Accounting Standard (AS) 28
(issued 2002)
Impairment ofAssets
Contents
OBJECTIVE
SCOPE Paragraphs 1-3
DEFINITIONS 4
IDENTIFYING AN ASSET THAT MAY BE IMPAIRED 5-13
MEASUREMENT OF RECOVERABLE AMOUNT 14-55
Net Selling Price 20-24
Value in Use 25-55
Basis for Estimates of Future Cash Flows 26-30
Composition of Estimates of Future Cash Flows 31-45
Foreign Currency Future Cash Flows 46
Discount Rate 47-55
RECOGNITION AND MEASUREMENT OF AN
IMPAIRMENT LOSS 56-62
CASH-GENERATING UNITS 63-92
Identification of the Cash-Generating Unit to Which an
Asset Belongs 64-71
Recoverable Amount and Carrying Amount of a
Cash-Generating Unit 72-86
Continued../. .
566
Goodwill 78-82
Corporate Assets 83-86
Impairment Loss for a Cash-Generating Unit 87-92
REVERSAL OF AN IMPAIRMENT LOSS 93-111
Reversal of an Impairment Loss for an Individual Asset 101-105
Reversal of an Impairment Loss for a
Cash-Generating Unit 106-107
Reversal of an Impairment Loss for Goodwill 108-111
IMPAIRMENT IN CASE OF DISCONTINUING
OPERATIONS 112-116
DISCLOSURE 117-123
TRANSITIONAL PROVISIONS 124-125
APPENDIX
Accounting Standard (AS) 28
(issued 2002)
Impairment ofAssets
(This Accounting Standard includes paragraphs set in bold italic type
and plain type, which have equal authority. Paragraphs in bold italic
type indicate the main principles. This Accounting Standard should be
read in the context of its objective and the Preface to the Statements of
Accounting Standards1.)
Accounting Standard (AS) 28, ‘Impairment of Assets’, issued by the Council
of the Institute of Chartered Accountants of India, comes into effect in
respect of accounting periods commencing on or after 1-4-2004.
This Standard is mandatory in nature2 in respect of accounting periods
commencing on or after:
(a) 1-4-20043, for the enterprises, which fall in any one or more of
the following categories, at any time during the accounting period:
(i) Enterprises whose equity or debt securities are listed
whether in India or outside India.
1 Attention is specifically drawn to paragraph 4.3 of the Preface, according to which
Accounting Standards are intended to apply only to items which are material.
2 Reference may be made to the section titled ‘Announcements of the council
regarding status of various documents issued by the Institute of Chartered
Accountants of India’ appearing at the beginning of this compendium for a detailed
discussion on the implications of the mandatory status of an accounting standard.
3 It was originally decided to make AS 28 mandatory in respect of accounting
periods commencing on or after 1-4-2004 for the following :
(i) Enterprises whose equity or debt securities are listed on a recognised
stock exchange in India, and enterprises that are in the process of issuing
equity or debt securities that will be listed on a recognised stock
exchange in India as evidenced by the board of directors’ resolution in
this regard.
(ii) All other commercial, industrial and business reporting enterprises,
whose turnover for the accounting period exceeds Rs. 50 crores.
In respect of all other enterprises, it was originally decided to make AS 28 mandatory
in respect of accounting periods commencing on or after 1-4-2005.
568 AS 28 (issued 2002)
(ii) Enterprises which are in the process of listing their equity or
debt securities as evidenced by the board of directors’
resolution in this regard.
(iii) Banks including co-operative banks.
(iv) Financial institutions.
(v) Enterprises carrying on insurance business.
(vi) All commercial, industrial and business reporting enterprises,
whose turnover for the immediately preceding accounting
period on the basis of audited financial statements exceeds
Rs. 50 crore. Turnover does not include ‘other income’.
(vii) All commercial, industrial and business reporting enterprises
having borrowings including public deposits, in excess of
Rs. 10 crore at any time during the accounting period.
(viii) Holding and subsidiary enterprises of any one of the above
at any time during the accounting period.
(b) 1-4-20064 , for the enterprises which do not fall in any of the
categories in (a) above but fall in any one ormore of the following
categories:
(i) All commercial, industrial and business reporting enterprises,
4 It was originally decided to make AS 28 mandatory in respect of accounting
periods commencing on or after 1-4-2004 for the following:
(i) Enterprises whose equity or debt securities are listed on a recognised
stock exchange in India, and enterprises that are in the process of issuing
equity or debt securities that will be listed on a recognised stock
exchange in India as evidenced by the board of directors’ resolution in
this regard.
(ii) All other commercial, industrial and business reporting enterprises,
whose turnover for the accounting period exceeds Rs. 50 crores.
In respect of all other enterprises, it was originally decided to make AS 28 mandatory
in respect of accounting periods commencing on or after 1-4-2005.
The Institute, in November 2005, considering that detailed cash flow projections of
enterprises covered under the categories (b) and (c) are often not readily available,
has relaxed the measurement of the ‘value in use’ for such enterprises. See also
footnote 8.
Impairment of Assets 569
whose turnover for the immediately preceding accounting
period on the basis of audited financial statements exceeds
Rs. 40 lakhs but does not exceed Rs. 50 crore. Turnover
does not include ‘other income’.
(ii) All commercial, industrial and business reporting enterprises
having borrowings, including public deposits, in excess Rs.
1 crore but not in excess of Rs. 10 crore at any time during
the accounting period.
(iii) Holding and subsidiary enterprises of any one of the above
at any time during the accounting period.
(c) 1-4-20085, for the enterprises, which do not fall in any of the
categories in (a) and (b) above.
Earlier application of the Accounting Standard is encouraged.
The following is the text of the Accounting Standard.
Objective
The objective of this Statement is to prescribe the procedures that an
enterprise applies to ensure that its assets are carried at no more than their
recoverable amount. An asset is carried atmore 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
this Statement requires the enterprise to recognise an impairment loss. This
Statement also specifies when an enterprise should reverse an impairment
loss and it prescribes certain disclosures for impaired assets.
Scope
1. This Statement should be applied in accounting for the impairment
of all assets, other than:
(a) inventories (see AS 2, Valuation of Inventories);
5 ibid.
570 AS 28 (issued 2002)
(b) assets arising from construction contracts (see AS 7,
Accounting for Construction Contracts6);
(c) financial assets7 , including investments that are included in
the scope of AS 13, Accounting for Investments; and
(d) deferred tax assets (see AS 22, Accounting for Taxes on
Income).
2. This Statement does not apply to inventories, assets arising fromconstruction
contracts, deferred tax assets or investments because existing Accounting
Standards applicable to these assets already contain specific requirements for
recognising and measuring the impairment related to these assets.
3. This Statement applies to assets that are carried at cost. It also applies to
assets that are carried at revalued amounts in accordancewith other applicable
Accounting Standards. However, identifying whether a revalued asset may
be impaired depends on the basis used to determine the fair value of the asset:
(a) if the fair value of the asset is itsmarket value, the only difference
between the fair value of the asset and its net selling price is the
direct incremental costs to dispose of the asset:
(i) if the disposal costs are negligible, the recoverable amount
of the revalued asset is necessarily close to, or greater than,
its revalued amount (fair value). In this case, after the
revaluation requirements have been applied, it is unlikely
that the revalued asset is impaired and recoverable amount
need not be estimated; and
(ii) if the disposal costs are not negligible, net selling price of
the revalued asset is necessarily less than its fair value.
Therefore, the revalued asset will be impaired if its value in
6 This Standard has been revised and titled as ‘Construction Contracts’. The revised
AS 7 is published elsewhere in this Compendium.
7A financial asset is any asset that is:
(a) cash;
(b) a contractual right to receive cash or another financial asset from another
enterprise;
(c) a contractual right to exchange financial instruments with another
enterprise under conditions that are potentially favourable; or
(d) an ownership interest in another enterprise.
Impairment of Assets 571
use is less than its revalued amount (fair value). In this case,
after the revaluation requirements have been applied, an
enterprise applies this Statement to determine whether the
asset may be impaired; and
(b) if the asset’s fair value is determined on a basis other than its
market value, its revalued amount (fair value) may be greater or
lower than its recoverable amount. Hence, after the revaluation
requirements have been applied, an enterprise applies this
Statement to determine whether the asset may be impaired.
Definitions
4. The following terms are used in this Statement with the meanings
specified:
Recoverable amount is the higher of an asset’s net selling price and its
value in use.
Value in use is the present value of estimated future cash flows expected
to arise from the continuing use of an asset and from its disposal at the
end of its useful life.8
8 The Institute, in November 2005, considering that detailed cash flow projections of
Small and Medium-sized Enterprises (SMEs) are often not readily available, has
allowed such enterprises to measure the ‘value in use’ on the basis of reasonable
estimate thereof instead of computing the value in use by present value technique.
Therefore, the definition of the term ‘value in use’ in the context of SMEs
would read as follows:
“Value in use is the present value of estimated future cash flows expected
to arise from the continuing use of an asset and from its disposal at the
end of its useful life, or a reasonable estimate thereof”.
The above change in the definition of ‘value in use’ implies that instead of
using the present value technique, a reasonable estimate of the ‘value in use’ can
be made. Consequently, if an SME chooses to measure the ‘value in use’ by not
using the present value technique, the relevant provisions of AS 28, such as discount
rate etc., would not be applicable to such SME. Further, such SME need not
disclose the information required by paragraph 121(g) of the Standard. Subject to
this, the other provisions of AS 28 would be applicable to SMEs.
[For full text of the Announcement issued in this regard, reference may be made to
the section titled ‘Announcements of the Council regarding status of various documents
issued by the Institute of Chartered Accountants of India’ appearing at the
beginning of this Compendium.]
572 AS 28 (issued 2002)
Net selling price is the amount obtainable from the sale of an asset in
an arm’s length transaction between knowledgeable, willing parties,
less the costs of disposal.
Costs of disposal are incremental costs directly attributable to the
disposal of an asset, excluding finance costs and income tax expense.
An impairment loss is the amount by which the carrying amount of an
asset exceeds its recoverable amount.
Carrying amount is the amount at which an asset is recognised in the
balance sheet after deducting any accumulated depreciation
(amortisation) and accumulated impairment losses thereon.
Depreciation (Amortisation) is a systematic allocation of the depreciable
amount of an asset over its useful life.9
Depreciable amount is the cost of an asset, or other amount substituted
for cost in the financial statements, less its residual value.
Useful life is either:
(a) the period of time over which an asset is expected to be used
by the enterprise; or
(b) the number of production or similar units expected to be
obtained from the asset by the enterprise.
A cash generating unit is the smallest identifiable group of assets that
generates cash inflows from continuing use that are largely independent
of the cash inflows from other assets or groups of assets.
Corporate assets are assets other than goodwill that contribute to the
future cash flows of both the cash generating unit under review and
other cash generating units.
An active market is a market where all the following conditions exist :
(a) the items traded within the market are homogeneous;
9 In the case of an intangible asset or goodwill, the term ‘amortisation’ is generally
used instead of ‘depreciation’. Both terms have the same meaning.
