Financial Accounting Financial Reporting FR

IAS 36 Impairment of Assets

IAS 36
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IAS 36, or International Accounting Standard 36, “Impairment of Assets,” is an accounting standard issued by the International Accounting Standards Board (IASB) that provides guidance on the assessment, recognition, and measurement of impairment of assets. Impairment of assets occurs when the carrying amount of an asset exceeds its recoverable amount, which is the higher of its fair value less costs to sell and its value in use. Here are some examples of how IAS 36 may be applied in practice:

  1. Example 1: XYZ Inc, a manufacturing company, owns a production plant that has been significantly impacted by a decline in demand for its products, resulting in lower projected future cash flows.

XYZ Inc assesses the carrying amount of the production plant for impairment in accordance with IAS 36. The company estimates the recoverable amount of the plant, considering the higher of its fair value less costs to sell and its value in use. If the estimated recoverable amount is lower than the carrying amount of the plant, XYZ Inc recognizes an impairment loss in the income statement for the difference between the carrying amount and the recoverable amount. The impairment loss reduces the carrying amount of the plant, and the reduced carrying amount becomes its new cost basis for subsequent accounting periods.

  1. Example 2: ABC Corp, a mining company, owns a mine that has been impacted by declining commodity prices, resulting in reduced expected future cash flows from the mining operation.

ABC Corp performs an impairment test on the carrying amount of the mine in accordance with IAS 36. The company compares the estimated recoverable amount of the mine, considering the higher of its fair value less costs to sell and its value in use, with its carrying amount. If the estimated recoverable amount is lower than the carrying amount, ABC Corp recognizes an impairment loss in the income statement for the difference between the carrying amount and the recoverable amount. The impairment loss is allocated to the assets of the mine, such as machinery, equipment, and mineral reserves, on a pro-rata basis based on their carrying amounts, and the reduced carrying amounts become their new cost bases for subsequent accounting periods.

  1. Example 3: DEF Ltd, a hospitality company, owns a hotel property that has been affected by a decline in occupancy rates and average room rates, resulting in lower projected future cash flows.

DEF Ltd performs an impairment review of the carrying amount of the hotel property in accordance with IAS 36. The company estimates the recoverable amount of the property, considering the higher of its fair value less costs to sell and its value in use. If the estimated recoverable amount is lower than the carrying amount of the property, DEF Ltd recognizes an impairment loss in the income statement for the difference between the carrying amount and the recoverable amount. The impairment loss reduces the carrying amount of the property, and the reduced carrying amount becomes its new cost basis for subsequent accounting periods.

It’s important to note that the specific application of IAS 36 may vary depending on the individual circumstances and accounting policies of each entity. Professional judgment and expertise may be required to properly apply the impairment testing requirements in IAS 36 and ensure compliance with the applicable accounting standards and regulations in the assessment, recognition, and measurement of impairment of assets.