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CMA Final · Corporate Financial Reporting

Impairment of Assets (Ind AS 36) for CMA Final

Ind AS 36 makes sure an asset is not carried above what the entity can recover from it. Recoverable amount is the higher of fair value less costs of disposal and value in use. If carrying amount is higher, the difference is an impairment loss. Work out the recoverable amount, compare, then allocate the loss.

What this chapter covers

Ind AS 36 deals with one question: is an asset, or a group of assets, carried in the books at more than the entity can recover? The standard defines an impairment loss as the amount by which the carrying amount of an asset or a cash-generating unit exceeds its recoverable amount. Recoverable amount is the higher of fair value less costs of disposal and value in use.

The chapter moves from the simple case to the harder one. You first learn the definitions and how to spot an indicator. Then you measure recoverable amount, and book the loss for a single asset. After that come cash-generating units (CGUs), corporate assets and goodwill, where the loss is allocated in a fixed order. Last are reversals and disclosures.

This chapter connects to the rest of Corporate Financial Reporting in several places. Carrying amount comes from Ind AS 16 and Ind AS 38 (depreciation, amortisation, revaluation). Goodwill comes from Ind AS 103 business combinations, and fair value follows Ind AS 113. Segment disclosures link to Ind AS 108. So the chapter pulls together topics you study elsewhere, and a numerical here often tests those links too.

Impairment is a favourite for both parts of the paper. Section A can test definitions, such as what recoverable amount is, or which asset absorbs the loss first. The descriptive section can give you a CGU with goodwill and ask for the loss allocation and the revised carrying amounts. The workings are short and rule-based, so you can score full marks if the order of steps is clear. A single wrong comparison, for example using the lower of the two values instead of the higher, can cost the whole answer. The effort is modest compared with the marks, because the logic repeats in every question.

Impairment of Assets (Ind AS 36): topics in the order to study them

  1. 1Scope, Definitions and Identifying Impairment IndicatorsEvery later step uses the defined terms, so fix carrying amount, recoverable amount, CGU and value in use first.
  2. 2Measuring Recoverable Amount: Fair Value and Value in UseYou cannot compute any loss until you can find the higher of fair value less costs of disposal and value in use.
  3. 3Recognition and Measurement of Impairment Loss for an Individual AssetThis applies the comparison to one asset, which is the simplest case and the base for CGU questions.
  4. 4Cash-Generating Units, Corporate Assets and GoodwillThis is the hardest and most examined part, and it builds on the single-asset method with an allocation order.
  5. 5Reversal of Impairment Loss and DisclosuresReversals use the caps and allocation rules you learned earlier, so they come last, with disclosures as a short recall block.

How to prepare Impairment of Assets (Ind AS 36)

Treat this chapter as a fixed sequence of steps. Learn the sequence, then practise it on numbers until it is automatic.

  1. Write the definitions from paragraph 6 in your own words: carrying amount, recoverable amount, value in use, costs of disposal, CGU, corporate assets.
  2. Practise the core test: find fair value less costs of disposal, find value in use, take the higher, compare with carrying amount. Loss arises only if recoverable amount is lower.
  3. Learn when you test an individual asset and when you must move to its CGU. The asset is tested alone unless it does not generate largely independent cash inflows, with the exceptions in paragraph 22.
  4. Master the CGU allocation order from paragraph 104: goodwill first, then other assets pro rata on carrying amounts. Solve at least five problems, including one where an asset's own recoverable amount limits its write-down.
  5. Learn how corporate assets are handled: test the CGU or group of CGUs to which they belong, and recognise any loss under paragraph 104.
  6. Study reversals: goodwill is never reversed, and other assets cannot go above the lower of recoverable amount and the depreciated carrying amount had no loss been recognised.
  7. Finish with the disclosure list in paragraph 130 as a memory block, then attempt a timed mixed question and 10 MCQs.

Common mistakes in Impairment of Assets (Ind AS 36)

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

    Fix: Recoverable amount is the higher of the two. Write this at the top of every working.

  • Ignoring costs of disposal, or deducting finance costs and tax as costs of disposal.

    Fix: Deduct only incremental costs directly attributable to disposal. Exclude finance costs and income tax expense.

  • Spreading a CGU loss pro rata across all assets including goodwill.

    Fix: Remember the order: goodwill first, then the other assets pro rata on carrying amounts.

  • Writing an asset below its own recoverable amount when allocating a CGU loss.

    Fix: After each allocation, check the asset does not fall below its recoverable amount where that is determinable, and reallocate any excess to the other assets.

  • Reversing a goodwill impairment, or reversing an asset to a figure above its depreciated historical carrying amount.

    Fix: Never reverse goodwill. For other assets, cap the carrying amount at the lower of recoverable amount and the amount that would have existed had no loss been recognised.

  • Testing a corporate asset on its own.

    Fix: State that a corporate asset has no separate cash inflows, so you test the CGU or group of CGUs to which it belongs.

Last-day revision: Impairment of Assets (Ind AS 36)

  • Recoverable amount = higher of fair value less costs of disposal and value in use.
  • Impairment loss = carrying amount minus recoverable amount, only if carrying amount is higher.
  • Carrying amount is after accumulated depreciation and accumulated impairment losses.
  • Costs of disposal are incremental costs directly attributable to disposal, excluding finance costs and income tax expense.
  • Value in use is the present value of future cash flows expected from the asset or CGU.
  • An asset is tested alone unless it lacks largely independent cash inflows; then its CGU is tested.
  • CGU loss order: goodwill first, then other assets pro rata to carrying amounts.
  • Corporate assets cannot be tested alone unless management has decided to dispose of them; test the CGU they belong to.
  • Reversal of a loss on an asset other than goodwill goes to profit or loss, unless the asset is revalued; then it is a revaluation increase.
  • Reversal cannot lift an asset above the lower of recoverable amount and depreciated carrying amount without the earlier loss.
  • Impairment loss on goodwill is not reversed, since any later increase is likely internally generated goodwill.
  • Disclose events leading to the loss, amount, nature of asset or CGU description, recoverable amount and its basis.

Impairment of Assets (Ind AS 36) practice questions

Impairment of Assets (Ind AS 36) in other exams

The same ground in other exams, if you are preparing for more than one or want another angle on it.

Impairment of Assets (Ind AS 36): frequently asked questions

What is recoverable amount under Ind AS 36?

It is the higher of an asset's or CGU's fair value less costs of disposal and its value in use. You compare it with carrying amount to see whether an impairment loss exists.

In what order is an impairment loss of a CGU allocated?

Goodwill allocated to the CGU is reduced first. Any remaining loss is spread to the other assets of the unit pro rata on the basis of their carrying amounts.

Can an impairment loss on goodwill be reversed?

No. Any later rise in the recoverable amount of goodwill is likely to be internally generated goodwill, which Ind AS 38 does not allow to be recognised.

When do I test a CGU instead of a single asset?

You test the CGU when the asset does not generate cash inflows that are largely independent of other assets. The exceptions are where its fair value less costs of disposal is above carrying amount, or its value in use is close to that fair value, which can be measured.