Impairment of Assets 573
(b) willing buyers and sellers can normally be found at any time;
and
(c) prices are available to the public.
Identifying anAsset thatmay be Impaired
5. An asset is impaired when the carrying amount of the asset exceeds its
recoverable amount. Paragraphs 6 to 13 specify when recoverable amount
should be determined. These requirements use the term ‘an asset’ but apply
equally to an individual asset or a cash-generating unit.
6. An enterprise should assess at each balance sheet date whether
there is any indication that an asset may be impaired. If any such
indication exists, the enterprise should estimate the recoverable amount
of the asset.
7. Paragraphs 8 to 10 describe some indications that an impairment loss
may have occurred: if any of those indications is present, an enterprise is
required to make a formal estimate of recoverable amount. If no indication
of a potential impairment loss is present, this Statement does not require an
enterprise to make a formal estimate of recoverable amount.
8. In assessing whether there is any indication that an asset may be
impaired, an enterprise should consider, as a minimum, the following
indications:
External sources of information
(a) during the period, an asset’s market value has declined
significantly more than would be expected as a result of the
passage of time or normal use;
(b) significant changes with an adverse effect on the enterprise
have taken place during the period, or will take place in the
near future, in the technological, market, economic or legal
environment in which the enterprise operates or in the market
to which an asset is dedicated;
574 AS 28 (issued 2002)
(c) market interest rates or other market rates of return on
investments have increased during the period, and those
increases are likely to affect the discount rate used in
calculating an asset’s value in use and decrease the asset’s
recoverable amount materially;
(d) the carrying amount of the net assets of the reporting
enterprise is more than its market capitalisation;
Internal sources of information
(e) evidence is available of obsolescence or physical damage of
an asset;
(f) significant changes with an adverse effect on the enterprise
have taken place during the period, or are expected to take
place in the near future, in the extent to which, or manner in
which, an asset is used or is expected to be used. These changes
include plans to discontinue or restructure the operation to
which an asset belongs or to dispose of an asset before the
previously expected date; and
(g) evidence is available from internal reporting that indicates
that the economic performance of an asset is, or will be, worse
than expected.
9. The list of paragraph 8 is not exhaustive. An enterprise may identify
other indications that an assetmay be impaired and these would also require
the enterprise to determine the asset’s recoverable amount.
10. Evidence from internal reporting that indicates that an asset may be
impaired includes the existence of:
(a) cash flows for acquiring the asset, or subsequent cash needs for
operating ormaintaining it, that are significantly higher than those
originally budgeted;
(b) actual net cash flows or operating profit or loss flowing from the
asset that are significantly worse than those budgeted;
Impairment of Assets 575
(c) a significant decline in budgeted net cash flows or operating profit,
or a significant increase in budgeted loss, flowing fromthe asset;
or
(d) operating losses or net cash outflows for the asset, when current
period figures are aggregated with budgeted figures for the future.
11. The concept ofmateriality applies in identifyingwhether the recoverable
amount of an asset needs to be estimated. For example, if previous
calculations show that an asset’s recoverable amount is significantly
greater than its carrying amount, the enterprise need not re-estimate the
asset’s recoverable amount if no events have occurred that would eliminate
that difference. Similarly, previous analysis may show that an asset’s
recoverable amount is not sensitive to one (or more) of the indications listed
in paragraph 8.
12. As an illustration of paragraph 11, if market interest rates or other
market rates of return on investments have increased during the period, an
enterprise is not required to make a formal estimate of an asset’s recoverable
amount in the following cases:
(a) if the discount rate used in calculating the asset’s value in use is
unlikely to be affected by the increase in these market rates. For
example, increases in short-term interest rates may not have a
material effect on the discount rate used for an asset that has a
long remaining useful life; or
(b) if the discount rate used in calculating the asset’s value in use is
likely to be affected by the increase in these market rates but
previous sensitivity analysis of recoverable amount shows that:
(i) it is unlikely that there will be a material decrease in
recoverable amountbecause future cash flows are also likely
to increase. For example, in some cases, an enterprise may
be able to demonstrate that it adjusts its revenues to
compensate for any increase in market rates; or
(ii) the decrease in recoverable amount is unlikely to result in a
material impairment loss.
576 AS 28 (issued 2002)
13. If there is an indication that an assetmay be impaired, thismay indicate
that the remaining useful life, the depreciation (amortisation) method or the
residual value for the asset need to be reviewed and adjusted under the
Accounting Standard applicable to the asset, such as Accounting Standard
(AS) 6, Depreciation Accounting1 0 , even if no impairment loss is recognised
for the asset.
Measurement ofRecoverableAmount
14. This Statement defines recoverable amount as the higher of an asset’s
net selling price and value in use. Paragraphs 15 to 55 set out the requirements
for measuring recoverable amount. These requirements use the term ‘an
asset’ but apply equally to an individual asset or a cash-generating unit.
15. It is not always necessary to determine both an asset’s net selling price
and its value in use. For example, if either of these amounts exceeds the
asset’s carrying amount, the asset is not impaired and it is not necessary to
estimate the other amount.
16. It may be possible to determine net selling price, even if an asset is not
traded in an active market. However, sometimes it will not be possible to
determine net selling price because there is no basis for making a reliable
estimate of the amount obtainable from the sale of the asset in an arm’s
length transaction between knowledgeable and willing parties. In this case,
the recoverable amount of the asset may be taken to be its value in use.
17. If there is no reason to believe that an asset’s value in use materially
exceeds its net selling price, the asset’s recoverable amount may be taken to
be its net selling price. This will often be the case for an asset that is held for
disposal. This is because the value in use of an asset held for disposal will
consistmainly of the net disposal proceeds, since the future cash flows from
continuing use of the asset until its disposal are likely to be negligible.
18. Recoverable amount is determined for an individual asset, unless the
asset does not generate cash inflows from continuing use that are largely
independent of those from other assets or groups of assets. If this is the
10 From the date of Accounting Standard (AS) 26, ‘Intangible Assets’, becoming
mandatory for the concerned enterprises, AS 6 stands withdrawn insofar as it relates
to the amortisation (depreciation) of intangible assets (see AS 26).
Impairment of Assets 577
case, recoverable amount is determined for the cash-generating unit to which
the asset belongs (see paragraphs 63 to 86), unless either:
(a) the asset’s net selling price is higher than its carrying amount; or
(b) the asset’s value in use can be estimated to be close to its net
selling price and net selling price can be determined.
19. In some cases, estimates, averages and simplified computations may
provide a reasonable approximation of the detailed computations illustrated
in this Statement for determining net selling price or value in use.
Net Selling Price
20. The best evidence of an asset’s net selling price is a price in a binding
sale agreement in an arm’s length transaction, adjusted for incremental costs
that would be directly attributable to the disposal of the asset.
21. If there is no binding sale agreement but an asset is traded in an active
market, net selling price is the asset’s market price less the costs of disposal.
The appropriate market price is usually the current bid price.When current
bid prices are unavailable, the price of themost recent transactionmay provide
a basis from which to estimate net selling price, provided that there has not
been a significant change in economic circumstances between the transaction
date and the date at which the estimate is made.
22. If there is no binding sale agreement or active market for an asset, net
selling price is based on the best information available to reflect the amount
that an enterprise could obtain, at the balance sheet date, for the disposal of
the asset in an arm’s length transaction between knowledgeable,willing parties,
after deducting the costs of disposal. In determining this amount, an enterprise
considers the outcome of recent transactions for similar assets within the
same industry. Net selling price does not reflect a forced sale, unless
management is compelled to sell immediately.
23. Costs of disposal, other than those that have already been recognised
as liabilities, are deducted in determining net selling price. Examples of such
costs are legal costs, costs of removing the asset, and direct incremental
costs to bring an asset into condition for its sale. However, termination
benefits and costs associated with reducing or reorganising a business
578 AS 28 (issued 2002)
following the disposal of an asset are not direct incremental costs to dispose
of the asset.
24. Sometimes, the disposal of an asset would require the buyer to take
over a liability and only a single net selling price is available for both the asset
and the liability. Paragraph 76 explains how to deal with such cases.
Value in Use
25. Estimating the value in use of an asset involves the following steps:
(a) estimating the future cash inflows and outflows arising from
continuing use of the asset and from its ultimate disposal; and
(b) applying the appropriate discount rate to these future cash flows.
Basis for Estimates of Future Cash Flows
26. In measuring value in use:
(a) cash flow projections should be based on reasonable and
supportable assumptions that represent management’s best
estimate of the set of economic conditions that will exist over
the remaining useful life of the asset. Greater weight should
be given to external evidence;
(b) cash flow projections should be based on the most recent
financial budgets/forecasts that have been approved by
management. Projections based on these budgets/forecasts
should cover a maximum period of five years, unless a longer
period can be justified; and
(c) cash flow projections beyond the period covered by the most
recent budgets/forecasts should be estimated by extrapolating
the projections based on the budgets/forecasts using a steady
or declining growth rate for subsequent years, unless an
increasing rate can be justified. This growth rate should not
exceed the long-term average growth rate for the products,
industries, or country or countries in which the enterprise
operates, or for the market in which the asset is used, unless
a higher rate can be justified.
Impairment of Assets 579
27. Detailed, explicit and reliable financial budgets/forecasts of future cash
flows for periods longer than five years are generally not available. For this
reason, management’s estimates of future cash flows are based on the most
recent budgets/forecasts for a maximum of five years. Management may
use cash flow projections based on financial budgets/forecasts over a period
longer than five years if management is confident that these projections are
reliable and it can demonstrate its ability, based on past experience, to forecast
cash flows accurately over that longer period.
28. Cash flowprojections until the end of an asset’s useful life are estimated
by extrapolating the cash flow projections based on the financial budgets/
forecasts using a growth rate for subsequent years. This rate is steady or
declining, unless an increase in the ratematches objective information about
patterns over a product or industry lifecycle. If appropriate, the growth rate
is zero or negative.
29. Where conditions are very favourable, competitors are likely to enter
the market and restrict growth. Therefore, enterprises will have difficulty in
exceeding the average historical growth rate over the long term (say, twenty
years) for the products, industries, or country or countries in which the
enterprise operates, or for the market in which the asset is used.
30. In using information from financial budgets/forecasts, an enterprise
considers whether the information reflects reasonable and supportable
assumptions and represents management’s best estimate of the set of
economic conditions thatwill exist over the remaining useful life of the asset.
Composition of Estimates of Future Cash Flows
31. Estimates of future cash flows should include:
(a) projections of cash inflows from the continuing use of the asset;
(b) projections of cash outflows that are necessarily incurred to
generate the cash inflows from continuing use of the asset
(including cash outflows to prepare the asset for use) and
that can be directly attributed, or allocated on a reasonable
and consistent basis, to the asset; and
(c) net cash flows, if any, to be received (or paid) for the disposal
of the asset at the end of its useful life.
580 AS 28 (issued 2002)
32. Estimates of future cash flows and the discount rate reflect consistent
assumptions about price increases due to general inflation. Therefore, if the
discount rate includes the effect of price increases due to general inflation,
future cash flows are estimated in nominal terms. If the discount rate
excludes the effect of price increases due to general inflation, future cash
flows are
estimated in real terms but include future specific price increases or
decreases.
