Introduction
IAS 36 is an international accounting standard that provides guidance on how to account for and report on the impairment of assets. It applies to all assets, except those that are accounted for under specific standards such as financial instruments, investment properties, and inventories.
Impairment is the reduction in the value of an asset below its carrying amount, which is the amount at which an asset is recognized in the financial statements. The impairment can be caused by various factors such as changes in market conditions, technological advancements, or changes in the economic environment.
Scope and Key Definitions
The scope of IAS 36 covers all assets except for the following:
- Inventories
- Deferred tax assets
- Financial assets accounted for under IAS 39 Financial Instruments: Recognition and Measurement
- Biological assets related to agricultural activity accounted for under IAS 41 Agriculture
- Exploration and evaluation assets accounted for under IFRS 6 Exploration for and Evaluation of Mineral Resources
- Investment property accounted for under IAS 40 Investment Property
IAS 36 defines impairment as the condition where the carrying amount of an asset exceeds its recoverable amount. The recoverable amount is the higher of an asset's fair value less costs to sell and its value in use.
Recognition and Measurement
IAS 36 requires entities to test assets for impairment when there are indications that the asset may be impaired. Indicators of impairment can include:
- Significant changes in the asset's market value
- A significant decline in the asset's physical condition
- A significant decline in the asset's usefulness
- An adverse change in legal or economic factors that affect the asset
When an asset is impaired, the carrying amount of the asset must be reduced to its recoverable amount. The impairment loss is recognized in the income statement unless the asset is carried at revalued amount, in which case the impairment loss is treated as a revaluation decrease.
The recoverable amount of an asset is determined using either its fair value less costs to sell or its value in use. Fair value less costs to sell is the amount that would be received from selling the asset in an arm's length transaction, less the costs of selling the asset. Value in use is the present value of the future cash flows expected to be generated by the asset.
If the recoverable amount of an asset is less than its carrying amount, an impairment loss is recognized in the income statement. The impairment loss is the difference between the carrying amount of the asset and its recoverable amount.
Reversal of Impairment Losses
IAS 36 allows for the reversal of impairment losses if the reasons for the impairment no longer exist. The reversal of an impairment loss is recognized in the income statement to the extent that the carrying amount of the asset does not exceed what the carrying amount would have been if the impairment had not been recognized.
Disclosure Requirements
IAS 36 requires entities to disclose the following information:
- The amount of any impairment losses recognized during the period
- The amount of any impairment losses reversed during the period
- The recoverable amount of impaired assets
- The key assumptions used in determining the recoverable amount of impaired assets
- The segment or geographical area to which the impaired assets belong
Conclusion
IAS 36 provides guidance on how to account for and report on the impairment of assets. It requires entities to test assets for impairment when there are indications that the asset may be impaired, and to recognize impairment losses when the carrying amount of an asset exceeds its recoverable amount. IAS 36 also allows for the reversal of impairment losses if the reasons for the impairment no longer exist. Entities must disclose certain information related to impairment losses in their financial statements.
FAQs
Frequently Asked Questions about IAS 36
IAS 36 is an international accounting standard that provides guidance on how to account for and report on the impairment of assets.
IAS 36 applies to all assets, except those that are accounted for under specific standards such as financial instruments, investment properties, and inventories.
Impairment is the reduction in the value of an asset below its carrying amount, which is the amount at which an asset is recognized in the financial statements.
Indicators of impairment can include significant changes in the asset's market value, a significant decline in the asset's physical condition, a significant decline in the asset's usefulness, or an adverse change in legal or economic factors that affect the asset.
The recoverable amount of an asset is determined using either its fair value less costs to sell or its value in use. Fair value less costs to sell is the amount that would be received from selling the asset in an arm's length transaction, less the costs of selling the asset. Value in use is the present value of the future cash flows expected to be generated by the asset.
Yes, impairment losses can be reversed if the reasons for the impairment no longer exist.
Entities must disclose the amount of any impairment losses recognized during the period, the amount of any impairment losses reversed during the period, the recoverable amount of impaired assets, the key assumptions used in determining the recoverable amount of impaired assets, and the segment or geographical area to which the impaired assets belong.
How Future Connect Training's Final Accounts Training can help in understaing IAS 36?
Future Connect Training's Final Accounts Training can be helpful in understanding IAS 36 in several ways.
- Firstly, the training covers the basic principles and concepts of financial accounting, which is essential for understanding IAS 36 as it is an accounting standard. It explains the importance of accurate and transparent financial reporting and the need for proper accounting treatment of assets.
- Secondly, the training provides an in-depth understanding of the preparation of financial statements, including balance sheets and income statements. This knowledge is important in understanding the impact of impairment losses on an entity's financial statements and how to properly disclose them as required under IAS 36.
- Thirdly, the training covers the principles of asset valuation and depreciation, which are also key elements of IAS 36. Impairment losses are recognized when the carrying amount of an asset exceeds its recoverable amount, which is the higher of the asset's fair value less costs to sell or its value in use. Knowledge of asset valuation and depreciation is, therefore, essential for determining the recoverable amount of an asset.
- Finally, the training also covers the principles of financial analysis, including ratio analysis, which is essential for understanding the impact of impairment losses on an entity's financial performance. The financial analysis skills gained through the training can help in interpreting and analyzing the financial statements of an entity in accordance with IAS 36.
In conclusion, Future Connect Training's Final Accounts Training can be helpful in understanding IAS 36 as it provides a solid foundation in financial accounting principles, financial statement preparation, asset valuation and depreciation, and financial analysis.
