs when finding net proceeds.

  Students read only the sale price.

  Fix: Deduct costs of disposal from the sale price before comparing with the carrying amount.

• Showing gain on disposal as revenue.

  The gain looks like income.

  Fix: Show it as a gain in the Statement of Profit and Loss. AS 26 states that the gain should not be classified as revenue. AS 9 is the revenue standard.

• Not changing amortisation after an impairment loss.

  Students keep the old charge.

  Fix: Spread the revised carrying amount, less any residual value, over the remaining useful life. The simple division applies to the straight-line method.

• Giving incomplete disclosures, such as skipping the reconciliation or the research and development expense.

  Students remember only useful life and method.

  Fix: Use a checklist: class, internal or other, life or rate, method, gross and accumulated amounts, reconciliation, R&D expense.

Worked examples