33. Projections of cash outflows include future overheads that can be
attributed directly, or allocated on a reasonable and consistent basis, to the
use of the asset.
34. When the carrying amount of an asset does not yet include all the cash
outflows to be incurred before it is ready for use or sale, the estimate of
future cash outflows includes an estimate of any further cash outflow that is
expected to be incurred before the asset is ready for use or sale. For example,
this is the case for a building under construction or for a development project
that is not yet completed.
35. To avoid double counting, estimates of future cash flows do not include:
(a) cash inflows from assets that generate cash inflows from
continuing use that are largely independent of the cash inflows
from the asset under review (for example, financial assets such
as receivables); and
(b) cash outflows that relate to obligations that have already been
recognised as liabilities (for example, payables, pensions or
provisions).
36. Future cash flows should be estimated for the asset in its current
condition. Estimates of future cash flows should not include estimated
future cash inflows or outflows that are expected to arise from:
(a) a future restructuring to which an enterprise is not yet
committed; or
(b) future capital expenditure that will improve or enhance the
asset in excess of its originally assessed standard of
performance.
Impairment of Assets 581
37. Because future cash flows are estimated for the asset in its current
condition, value in use does not reflect:
(a) future cash outflows or related cost savings (for example,
reductions in staff costs) or benefits that are expected to arise
from a future restructuring to which an enterprise is not yet
committed; or
(b) future capital expenditure that will improve or enhance the asset
in excess of its originally assessed standard of performance or
the related future benefits from this future expenditure.
38. A restructuring is a programme that is planned and controlled by
management and that materially changes either the scope of the business
undertaken by an enterprise or the manner in which the business is
conducted.
39. When an enterprise becomes committed to a restructuring, some assets
are likely to be affected by this restructuring.Once the enterprise is committed
to the restructuring, in determining value in use, estimates of future cash
inflows and cash outflows reflect the cost savings and other benefits from
the restructuring (based on the most recent financial budgets/forecasts that
have been approved by management).
Example 5 given in theAppendix illustrates the effect of a future restructuring
on a value in use calculation.
40. Until an enterprise incurs capital expenditure that improves or enhances
an asset in excess of its originally assessed standard of performance, estimates
of future cash flows do not include the estimated future cash inflows that are
expected to arise from this expenditure (see Example 6 given in the
Appendix).
41. Estimates of future cash flows include future capital expenditure
necessary to maintain or sustain an asset at its originally assessed standard
of performance.
42. Estimates of future cash flows should not include:
(a) cash inflows or outflows from financing activities; or
(b) income tax receipts or payments.
582 AS 28 (issued 2002)
43. Estimated future cash flows reflect assumptions that are consistent
with the way the discount rate is determined. Otherwise, the effect of some
assumptions will be counted twice or ignored. Because the time value of
money is considered by discounting the estimated future cash flows, these
cash flows exclude cash inflows or outflows from financing activities.
Similarly, since the discount rate is determined on a pre-tax basis, future
cash flows are also estimated on a pre-tax basis.
44. The estimate of net cash flows to be received (or paid) for the
disposal of an asset at the end of its useful life should be the amount
that an enterprise expects to obtain from the disposal of the asset in an
arm’s length transaction between knowledgeable, willing parties, after
deducting the estimated costs of disposal.
45. The estimate of net cash flows to be received (or paid) for the disposal
of an asset at the end of its useful life is determined in a similar way to an
asset’s net selling price, except that, in estimating those net cash flows:
(a) an enterprise uses prices prevailing at the date of the estimate for
similar assets that have reached the end of their useful life and
that have operated under conditions similar to those in which the
asset will be used; and
(b) those prices are adjusted for the effect of both future price
increases due to general inflation and specific future price increases
(decreases). However, if estimates of future cash flows
from the asset’s continuing use and the discount rate exclude the
effect of general inflation, this effect is also excluded from the
estimate of net cash flows on disposal.
Foreign Currency Future Cash Flows
46. Future cash flows are estimated in the currency in which they will be
generated and then discounted using a discount rate appropriate for
that currency. An enterprise translates the present value obtained
using the exchange rate at the balance sheet date (described in
Accounting Standard
(AS) 11,Accounting for the Effects of Changes in Foreign Exchange Rates11 ,
as the closing rate).
11 AS 11 has been revised in 2003, and titled as ‘The Effects of Changes in Foreign
Exchange Rates’. The revised Standard is published elsewhere in this Compendium.
Impairment of Assets 583
Discount Rate
47. The discount rate(s) should be a pre tax rate(s) that reflect(s)
current market assessments of the time value of money and the risks
specific to the asset. The discount rate(s) should not reflect risks
for which future cash flow estimates have been adjusted.
48. A rate that reflects current market assessments of the time value of
money and the risks specific to the asset is the return that investors would
require if they were to choose an investment that would generate cash flows
of amounts, timing and risk profile equivalent to those that the enterprise expects
to derive fromthe asset. This rate is estimated fromthe rate implicit in current
market transactions for similar assets or from the weighted average cost of
capital of a listed enterprise that has a single asset (or a portfolio of assets)
similar in terms of service potential and risks to the asset under review.
49. When an asset-specific rate is not directly available from the market,
an enterprise uses other bases to estimate the discount rate. The purpose is
to estimate, as far as possible, a market assessment of:
(a) the time value of money for the periods until the end of the asset’s
useful life; and
(b) the risks that the future cash flows will differ in amount or timing
from estimates.
50. As a starting point, the enterprisemay take into account the following rates:
(a) the enterprise’s weighted average cost of capital determined using
techniques such as the Capital Asset Pricing Model;
(b) the enterprise’s incremental borrowing rate; and
(c) other market borrowing rates.
51. These rates are adjusted:
(a) to reflect the way that the market would assess the specific risks
associated with the projected cash flows; and
(b) to exclude risks that are not relevant to the projected cash flows.
584 AS 28 (issued 2002)
Consideration is given to risks such as country risk, currency risk, price risk
and cash flow risk.
52. To avoid double counting, the discount rate does not reflect risks for
which future cash flow estimates have been adjusted.
53. The discount rate is independent of the enterprise’s capital structure
and the way the enterprise financed the purchase of the asset because the
future cash flows expected to arise from an asset do not depend on the way
in which the enterprise financed the purchase of the asset.
54. When the basis for the rate is post-tax, that basis is adjusted to reflect
a pre-tax rate.
55. An enterprise normally uses a single discount rate for the estimate of
an asset’s value in use. However, an enterprise uses separate discount rates
for different future periods where value in use is sensitive to a difference in
risks for different periods or to the term structure of interest rates.
Recognition and Measurement of an Impairment
Loss
56. Paragraphs 57 to 62 set out the requirements for recognising and
measuring impairment losses for an individual asset. Recognition and
measurement of impairment losses for a cash-generating unit are dealt with
in paragraphs 87 to 92.
57. If the recoverable amount of an asset is less than its carrying
amount, the carrying amount of the asset should be reduced to its
recoverable amount. That reduction is an impairment loss.
58. An impairment loss should be recognised as an expense in the
statement of profit and loss immediately, unless the asset is carried at
revalued amount in accordance with another Accounting Standard (see
Accounting Standard (AS) 10, Accounting for Fixed Assets), in which
case any impairment loss of a revalued asset should be treated as a
revaluation decrease under that Accounting Standard.
59. An impairment loss on a revalued asset is recognised as an expense in
the statement of profit and loss. However, an impairment loss on a revalued
Impairment of Assets 585
asset is recognised directly against any revaluation surplus for the asset to
the extent that the impairment loss does not exceed the amount held in the
revaluation surplus for that same asset.
60. When the amount estimated for an impairment loss is greater
than the carrying amount of the asset to which it relates, an enterprise
should recognise a liability if, and only if, that is required by another
Accounting Standard.
61. After the recognition of an impairment loss, the depreciation
(amortisation) charge for the asset should be adjusted in future periods
to allocate the asset’s revised carrying amount, less its residual value
(if any), on a systematic basis over its remaining useful life.
62. If an impairment loss is recognised, any related deferred tax assets or
liabilities are determined under Accounting Standard (AS) 22, Accounting
for Taxes on Income (see Example 3 given in the Appendix).
Cash-GeneratingUnits
63. Paragraphs 64 to 92 set out the requirements for identifying the cashgenerating
unit towhich an asset belongs and determining the carrying amount
of, and recognising impairment losses for, cash-generating units.
Identification of the Cash-Generating Unit to Which an
Asset Belongs
64. If there is any indication that an asset may be impaired, the
recoverable amount should be estimated for the individual asset. If it is not
possible to estimate the recoverable amount of the individual asset, an
enterprise should determine the recoverable amount of the cash-generating
unit to which the asset belongs (the asset’s cash-generating unit).
65. The recoverable amount of an individual asset cannot be determined if:
(a) the asset’s value in use cannot be estimated to be close to its net
selling price (for example, when the future cash flows from
continuing use of the asset cannot be estimated to be negligible);
and
586 AS 28 (issued 2002)
(b) the asset does not generate cash inflows fromcontinuing use that
are largely independent of those from other assets. In such cases,
value in use and, therefore, recoverable amount, can be determined
only for the asset’s cash-generating unit.
Example
A mining enterprise owns a private railway to support its mining
activities. The private railway could be sold only for scrap value and
the private railway does not generate cash inflows fromcontinuing use
that are largely independent of the cash inflows from the other assets
of the mine.
It is not possible to estimate the recoverable amount of the private
railway because the value in use of the private railway cannot be
determined and it is probably different from scrap value. Therefore,
the enterprise estimates the recoverable amount of the cashgenerating
unit to which the private railway belongs, that is, the
mine as a whole.
66. As defined in paragraph 4, an asset’s cash-generating unit is the smallest
group of assets that includes the asset and that generates cash inflows from
continuing use that are largely independent of the cash inflows from other
assets or groups of assets. Identification of an asset’s cash-generating unit
involves judgement. If recoverable amount cannot be determined for an
individual asset, an enterprise identifies the lowest aggregation of assets that
generate largely independent cash inflows from continuing use.
Example
A bus company provides services under contract with a municipality
that requires minimum service on each of five separate routes. Assets
devoted to each route and the cash flows from each route can be
identified separately. One of the routes operates at a significant loss.
Because the enterprise does not have the option to curtail any one
bus route, the lowest level of identifiable cash inflows from continuing
use that are largely independent of the cash inflows from other assets
or groups of assets is the cash inflows generated by the five routes
together. The cash-generating unit for each route is the bus company
as a whole.
Impairment of Assets 587
67. Cash inflows from continuing use are inflows of cash and cash
equivalents received from parties outside the reporting enterprise. In
identifying whether cash inflows from an asset (or group of assets) are
largely independent of the cash inflows fromother assets (or groups of assets),
an enterprise considers various factors including howmanagementmonitors
the enterprise’s operations (such as by product lines, businesses, individual
locations, districts or regional areas or in some otherway) or howmanagement
makes decisions about continuing or disposing of the enterprise’s assets and
operations. Example 1 in the Appendix gives examples of identification of a
cash-generating unit.
