IFRIC 10, also known as “Interim Financial Reporting and Impairment”, provides guidance on how companies should recognize and measure impairment losses on assets in their interim financial statements. This standard applies to all companies that prepare interim financial statements in accordance with IAS 34, Interim Financial Reporting.
Interim financial statements are financial statements that cover a period of less than a full fiscal year. They are usually issued on a quarterly or semi-annual basis and provide updates on a company’s financial position and performance.
Impairment is the reduction in value of an asset. It occurs when the carrying amount of an asset exceeds its recoverable amount. The carrying amount is the cost of the asset less any accumulated depreciation or amortization. The recoverable amount is the higher of an asset’s fair value less selling costs and its value in use.
The following are some definitions, explanations, examples, and case studies related to IFRIC 10:
Recognition of Impairment Losses
IFRIC 10 requires companies to recognize impairment losses on assets in their interim financial statements if there is evidence of impairment. Evidence of impairment may include significant changes in market conditions, legal or regulatory changes, or other factors that indicate the asset may not be recoverable.
Example:
A company owns a building that it uses as its headquarters. The company’s business has been impacted by the COVID-19 pandemic, and it has decided to downsize its operations. As a result, it has decided to sell the building. The company estimates that the fair value of the building is now $5 million, compared to its carrying amount of $7 million. In this case, the company would recognize an impairment loss of $2 million in its interim financial statements.
Measurement of Impairment Losses
IFRIC 10 requires companies to measure impairment losses on assets at the lower of their carrying amount or their recoverable amount. The recoverable amount is the higher of an asset’s fair value less selling costs and its value in use.
Example:
A company owns a manufacturing plant that it uses to produce goods. The company’s business has been impacted by the COVID-19 pandemic, and it has decided to close the plant. The company estimates that the fair value of the plant is now $3 million, compared to its carrying amount of $6 million. The company estimates that it could sell the plant for $2 million, and that it would cost $1 million to dismantle and remove the plant. In this case, the recoverable amount of the plant is $3 million (fair value less selling costs), which is lower than its carrying amount of $6 million. Therefore, the company would recognize an impairment loss of $3 million in its interim financial statements.
Reversal of Impairment Losses
IFRIC 10 allows companies to reverse impairment losses on assets in their interim financial statements if there is evidence of a change in the recoverable amount of the asset. However, the amount of the reversal cannot exceed the amount of the original impairment loss.
Example: A company owns a trademark that it uses to market its products. The company’s business has been impacted by the COVID-19 pandemic, and it has decided to discontinue one of its product lines. As a result, the company estimates that the fair value of the trademark is now $2 million, compared to its carrying amount of $1 million. In this case, the company would recognize an impairment loss of $1 million in its interim financial statements. However, six months later, the company receives a lucrative offer from a competitor to purchase the trademark for $3 million. In this case, the company would be able to reverse the impairment loss and recognize a gain of $1 million in its interim financial statements.
Case Study
Company X owns a fleet of trucks that it uses to transport goods. The company prepares quarterly interim financial statements in accordance with IAS 34.
At the end of the first quarter, the company estimates that the fair value of the fleet is $4 million, compared to its carrying amount of $6 million. The company believes that the decrease in fair value is due to changes in market conditions and increased competition.
In this case, the company would recognize an impairment loss of $2 million in its interim financial statements for the first quarter. The impairment loss would be recorded as an expense on the income statement and reduce the carrying amount of the fleet on the balance sheet.
At the end of the second quarter, the company re-evaluates the fair value of the fleet and determines that it has increased to $5 million. The company believes that the increase in fair value is due to increased demand for its transportation services.
In this case, the company would be able to reverse the impairment loss and recognize a gain of $1 million in its interim financial statements for the second quarter. The gain would be recorded as income on the income statement and increase the carrying amount of the fleet on the balance sheet. However, the gain cannot exceed the amount of the original impairment loss of $2 million.
In conclusion, IFRIC 10 provides guidance on how companies should recognize and measure impairment losses on assets in their interim financial statements. It is important for companies to carefully evaluate their assets and consider any evidence of impairment in order to accurately reflect their financial position and performance in their interim financial statements.