IAS 36 – Impairment of Assets

1 Why Impairment is needed?

One of the problems in using historical cost basis to value assets is that with the passage of time the carrying amount of asset may become significantly different from the recoverable amount. Recoverable amount in simple words mean the monetary value of benefits that can be rendered from the asset. Therefore, if the carrying amount of asset in the statement of financial position is not a reasonable expression of benefits it can render than financial information may become unreliable.

This issue has been taken in IAS 36 Impairment of assets prescribes the procedures that an entity applies to ensure that its assets are carried at no more than their recoverable amount.

1.1 Bottom line principle

Carrying amount of the asset should not exceed its recoverable amount

An asset is carried at more than its recoverable amount if its carrying amount exceeds the amount to be recovered through use or sale of the asset. If this is the case, the asset is described as impaired and the Standard requires the entity to recognise an impairment loss.

1.2 IAS 36 – Scope

Apart from setting out principles regarding asset’s impairment, this standard also discusses when the impairment loss already recognized is to be reversed.

This Standard shall be applied in accounting for the impairment of all assets including the following financial assets classified as subsidiaries, associates and joint ventures.

However, this standard does not apply to such assets for which existing IFRSs prescribes valuation procedures i.e.:

  1. Inventories
  2. assets arising from construction contracts
  3. deferred tax assets
  4. assets arising from employee benefits
  5. financial assets that are within the scope of IFRS 9
  6. financial assets other than subsidiaries, associates and joint ventures for which IAS 39 is applicable
  7. investment property that is measured at fair value
  8. biological assets measured at fair value less costs to sell
  9. deferred acquisition costs, and intangible assets, arising from an insurer’s contractual rights under insurance contracts
  10. non-current assets classified as held-for-sale