68. If an active market exists for the output produced by an asset or a
group of assets, this asset or group of assets should be identified as a
separate cash-generating unit, even if some or all of the output is used
internally. If this is the case, management’s best estimate of future
market prices for the output should be used:
(a) in determining the value in use of this cash-generating unit,
when estimating the future cash inflows that relate to the
internal use of the output; and
(b) in determining the value in use of other cash-generating units
of the reporting enterprise, when estimating the future cash
outflows that relate to the internal use of the output.
69. Even if part or all of the output produced by an asset or a group of
assets is used by other units of the reporting enterprise (for example, products
at an intermediate stage of a production process), this asset or group of
assets forms a separate cash-generating unit if the enterprise could sell this
output in an active market. This is because this asset or group of assets
could generate cash inflows from continuing use that would be largely
independent of the cash inflows from other assets or groups of assets. In
using information based on financial budgets/forecasts that relates to such a
cash-generating unit, an enterprise adjusts this information if internal transfer
prices do not reflect management’s best estimate of future market prices for
the cash-generating unit’s output.
70. Cash-generating units should be identified consistently from
period to period for the same asset or types of assets, unless a change is
justified.
588 AS 28 (issued 2002)
71. If an enterprise determines that an asset belongs to a different cashgenerating
unit than in previous periods, or that the types of assets aggregated
for the asset’s cash-generating unit have changed, paragraph 121 requires
certain disclosures about the cash-generating unit, if an impairment loss is
recognised or reversed for the cash-generating unit and is material to the
financial statements of the reporting enterprise as a whole.
Recoverable Amount and Carrying Amount of a Cash-
Generating Unit
72. The recoverable amount of a cash-generating unit is the higher of the
cash-generating unit’s net selling price and value in use. For the purpose of
determining the recoverable amount of a cash-generating unit, any reference
in paragraphs 15 to 55 to ‘an asset’ is read as a reference to ‘a cashgenerating
unit’.
73. The carrying amount of a cash-generating unit should be
determined consistently with the way the recoverable amount of the
cash-generating unit is determined.
74. The carrying amount of a cash-generating unit:
(a) includes the carrying amount of only those assets that can be
attributed directly, or allocated on a reasonable and consistent
basis, to the cash-generating unit and that will generate the future
cash inflows estimated in determining the cash-generating unit’s
value in use; and
(b) does not include the carrying amount of any recognised liability,
unless the recoverable amount of the cash-generating unit cannot
be determined without consideration of this liability.
This is because net selling price and value in use of a cash-generating unit
are determined excluding cash flows that relate to assets that are not part of
the cash-generating unit and liabilities that have already been recognised in
the financial statements, as set out in paragraphs 23 and 35.
75. Where assets are grouped for recoverability assessments, it is important
to include in the cash-generating unit all assets that generate the relevant
stream of cash inflows from continuing use. Otherwise, the cash-generating
Impairment of Assets 589
unit may appear to be fully recoverable when in fact an impairment loss has
occurred. In some cases, although certain assets contribute to the estimated
future cash flows of a cash-generating unit, they cannot be allocated to the
cash-generating unit on a reasonable and consistent basis. This might be the
case for goodwill or corporate assets such as head office assets. Paragraphs
78 to 86 explain how to deal with these assets in testing a cash-generating
unit for impairment.
76. Itmay be necessary to consider certain recognised liabilities in order to
determine the recoverable amount of a cash-generating unit. This may occur
if the disposal of a cash-generating unit would require the buyer to take over
a liability. In this case, the net selling price (or the estimated cash flow from
ultimate disposal) of the cash-generating unit is the estimated selling price
for the assets of the cash-generating unit and the liability together, less the
costs of disposal. In order to perform a meaningful comparison between the
carrying amount of the cash-generating unit and its recoverable amount, the
carrying amount of the liability is deducted in determining both the cashgenerating
unit’s value in use and its carrying amount.
Example
A company operates a mine in a country where legislation requires
that the owner must restore the site on completion of its mining
operations. The cost of restoration includes the replacement of the
overburden, which must be removed before mining operations
commence. A provision for the costs to replace the overburden was
recognised as soon as the overburden was removed. The amount
provided was recognised as part of the cost of the mine and is being
depreciated over the mine’s useful life. The carrying amount of the
provision for restoration costs is Rs. 50,00,000, which is equal to the
present value of the restoration costs.
The enterprise is testing the mine for impairment. The cash-generating
unit for the mine is the mine as a whole. The enterprise has received
various offers to buy the mine at a price of around Rs. 80,00,000;
this price encompasses the fact that the buyer will take over the
obligation to restore the overburden. Disposal costs for the mine are
negligible.The value in use of themine is approximatelyRs. 1,20,00,000
excluding restoration costs. The carrying amount of the mine is Rs.
1,00,00,000.
590 AS 28 (issued 2002)
The net selling price for the cash-generating unit is Rs. 80,00,000.
This amount considers restoration costs that have already been
provided for. As a consequence, the value in use for the cashgenerating
unit is determined after consideration of the restoration
costs and is estimated to be Rs. 70,00,000 (Rs. 1,20,00,000 less Rs.
50,00,000). The carrying amount of the cash-generating unit is Rs.
50,00,000, which is the carrying amount of the mine (Rs.
1,00,00,000) less the carrying amount of the provision for restoration
costs (Rs. 50,00,000).
77. For practical reasons, the recoverable amount of a cash-generating
unit is sometimes determined after consideration of assets that are not part
of the cash-generating unit (for example, receivables or other financial assets)
or liabilities that have already been recognised in the financial statements
(for example, payables, pensions and other provisions). In such cases, the
carrying amount of the cash-generating unit is increased by the carrying
amount of those assets and decreased by the carrying amount of those
liabilities.
Goodwill
78. In testing a cash-generating unit for impairment, an enterprise
should identify whether goodwill that relates to this cash-generating
unit is recognised in the financial statements. If this is the case, an
enterprise should:
(a) perform a ‘bottom-up’ test, that is, the enterprise should:
(i) identify whether the carrying amount of goodwill can be
allocated on a reasonable and consistent basis to the
cash-generating unit under review; and
(ii) then, compare the recoverable amount of the cashgenerating
unit under review to its carrying amount
(including the carrying amount of allocated goodwill, if
any) and recognise any impairment loss in accordance
with paragraph 87.
Impairment of Assets 591
The enterprise should perform the step at (ii) above even if
none of the carrying amount of goodwill can be allocated on
a reasonable and consistent basis to the cash-generating unit
under review; and
(b) if, in performing the ‘bottom-up’ test, the enterprise could
not allocate the carrying amount of goodwill on a reasonable
and consistent basis to the cash-generating unit under review,
the enterprise should also perform a ‘top-down’ test, that is,
the enterprise should:
(i) identify the smallest cash-generating unit that includes
the cash-generating unit under review and to which the
carrying amount of goodwill can be allocated on a
reasonable and consistent basis (the ‘larger’ cashgenerating
unit); and
(ii) then, compare the recoverable amount of the larger cashgenerating
unit to its carrying amount (including the
carrying amount of allocated goodwill) and recognise
any impairment loss in accordance with paragraph 87.
79. Goodwill arising on acquisition represents a payment made by an
acquirer in anticipation of future economic benefits. The future economic
benefits may result fromsynergy between the identifiable assets acquired or
from assets that individually do not qualify for recognition in the financial
statements.Goodwill does not generate cash flows independently fromother
assets or groups of assets and, therefore, the recoverable amount of goodwill
as an individual asset cannot be determined. As a consequence, if there is an
indication that goodwillmay be impaired, recoverable amount is determined
for the cash-generating unit to which goodwill belongs. This amount is then
compared to the carrying amount of this cash-generating unit and any
impairment loss is recognised in accordance with paragraph 87.
80. Whenever a cash-generating unit is tested for impairment, an enterprise
considers any goodwill that is associated with the future cash flows to be
generated by the cash-generating unit. If goodwill can be allocated on a
reasonable and consistent basis, an enterprise applies the ‘bottom-up’ test
only. If it is not possible to allocate goodwill on a reasonable and consistent
basis, an enterprise applies both the ‘bottom-up’ test and ‘top-down’ test
(see Example 7 given in the Appendix).
592 AS 28 (issued 2002)
81. The ‘bottom-up’ test ensures that an enterprise recognises any
impairment loss that exists for a cash-generating unit, including for goodwill
that can be allocated on a reasonable and consistent basis. Whenever it is
impracticable to allocate goodwill on a reasonable and consistent basis in the
‘bottom-up’ test, the combination of the ‘bottom-up’ and the ‘top-down’ test
ensures that an enterprise recognises:
(a) first, any impairment loss that exists for the cash-generating unit
excluding any consideration of goodwill; and
(b) then, any impairment loss that exists for goodwill. Because an
enterprise applies the ‘bottom-up’ test first to all assets that may
be impaired, any impairment loss identified for the larger cashgenerating
unit in the ‘top-down’ test relates only to goodwill
allocated to the larger unit.
82. If the ‘top-down’ test is applied, an enterprise formally determines the
recoverable amount of the larger cash-generating unit, unless there is
persuasive evidence that there is no risk that the larger cash-generating unit
is impaired.
Corporate Assets
83. Corporate assets include group or divisional assets such as the building
of a headquarters or a division of the enterprise,EDP equipment or a research
centre. The structure of an enterprise determines whether an asset meets
the definition of corporate assets (see paragraph 4) for a particular
cash- generating unit. Key characteristics of corporate assets are that they
do not generate cash inflows independently from other assets or groups of
assets and their carrying amount cannot be fully attributed to the cashgenerating
unit under review.
84. Because corporate assets do not generate separate cash inflows, the
recoverable amount of an individual corporate asset cannot be determined
unless management has decided to dispose of the asset. As a consequence,
if there is an indication that a corporate asset may be impaired, recoverable
amount is determined for the cash-generating unit to which the corporate
asset belongs, compared to the carrying amount of this cash-generating unit
and any impairment loss is recognised in accordance with paragraph 87.
85. In testing a cash-generating unit for impairment, an enterprise
Impairment of Assets 593
should identify all the corporate assets that relate to the cash-generating
unit under review. For each identified corporate asset, an enterprise
should then apply paragraph 78, that is:
(a) if the carrying amount of the corporate asset can be allocated
on a reasonable and consistent basis to the cash-generating
unit under review, an enterprise should apply the ‘bottomup’
test only; and
(b) if the carrying amount of the corporate asset cannot be
allocated on a reasonable and consistent basis to the cashgenerating
unit under review, an enterprise should apply both
the ‘bottom-up’ and ‘top-down’ tests.
86. An example of how to deal with corporate assets is given as Example
8 in the Appendix.
Impairment Loss for a Cash-Generating Unit
87. An impairment loss should be recognised for a cash-generating
unit if, and only if, its recoverable amount is less than its
carrying amount. The impairment loss should be allocated to reduce the
carrying amount of the assets of the unit in the following order:
(a) first, to goodwill allocated to the cash-generating unit (if any);
and
(b) then, to the other assets of the unit on a pro-rata basis based
on the carrying amount of each asset in the unit.
These reductions in carrying amounts should be treated as impairment
losses on individual assets and recognised in accordance with paragraph
58.
88. In allocating an impairment loss under paragraph 87, the carrying
amount of an asset should not be reduced below the highest of:
(a) its net selling price (if determinable);
(b) its value in use (if determinable); and
(c) zero.
594 AS 28 (issued 2002)
The amount of the impairment loss that would otherwise have been
allocated to the asset should be allocated to the other assets of the unit
on a pro-rata basis.
89. The goodwill allocated to a cash-generating unit is reduced before
reducing the carrying amount of the other assets of the unit because of its
nature.
90. If there is no practical way to estimate the recoverable amount of
each individual asset of a cash-generating unit, this Statement requires the
allocation of the impairment loss between the assets of that unit other than
goodwill on a pro-rata basis, because all assets of a cash-generating unit
work together.
91. If the recoverable amount of an individual asset cannot be determined
(see paragraph 65):
(a) an impairment loss is recognised for the asset if its carrying amount
is greater than the higher of its net selling price and the results of
the allocation procedures described in paragraphs 87 and 88; and
(b) no impairment loss is recognised for the asset if the related cashgenerating
unit is not impaired. This applies even if the asset’s net
selling price is less than its carrying amount.
Example
A machine has suffered physical damage but is still working, although
not as well as it used to. The net selling price of themachine is less than
its carrying amount. The machine does not generate independent cash
inflows from continuing use. The smallest identifiable group of assets
that includes the machine and generates cash inflows from continuing
use that are largely independent of the cash inflows fromother assets is
the production line to which the machine belongs. The recoverable
amount of the production line shows that the production line taken as a
whole is not impaired.
Assumption 1: Budgets/forecasts approved by management reflect no
commitment of management to replace the machine.
Impairment of Assets 595
The recoverable amount of the machine alone cannot be estimated
since the machine’s value in use:
(a) may differ from its net selling price; and
(b) can be determined only for the cash-generating unit to
which the machine belongs (the production line).
The production line is not impaired, therefore, no impairment loss
is recognised for the machine. Nevertheless, the enterprise may
need to reassess the depreciation period or the depreciation method
for the machine. Perhaps, a shorter depreciation period or a faster
depreciation method is required to reflect the expected remaining
useful life of the machine or the pattern in which economic benefits
are consumed by the enterprise.
Assumption 2: Budgets/forecasts approved by management reflect a
commitment of management to replace the machine and sell it in
the near future. Cash flows from continuing use of the machine
until its disposal are estimated to be negligible.
The machine’s value in use can be estimated to be close to its net
selling price. Therefore, the recoverable amount of the machine
can be determined and no consideration is given to the cashgenerating
unit to which the machine belongs (the production line).
Since the machine’s net selling price is less than its carrying amount,
an impairment loss is recognised for the machine.
92. After the requirements in paragraphs 87 and 88 have been applied,
a liability should be recognised for any remaining amount of an
impairment loss for a cash-generating unit if that is required by another
Accounting Standard.
Reversal of an Impairment Loss
93. Paragraphs 94 to 100 set out the requirements for reversing an
impairment loss recognised for an asset or a cash-generating unit in prior
accounting periods. These requirements use the term ‘an asset’ but apply
equally to an individual asset or a cash-generating unit.Additional requirements
596 AS 28 (issued 2002)
are set out for an individual asset in paragraphs 101 to 105, for a cashgenerating
unit in paragraphs 106 to 107 and for goodwill in paragraphs 108
to 111.
94. An enterprise should assess at each balance sheet date whether there
is any indication that an impairment loss recognised for an asset in prior
accounting periods may no longer exist or may have decreased. If any
such indication exists, the enterprise should estimate the recoverable
amount of that asset.
95. In assessing whether there is any indication that an impairment
loss recognised for an asset in prior accounting periods may no longer
exist or may have decreased, an enterprise should consider, as a
minimum, the following indications:
External sources of information
(a) the asset’s market value has increased significantly during
the period;
(b) significant changes with a favourable effect on the enterprise
have taken place during the period, or will take place in the
near future, in the technological, market, economic or legal
environment in which the enterprise operates or in the market
to which the asset is dedicated;
(c) market interest rates or other market rates of return on
investments have decreased during the period, and those
decreases are likely to affect the discount rate used in
calculating the asset’s value in use and increase the asset’s
recoverable amount materially;
Internal sources of information
(d) significant changes with a favourable effect on the enterprise have
taken place during the period, or are expected to take place in the
near future, in the extent to which, or manner in which, the asset
is used or is expected to be used. These changes include capital
expenditure that has been incurred during the period to improve
or enhance an asset in excess of its originally assessed standard
Impairment of Assets 597
of performance or a commitment to discontinue or restructure the
operation to which the asset belongs; and
(e) evidence is available from internal reporting that indicates
that the economic performance of the asset is, or will be, better
than expected.
96. Indications of a potential decrease in an impairment loss in paragraph
95 mainly mirror the indications of a potential impairment loss in paragraph
8. The concept of materiality applies in identifying whether an impairment
loss recognised for an asset in prior accounting periods may need to be
reversed and the recoverable amount of the asset determined.
97. If there is an indication that an impairment loss recognised for an asset
may no longer exist or may have decreased, this may indicate that the
remaining useful life, the depreciation (amortisation) method or the residual
value may need to be reviewed and adjusted in accordance with the
Accounting Standard applicable to the asset, even if no impairment loss is
reversed for the asset.
98. An impairment loss recognised for an asset in prior accounting
periods should be reversed if there has been a change in the estimates of
cash inflows, cash outflows or discount rates used to determine the asset’s
recoverable amount since the last impairment loss was recognised. If this
is the case, the carrying amount of the asset should be increased to its
recoverable amount. That increase is a reversal of an impairment loss.
99. A reversal of an impairment loss reflects an increase in the estimated
service potential of an asset, either from use or sale, since the date when an
enterprise last recognised an impairment loss for that asset. An enterprise is
required to identify the change in estimates that causes the increase in
estimated service potential. Examples of changes in estimates include:
(a) a change in the basis for recoverable amount (i.e., whether
recoverable amount is based on net selling price or value in use);
(b) if recoverable amount was based on value in use: a change in the
amount or timing of estimated future cash flows or in the discount
rate; or
598 AS 28 (issued 2002)
(c) if recoverable amount was based on net selling price: a change in
estimate of the components of net selling price.
100. An asset’s value in use may become greater than the asset’s carrying
amount simply because the present value of future cash inflows increases as
they become closer. However, the service potential of the asset has not
increased. Therefore, an impairment loss is not reversed just because of the
passage of time (sometimes called the ‘unwinding’ of the discount), even if
the recoverable amount of the asset becomes higher than its carrying amount.
Reversal of an Impairment Loss for an Individual Asset
101. The increased carrying amount of an asset due to a reversal of
an impairment loss should not exceed the carrying amount that would
have been determined (net of amortisation or depreciation) had no
impairment loss been recognised for the asset in prior accounting periods.
102. Any increase in the carrying amount of an asset above the carrying
amount thatwould have been determined (net of amortisation or depreciation)
had no impairment loss been recognised for the asset in prior accounting
periods is a revaluation. In accounting for such a revaluation, an enterprise
applies the Accounting Standard applicable to the asset.
103. A reversal of an impairment loss for an asset should be recognised
as income immediately in the statement of profit and loss, unless the
asset is carried at revalued amount in accordance with another
Accounting Standard (see Accounting Standard (AS) 10, Accounting
for Fixed Assets) in which case any reversal of an impairment loss on a
revalued asset should be treated as a revaluation increase under that
Accounting Standard.
104. Areversal of an impairment loss on a revalued asset is credited directly
to equity under the heading revaluation surplus. However, to the extent that
an impairment loss on the same revalued asset was previously recognised as
an expense in the statement of profit and loss, a reversal of that impairment
loss is recognised as income in the statement of profit and loss.
105. After a reversal of an impairment loss is recognised, the depreciation
(amortisation) charge for the asset should be adjusted in future periods to
allocate the asset’s revised carrying amount, less its residual value (if any),
on a systematic basis over its remaining useful life.
Impairment of Assets 599
Reversal of an Impairment Loss for a Cash-Generating
Unit
106. A reversal of an impairment loss for a cash-generating unit should
be allocated to increase the carrying amount of the assets of the unit in
the following order:
(a) first, assets other than goodwill on a pro-rata basis based on
the carrying amount of each asset in the unit; and
(b) then, to goodwill allocated to the cash-generating unit (if any),
if the requirements in paragraph 108 are met.
These increases in carrying amounts should be treated as reversals
of impairment losses for individual assets and recognised in
accordance with paragraph 103.
107. In allocating a reversal of an impairment loss for a cashgenerating
unit under paragraph 106, the carrying amount of an asset
should not be increased above the lower of:
(a) its recoverable amount (if determinable); and
(b) the carrying amount that would have been determined (net
of amortisation or depreciation) had no impairment loss been
recognised for the asset in prior accounting periods.
The amount of the reversal of the impairment loss that would otherwise
have been allocated to the asset should be allocated to the other assets
of the unit on a pro-rata basis.
Reversal of an Impairment Loss for Goodwill
108. As an exception to the requirement in paragraph 98, an
impairment loss recognised for goodwill should not be reversed in a
subsequent period unless:
(a) the impairment loss was caused by a specific external event
of an exceptional nature that is not expected to recur; and
(b) subsequent external events have occurred that reverse the
effect of that event.
600 AS 28 (issued 2002)
109. Accounting Standard (AS) 26, Intangible Assets, prohibits the
recognition of internally generated goodwill.Any subsequent increase in the
recoverable amount of goodwill is likely to be an increase in internally
generated goodwill, unless the increase relates clearly to the reversal of the
effect of a specific external event of an exceptional nature.
110. This Statement does not permit an impairment loss to be reversed for
goodwill because of a change in estimates (for example, a change in the
discount rate or in the amount and timing of future cash flows of the cashgenerating
unit to which goodwill relates).
111. A specific external event is an event that is outside of the control of
the enterprise. Examples of external events of an exceptional nature include
new regulations that significantly curtail the operating activities, or decrease
the profitability, of the business to which the goodwill relates.
Impairment in case ofDiscontinuingOperations
112. The approval and announcement of a plan for discontinuance1 2 is an
indication that the assets attributable to the discontinuing operation may be
impaired or that an impairment loss previously recognised for those assets
should be increased or reversed. Therefore, in accordance with this
Statement, an enterprise estimates the recoverable amount of each asset of
the discontinuing operation and recognises an impairment loss or reversal of
a prior impairment loss, if any.
113. In applying this Statement to a discontinuing operation, an enterprise
determines whether the recoverable amount of an asset of a discontinuing
operation is assessed for the individual assetor for the asset’s cash-generating
unit. For example:
(a) if the enterprise sells the discontinuing operation substantially in
its entirety, none of the assets of the discontinuing operation
generate cash inflows independently fromother assets within the
discontinuing operation. Therefore, recoverable amount is
determined for the discontinuing operation as a whole and an
impairment loss, if any, is allocated among the assets of the
discontinuing operation in accordance with this Statement;
12 See Accounting Standard (AS) 24 ‘Discontinuing Operations’.
Impairment of Assets 601
(b) if the enterprise disposes of the discontinuing operation in other
ways such as piecemeal sales, the recoverable amount is
determined for individual assets, unless the assets are sold in
groups; and
(c) if the enterprise abandons the discontinuing operation, the
recoverable amount is determined for individual assets as set out
in this Statement.
114. After announcement of a plan, negotiations with potential purchasers
of the discontinuingoperation or actualbindingsale agreementsmayindicate
that the assets of the discontinuing operation may be further impaired
or that impairment losses recognised for these assets in prior periods may
have decreased. As a consequence, when such events occur, an
enterprise re- estimates the recoverable amount of the assets of the
discontinuing operation and recognises resulting impairment losses or
reversals of impairment losses
in accordance with this Statement.
115. A price in a binding sale agreement is the best evidence of an asset’s
(cash-generating unit’s) net selling price or of the estimated cash inflow
from ultimate disposal in determining the asset’s (cash-generating
unit’s) value in use.
116. The carryingamount (recoverable amount) of a discontinuingoperation
includes the carrying amount (recoverable amount) of any goodwill that can
be allocated on a reasonable and consistent basis to that discontinuing
operation.
Disclosure
117. For each class of assets, the financial statements should disclose:
(a) the amount of impairment losses recognised in the statement
of profit and loss during the period and the line item(s) of the
statement of profit and loss in which those impairment losses
are included;
(b) the amount of reversals of impairment losses recognised in
the statement of profit and loss during the period and the line
item(s) of the statement of profit and loss in which those
impairment losses are reversed;
602 AS 28 (issued 2002)
(c) the amount of impairment losses recognised directly against
revaluation surplus during the period; and
(d) the amount of reversals of impairment losses recognised
directly in revaluation surplus during the period.
118. A class of assets is a grouping of assets of similar nature and use in
an enterprise’s operations.
119. The information required in paragraph 117 may be presented with
other information disclosed for the class of assets. For example, this
information may be included in a reconciliation of the carrying amount of
fixed assets, at the beginning and end of the period, as required underAS 10,
Accounting for Fixed Assets.
120. An enterprise that applies AS 17, Segment Reporting, should
disclose the following for each reportable segment based on an
enterprise’s primary format (as defined in AS 17):
(a) the amount of impairment losses recognised in the statement
of profit and loss and directly against revaluation surplus
during the period; and
(b) the amount of reversals of impairment losses recognised in
the statement of profit and loss and directly in revaluation
surplus during the period.
121. If an impairment loss for an individual asset or a cash-generating
unit is recognised or reversed during the period and is material to the
financial statements of the reporting enterprise as a whole, an enterprise
should disclose:
(a) the events and circumstances that led to the recognition or
reversal of the impairment loss;
(b) the amount of the impairment loss recognised or reversed;
(c) for an individual asset:
(i) the nature of the asset; and
Impairment of Assets 603
(ii) the reportable segment to which the asset belongs, based
on the enterprise’s primary format (as defined in AS
17, Segment Reporting);
(d) for a cash-generating unit:
(i) a description of the cash-generating unit (such as
whether it is a product line, a plant, a business operation,
a geographical area, a reportable segment as defined
in AS 17 or other);
(ii) the amount of the impairment loss recognised or reversed
by class of assets and by reportable segment based on
the enterprise’s primary format (as defined in AS 17);
and
(iii) if the aggregation of assets for identifying the cashgenerating
unit has changed since the previous estimate
of the cash-generating unit’s recoverable amount (if any),
the enterprise should describe the current and former way
of aggregating assets and the reasons for changing the
way the cash-generating unit is identified;
(e) whether the recoverable amount of the asset (cash-generating
unit) is its net selling price or its value in use;
(f) if recoverable amount is net selling price, the basis used to
determine net selling price (such as whether selling price
was determined by reference to an active market or in some
other way); and
(g) if recoverable amount is value in use, the discount rate(s)
used in the current estimate and previous estimate (if any) of
value in use.13
122. If impairment losses recognised (reversed) during the period
are material in aggregate to the financial statements of the reporting
enterprise as a whole, an enterprise should disclose a brief description
of the following:
13 See also footnote 8.
604 AS 28 (issued 2002)
(a) the main classes of assets affected by impairment losses
(reversals of impairment losses) for which no information is
disclosed under paragraph 121; and
(b) the main events and circumstances that led to the recognition
(reversal) of these impairment losses for which no information
is disclosed under paragraph 121.
123. An enterprise is encouraged to disclose key assumptions used to
determine the recoverable amount of assets (cash-generating units) during
the period.
TransitionalProvisions
124. On the date of this Statement becoming mandatory, an enterprise
should assess whether there is any indication that an asset may be
impaired (see paragraphs 5-13). If any such indication exists, the
enterprise should determine impairment loss, if any, in accordance with
this Statement. The impairment loss, so determined, should be adjusted
against opening balance of revenue reserves being the accumulated
impairment loss relating to periods prior to this Statement becoming
mandatory unless the impairment loss is on a revalued asset. An
impairment loss on a revalued asset should be recognised directly against
any revaluation surplus for the asset to the extent that the impairment
loss does not exceed the amount held in the revaluation surplus for that
same asset. If the impairment loss exceeds the amount held in the
revaluation surplus for that same asset, the excess should be adjusted
against opening balance of revenue reserves.
125. Any impairment loss arising after the date of this Statement
becoming mandatory should be recognised in accordance with this
Statement (i.e., in the statement of profit and loss unless an asset is
carried at revalued amount. An impairment loss on a revalued asset
should be treated as a revaluation decrease).
Appendix
Illustrative Examples
Contents
Impairment of Assets 605
EXAMPLE 1– IDENTIFICATION OF CASHParagraphs
GENERATING UNITS A1–A22
A– Retail Store Chain A1–A4
B– Plant for an Intermediate Step in a
Production Process A5–A10
C– Single Product Enterprise A11–A16
D– Magazine Titles A17–A19
E– Building: Half Rented to Others and
Half Occupied for Own Use A20–A22
EXAMPLE 2– CALCULATION OF VALUE IN USE
AND RECOGNITION OF AN
IMPAIRMENT LOSS A23–A32
EXAMPLE 3– DEFERRED TAX EFFECTS A33–A34
EXAMPLE 4– REVERSAL OF AN IMPAIRMENT
LOSS A35– A39
EXAMPLE 5– TREATMENT OF A FUTURE
RESTRUCTURING A40– A49
EXAMPLE 6– TREATMENT OF FUTURE CAPITAL
EXPENDITURE A50– A57
Continued../. .
606 AS 28 (issued 2002)
EXAMPLE 7– APPLICATION OF THE ‘BOTTOM-UP’
AND ‘TOP-DOWN’ TESTS TO
GOODWILL A58– A67
A – Goodwill Can Be Allocated on a
Reasonable and Consistent Basis A60–A62
B –Goodwill Cannot Be Allocated on a
Reasonable and Consistent Basis A63–A67
EXAMPLE 8– ALLOCATION OF CORPORATE
ASSETS A68– A79
Appendix
Illustrative Examples
Impairment of Assets 607
The appendix is illustrative only and does not form part of the Accounting
Standard. The purpose of the appendix is to illustrate the application
of the Accounting Standard to assist in clarifying its meaning.
All the examples in this appendix assume the enterprises concerned
have no transactions other than those described.
Example 1 - IdentificationofCash-GeneratingUnits
The purpose of this example is:
(a) to give an indication of how cash-generating units are
identified in various situations; and
(b) to highlight certain factors that an enterprise may consider
in identifying the cash-generating unit to which an asset
belongs.
A - Retail Store Chain
Background
Al. Store X belongs to a retail store chainM. Xmakes all its retail purchases
through M’s purchasing centre. Pricing, marketing, advertising and human
resources policies (except for hiring X’s cashiers and salesmen) are decided
byM.Malso owns 5 other stores in the same city as X (although in different
neighbourhoods) and 20 other stores in other cities. All stores are managed
in the same way as X. X and 4 other stores were purchased 4 years ago and
goodwill was recognised.
What is the cash-generating unit for X (X’s cash-generating unit)?
Analysis
A2. In identifyingX’s cash-generating unit, an enterprise considerswhether,
for example:
608 AS 28 (issued 2002)
(a) internal management reporting is organised to measure
performance on a store-by-store basis; and
(b) the business is run on a store-by-store profit basis or on region/
city basis.
A3. All M’s stores are in different neighbourhoods and probably have
different customer bases. So, although X is managed at a corporate level, X
generates cash inflows that are largely independent from those ofM’s other
stores. Therefore, it is likely that X is a cash-generating unit.
A4. If the carrying amount of the goodwill can be allocated on a reasonable
and consistent basis to X’s cash-generating unit, M applies the ‘bottom-up’
test described in paragraph 78 of this Statement. If the carrying amount of
the goodwill cannot be allocated on a reasonable and consistent basis to X’s
cash-generating unit, M applies the ‘bottom-up’ and ‘top-down’ tests.
B - Plant for an Intermediate Step in a Production Process
Background
A5. A significant raw material used for plant Y’s final production is an
intermediate product bought fromplantXof the same enterprise.X’s products
are sold to Y at a transfer price that passes all margins to X. 80% of Y’s
final production is sold to customers outside of the reporting enterprise. 60%
ofX’s final production is sold toYand the remaining 40%is sold to customers
outside of the reporting enterprise.
For each of the following cases, what are the cash-generating units for X
and Y?
Case 1: X could sell the products it sells to Y in an active market. Internal
transfer prices are higher than market prices.
Case 2: There is no active market for the products X sells to Y.
Analysis
Case 1
A6. X could sell its products on an active market and, so, generate cash
inflows from continuing use that would be largely independent of the cash
Impairment of Assets 609
inflows from Y. Therefore, it is likely that X is a separate cash-generating
unit, although part of its production is used by Y (see paragraph 68 of this
Statement).
A7. It is likely that Y is also a separate cash-generating unit. Y sells 80%
of its products to customers outside of the reporting enterprise. Therefore,
its cash inflows from continuing use can be considered to be largely
independent.
A8. Internal transfer prices do not reflect market prices for X’s output.
Therefore, in determining value in use of bothXandY, the enterprise adjusts
financial budgets/forecasts to reflect management’s best estimate of future
market prices for those ofX’s products that are used internally (see paragraph
68 of this Statement).
Case 2
A9. It is likely that the recoverable amount of each plant cannot be assessed
independently from the recoverable amount of the other plant because:
(a) themajority ofX’s production is used internally and could not be
sold in an activemarket. So, cash inflows ofXdepend on demand
for Y’s products. Therefore, X cannot be considered to generate
cash inflows that are largely independent from those of Y; and
(b) the two plants are managed together.
A10. As a consequence, it is likely that X and Y together is the smallest
group of assets that generates cash inflows from continuing use that are
largely independent.
C - Single Product Enterprise
Background
A11. Enterprise M produces a single product and owns plants A, B and C.
Each plant is located in a different continent. A produces a component that
is assembled in either B or C. The combined capacity of B and C is not fully
utilised.M’s products are sold world-wide from either B or C. For example,
B’s production can be sold in C’s continent if the products can be delivered
faster from B than from C. Utilisation levels of B and C depend on the
allocation of sales between the two sites.
610 AS 28 (issued 2002)
For each of the following cases, what are the cash-generating units for A, B
and C?
Case 1: There is an active market for A’s products.
Case 2: There is no active market for A’s products.
Analysis
Case 1
A12. It is likely that A is a separate cash-generating unit because there is
an active market for its products (see Example B-Plant for an Intermediate
Step in a Production Process, Case 1).
A13. Although there is an active market for the products assembled by B
and C, cash inflows for B and C depend on the allocation of production
across the two sites. It is unlikely that the future cash inflows for B and C
can be determined individually. Therefore, it is likely thatBand Ctogether is
the smallest identifiable group of assets that generates cash inflows from
continuing use that are largely independent.
A14. In determining the value in use ofAand B plusC,Madjusts financial
budgets/forecasts to reflect its best estimate of future market prices for A’s
products (see paragraph 68 of this Statement).
Case 2
A15. It is likely that the recoverable amount of each plant cannot be assessed
independently because:
(a) there is no active market for A’s products. Therefore, A’s cash
inflows depend on sales of the final product by B and C; and
(b) although there is an active market for the products assembled by
B and C, cash inflows for B and C depend on the allocation of
production across the two sites. It is unlikely that the future cash
inflows for B and C can be determined individually.
A16. As a consequence, it is likely that A, B and C together (i.e., M as a
whole) is the smallest identifiable group of assets that generates cash inflows
from continuing use that are largely independent.
D -Magazine Titles
Background
Impairment of Assets 611
A17. A publisher owns 150 magazine titles of which 70 were purchased
and 80 were self-created. The price paid for a purchased magazine title is
recognised as an intangible asset. The costs of creating magazine titles and
maintaining the existing titles are recognised as an expense when incurred.
Cash inflows from direct sales and advertising are identifiable for each
magazine title. Titles are managed by customer segments. The level of
advertising income for a magazine title depends on the range of titles in the
customer segment to which the magazine title relates. Management has a
policy to abandon old titles before the end of their economic lives and replace
them immediately with new titles for the same customer segment.
What is the cash-generating unit for an individual magazine title?
Analysis
A18. It is likely that the recoverable amount of an individualmagazine title
can be assessed. Even though the level of advertising income for a title is
influenced, to a certain extent, by the other titles in the customer segment,
cash inflows from direct sales and advertising are identifiable for each title.
In addition, although titles are managed by customer segments, decisions to
abandon titles are made on an individual title basis.
A19. Therefore, it is likely that individual magazine titles generate cash
inflows that are largelyindependentone fromanother and that eachmagazine
title is a separate cash-generating unit.
E - Building: Half-Rented to Others and Half-Occupied for
Own Use
Background
A20. M is a manufacturing company. It owns a headquarter building that
used to be fully occupied for internal use. After down-sizing, half of the
building is now used internally and half rented to third parties. The lease
agreement with the tenant is for five years.
What is the cash-generating unit of the building?
612 AS 28 (issued 2002)
Analysis
A21. The primary purpose of the building is to serve as a corporate asset,
supportingM’s manufacturing activities. Therefore, the building as a whole
cannot be considered to generate cash inflows that are largely independent
of the cash inflows from the enterprise as a whole. So, it is likely that the
cash-generating unit for the building is M as a whole.
A22. The building is not held as an investment. Therefore, it would not be
appropriate to determine the value in use of the building based on projections
of future market related rents.
Example 2 - Calculation of Value in Use and
Recognition of an ImpairmentLoss
In this example, tax effects are ignored.
Background and Calculation of Value in Use
A23. At the end of 20X0, enterprise T acquires enterpriseMfor Rs. 10,000
lakhs.Mhas manufacturing plants in 3 countries. The anticipated useful life
of the resulting merged activities is 15 years.
Schedule 1. Data at the end of 20X0 (Amount in Rs. lakhs)
End of 20X0 Allocation of Fair value of Goodwill(1)
purchase price identifiable assets
Activities in Country A 3,000 2,000 1,000
Activities in Country B 2,000 1,500 500
Activities in Country C 5,000 3,500 1,500
Total 10,000 7,000 3,000
(1) Activities in each country are the smallest cash-generating units to which goodwill
can be allocated on a reasonable and consistent basis (allocation based on the
purchase price of the activities in each country, as specified in the purchase agreement).
A24. T uses straight-line depreciation over a 15-year life for the Country
A assets and no residual value is anticipated. In respect of goodwill, T uses
straight-line amortisation over a 5 year life.
Impairment of Assets 613
A25. In 20X4, a new government is elected in Country A. It passes
legislation significantly restricting exports of T’s main product. As a result,
and for the foreseeable future, T’s production will be cut by 40%.
A26. The significant export restriction and the resulting production
decrease require T to estimate the recoverable amount of the goodwill and
net assets of the Country A operations. The cash-generating unit for the
goodwill and the identifiable assets of the Country A operations is the
Country A operations, since no independent cash inflows can be identified
for individual assets.
A27. The net selling price of the Country A cash-generating unit is not
determinable, as it is unlikely that a ready buyer exists for all the assets of
that unit.
A28. To determine the value in use for the CountryAcash-generating unit
(see Schedule 2), T:
(a) prepares cash flow forecasts derived from the most recent
financial budgets/forecasts for the next five years (years 20X5-
20X9) approved by management;
(b) estimates subsequent cash flows (years 20X10-20X15) based
on declining growth rates. The growth rate for 20X10 is
estimated to be 3%. This rate is lower than the average longterm
growth rate for the market in Country A; and
(c) selects a 15% discount rate, which represents a pre-tax rate that
reflects current market assessments of the time value of money
and the risks specific to the Country A cash-generating unit.
Recognition and Measurement of Impairment Loss
A29. The recoverable amount of the Country A cash-generating unit is
1,360 lakhs: the higher of the net selling price of theCountryAcash-generating
unit (not determinable) and its value in use (Rs. 1,360 lakhs).
A30. T compares the recoverable amount of the CountryAcash-generating
unit to its carrying amount (see Schedule 3).
614 AS 28 (issued 2002)
A31. T recognises an impairment loss of Rs. 307 lakhs immediately in the
statement of profit and loss. The carrying amount of the goodwill that relates
to theCountryAoperations is eliminated before reducing the carrying amount
of other identifiable assets within the Country A cash-generating unit (see
paragraph 87 of this Statement).
A32. Tax effects are accounted for separately in accordance with AS 22,
Accounting for Taxes on Income.
Schedule 2. Calculation of the value in use of the CountryAcash-generating
unit at the end of 20X4 (Amount in Rs. lakhs)
Year Long-term Future Present value Discounted
growth rates cash flows factor at future cash
15% discount flows
rate(3 )
20X5 (n=1) 230(1 ) 0.86957 200
20X6 253(1 ) 0.75614 191
20X7 273(1 ) 0.65752 180
20X8 290(1 ) 0.57175 166
20X9 304(1 ) 0.49718 151
20X10 3% 313(2 ) 0.43233 135
20X11 –2% 307(2 ) 0.37594 115
20X12 –6% 289(2 ) 0.32690 94
20X13 –15% 245(2 ) 0.28426 70
20X14 –25% 184(2 ) 0.24719 45
20X15 –67% 61(2 ) 0.21494 13
Value in use 1,360
(1) Based on management’s best estimate of net cash flow projections (after the 40%
cut).
(2) Based on an extrapolation from preceding year cash flow using declining growth
rates.
(3) The present value factor is calculated as k = 1/(1+a)n, where a = discount rate and
n = period of discount.
End of 20X4 Goodwill Identifiable assets Total
Historical cost 1,000 2,000 3,000
Accumulated depreciation/
amortisation (20X1-20X4) (800) (533) (1,333
Carrying amount 200 1,467 1,667
Impairment Loss (200) (107) (307)
Carrying amount after
impairment loss 0 1,360 1,360
Impairment of Assets 615
Schedule 3. Calculation and allocation of the impairment loss for theCountry
A cash-generating unit at the end of 20X4 (Amount in Rs. lakhs)
)
Example 3 -DeferredTax Effects
A33. An enterprise has an assetwith a carrying amount of Rs. 1,000 lakhs.
Its recoverable amount is Rs. 650 lakhs. The tax rate is 30%and the carrying
amount of the asset for tax purposes is Rs. 800 lakhs. Impairment losses are
not allowable as deduction for tax purposes. The effect of the impairment
loss is as follows:
Amount in
Rs. lakhs
Impairment Loss recognised in the statement of profit and loss 350
Impairment Loss allowed for tax purposes —
Timing Difference 350
Tax Effect of the above timing difference at 30%
(deferred tax asset) 105
Less: Deferred tax liability due to difference in depreciation for
accounting purposes and tax purposes [(1,000 – 800) x 30%] 60
Deferred tax asset 45
A34. In accordance with AS 22, Accounting for Taxes on Income, the
enterprise recognises the deferred tax asset subject to the consideration of
prudence as set out in AS 22.
616 AS 28 (issued 2002)
Example 4 -Reversal of an ImpairmentLoss
Use the data for enterprise T as presented in Example 2, with
supplementary information as provided in this example. In this example,
tax effects are ignored.
Background
A35. In 20X6, the government is still in office inCountryA, but the business
situation is improving. The effects of the export laws on T’s production are
proving to be less drastic than initially expected bymanagement.As a result,
management estimates that productionwill increase by 30%.This favourable
change requires T to re-estimate the recoverable amount of the net assets of
the Country A operations (see paragraphs 94-95 of this Statement). The
cash-generating unit for the net assets of the CountryA operations is still the
Country A operations.
A36. Calculations similar to those in Example 2 show that the recoverable
amount of the Country A cash-generating unit is now Rs. 1,710 lakhs.
Reversal of Impairment Loss
A37. T compares the recoverable amount and the net carrying amount of
the Country A cash-generating unit.
Impairment of Assets 617
Schedule 1. Calculation of the carrying amount of the Country A cashgenerating
unit at the end of 20X6 (Amount in Rs. lakhs)
End of 20X4 (Example 2)
Goodwill Identifiable assets Total
Historical cost 1,000 2,000 3,000
Accumulated depreciation/
amortisation (4 years) (800) (533) (1,333)
Impairment loss (200) (107) (307)
Carrying amount after
impairment loss 0 1,360 1,360
End of 20X6
Additional depreciation
(2 years)(1) – (247) (247)
Carrying amount 0 1,113 1,113
Recoverable amount 1,710
Excess of recoverable amount
over carrying amount 597
(1)After recognition of the impairment loss at the end of 20X4, T revised the
depreciation charge for the Country A identifiable assets (from Rs. 133.3 lakhs per
year to Rs. 123.7 lakhs per year), based on the revised carrying amount and remaining
useful life (11 years).
A38. There has been a favourable change in the estimates used to determine
the recoverable amount of the CountryAnet assets since the last impairment
loss was recognised. Therefore, in accordance with paragraph 98 of this
Statement, T recognises a reversal of the impairment loss recognised in
20X4.
A39. In accordance with paragraphs 106 and 107 of this Statement, T
increases the carrying amount of the Country A identifiable assets by Rs. 87
lakhs (see Schedule 3), i.e., up to the lower of recoverable amount
(Rs.
1,710 lakhs) and the identifiable assets’ depreciated historical cost (Rs. 1,200
lakhs) (see Schedule 2). This increase is recognised in the statement of
profit and loss immediately.
618 AS 28 (issued 2002)
Schedule 2. Determination of the depreciated historical cost of the Country
A identifiable assets at the end of 20X6 (Amount in Rs. lakhs)
End of 20X6 Identifiable assets
Historical cost 2,000
Accumulated depreciation (133.3 * 6 years) (800)
Depreciated historical cost 1,200
Carrying amount (Schedule 1) 1,113
Difference 87
Schedule 3. Carrying amount of the Country A assets at the end of 20X6
(Amount in Rs. lakhs)
End of 20X6 Goodwill Identifiable assets Total
Gross carrying amount 1,000 2,000 3,000
Accumulated depreciation/
amortisation (800) (780) (1,580)
Accumulated impairment loss (200) (107) (307)
Carrying amount 0 1,113 1,113
Reversal of impairment loss 0 87 87
Carrying amount after reversal
of impairment loss 0 1,200 1,200
Example 5 -Treatment of a FutureRestructuring
In this example, tax effects are ignored.
Background
A40. At the end of 20X0, enterprise K tests a plant for impairment. The
plant is a cash-generating unit. The plant’s assets are carried at depreciated
historical cost. The plant has a carrying amount of Rs. 3,000 lakhs and a
remaining useful life of 10 years.
A41. The plant is so specialised that it is not possible to determine its net
selling price. Therefore, the plant’s recoverable amount is its value in use.
Value in use is calculated using a pre-tax discount rate of 14%.
Impairment of Assets 619
A42. Management approved budgets reflect that:
(a) at the end of 20X3, the plantwill be restructured at an estimated
cost of Rs. 100 lakhs. Since K is not yet committed to the
restructuring, a provision has not been recognised for the future
restructuring costs; and
(b) there will be future benefits from this restructuring in the form
of reduced future cash outflows.
A43. At the end of 20X2, K becomes committed to the restructuring. The
costs are still estimated to be Rs. 100 lakhs and a provision is recognised
accordingly. The plant’s estimated future cash flows reflected in the most
recent management approved budgets are given in paragraph A47 and a
current discount rate is the same as at the end of 20X0.
A44. At the end of 20X3, restructuring costs of Rs. 100 lakhs are paid.
Again, the plant’s estimated future cash flows reflected in the most recent
management approved budgets and a current discount rate are the same as
those estimated at the end of 20X2.
620 AS 28 (issued 2002)
At the End of 20X0
Schedule 1. Calculation of the plant’s value in use at the end of 20X0
(Amount in Rs. lakhs)
Year Future cash flows Discounted at 14%
20X1 300 263
20X2 280 215
20X3 420(1) 283
20X4 520(2) 308
20X5 350(2) 182
20X6 420(2) 191
20X7 480(2) 192
20X8 480(2) 168
20X9 460(2) 141
20X10 400(2) 108
Value in use 2,051
(1) Excludes estimated restructuring costs reflected in management budgets.
(2) Excludes estimated benefits expected from the restructuring reflected in
management budgets.
A45. The plant’s recoverable amount (value in use) is less than its carrying
amount. Therefore, K recognises an impairment loss for the plant.
Schedule 2. Calculation of the impairment loss at the end of 20X0 (Amount
in Rs. lakhs)
Plant
Carrying amount before impairment loss 3,000
Recoverable amount (Schedule 1) 2,051
Impairment loss (949)
Carrying amount after impairment loss 2,051
Impairment of Assets 621
At the End of 20X1
A46. No event occurs that requires the plant’s recoverable amount to be
re-estimated. Therefore, no calculation of the recoverable amount is required
to be performed.
At the End of 20X2
A47. The enterprise is now committed to the restructuring. Therefore, in
determining the plant’s value in use, the benefits expected from the
restructuring are considered in forecasting cash flows. This results in an
increase in the estimated future cash flows used to determine value in use at
the end of 20X0. In accordance with paragraphs 94-95 of this Statement, the
recoverable amount of the plant is re-determined at the end of 20X2.
Schedule 3. Calculation of the plant’s value in use at the end of 20X2
(Amount in Rs. lakhs)
Year Future cash flows Discounted at 14%
20X3 420(1) 368
20X4 570(2) 439
20X5 380(2) 256
20X6 450(2) 266
20X7 510(2) 265
20X8 510(2) 232
20X9 480(2) 192
20X10 410(2) 144
Value in use 2,162
(1) Excludes estimated restructuring costs because a liability has already been recognised.
(2) Includes estimated benefits expected from the restructuring reflected in management
budgets.
A48. The plant’s recoverable amount (value in use) is higher than its carrying
amount (see Schedule 4). Therefore, K reverses the impairment loss
recognised for the plant at the end of 20X0.
lakhs)
End of Depreciated Recoverable Adjusted
year historical amount depreciation
cost charge
20X0 3,000 2,051 0
20X1 2,700 n.c. (205)
20X2 2,400 2,162 (205)
20X3 2,100 n.c. (270)
622 AS 28 (issued 2002)
Schedule 4. Calculation of the reversal of the impairment loss at the end
of 20X2 (Amount in Rs. lakhs)
Plant
Carrying amount at the end of 20X0 (Schedule 2) 2,051
End of 20X2
Depreciation charge (for 20X1 and 20X2 Schedule 5) (410)
Carrying amount before reversal 1,641
Recoverable amount (Schedule 3) 2,162
Reversal of the impairment loss 521
Carrying amount after reversal 2,162
Carrying amount: depreciated historical cost (Schedule 5) 2,400(1)
(1) The reversal does not result in the carrying amount of the plant exceeding what its
carrying amount would have been at depreciated historical cost. Therefore, the full
reversal of the impairment loss is recognised.
At the End of 20X3
A49. There is a cash outflow of Rs. 100 lakhs when the restructuring
costs are paid. Even though a cash outflow has taken place, there is no
change in the estimated future cash flows used to determine value in use at
the end of 20X2. Therefore, the plant’s recoverable amount is not calculated
at the end of 20X3.
Schedule 5. Summary of the carrying amount of the plant (Amount in Rs.
Impairment Carrying
loss amount
after
impairment
(949) 2,051
0 1,846
521 2,162
0 1,892
n.c. = not calculated as there is no indication that the impairment loss may have
increased/decreased.
Impairment of Assets 623
Example 6 - Treatment of Future Capital
Expenditure
In this example, tax effects are ignored.
Background
A50. At the end of 20X0, enterprise F tests a plane for impairment. The
plane is a cash-generating unit. It is carried at depreciated historical cost and
its carrying amount is Rs. 1,500 lakhs. It has an estimated remaining useful
life of 10 years.
A51. For the purpose of this example, it is assumed that the plane’s net
selling price is not determinable. Therefore, the plane’s recoverable amount
is its value in use. Value in use is calculated using a pre-tax discount rate of
14%.
A52. Management approved budgets reflect that:
(a) in 20X4, capital expenditure of Rs. 250 lakhs will be incurred to
renew the engine of the plane; and
(b) this capital expenditurewill improve the performance of the plane
by decreasing fuel consumption.
A53. At the end of 20X4, renewal costs are incurred.The plane’s estimated
future cash flows reflected in themost recentmanagement approved budgets
are given in paragraph A56 and a current discount rate is the same as at the
end of 20X0.
624 AS 28 (issued 2002)
At the End of 20X0
Schedule 1. Calculation of the plane’s value in use at the end of 20X0
(Amount in Rs. lakhs)
Year Future cash flows Discounted at 14%
20X1 221.65 194.43
20X2 214.50 165.05
20X3 205.50 138.71
20X4 247.25(1) 146.39
20X5 253.25(2) 131.53
20X6 248.25(2) 113.10
20X7 241.23(2) 96.40
20X8 255.33(2) 89.51
20X9 242.34(2) 74.52
20X10 228.50(2) 61.64
Value in use 1,211.28
(1) Excludes estimated renewal costs reflected in management budgets.
(2) Excludes estimated benefits expected from the renewal of the engine reflected in
management budgets.
A54. The plane’s carrying amount is less than its recoverable amount (value
in use). Therefore, F recognises an impairment loss for the plane.
Schedule 2. Calculation of the impairment loss at the end of 20X0 (Amount
in Rs. lakhs)
Plane
Carrying amount before impairment loss 1,500.00
Recoverable amount (Schedule 1) 1,211.28
Impairment loss (288.72)
Carrying amount after impairment loss 1,211.28
Impairment of Assets 625
Years 20X1-20X3
A55. No event occurs that requires the plane’s recoverable amount to be
re-estimated. Therefore, no calculation of recoverable amount is required to
be performed.
At the End of 20X4
A56. The capital expenditure is incurred. Therefore, in determining the
plane’s value in use, the future benefits expected from the renewal of the
engine are considered in forecasting cash flows. This results in an increase
in the estimated future cash flows used to determine value in use at the end
of 20X0. As a consequence, in accordance with paragraphs 94-95 of this
Statement, the recoverable amount of the plane is recalculated at the end of
20X4.
Schedule 3. Calculation of the plane’s value in use at the end of 20X4
(Amount in Rs. lakhs)
Year Future cash flows(1) Discounted at 14%
20X5 303.21 265.97
20X6 327.50 252.00
20X7 317.21 214.11
20X8 319.50 189.17
20X9 331.00 171.91
20X10 279.99 127.56
Value in use 1,220.72
(1) Includes estimated benefits expected from the renewal of the engine reflected in
management budgets.
A57. The plane’s recoverable amount (value in use) is higher than the
plane’s carrying amount and depreciated historical cost (see Schedule 4).
Therefore, K reverses the impairment loss recognised for the plane at the
end of 20X0 so that the plane is carried at depreciated historical cost.
626 AS 28 (issued 2002)
Schedule 4. Calculation of the reversal of the impairment loss at the end
of 20X4 (Amount in Rs. lakhs)
Plane
Carrying amount at the end of 20X0 (Schedule 2) 1,211.28
End of 20X4
Depreciation charge (20X1 to 20X4-Schedule 5) (484.52)
Renewal expenditure 250.00
Carrying amount before reversal 976.76
Recoverable amount (Schedule 3) 1,220.72
Reversal of the impairment loss 173.24
Carrying amount after reversal 1,150.00
Carrying amount: depreciated historical cost (Schedule 5) 1,150.00(1)
(1) The value in use of the plane exceeds what its carrying amount would have been at
depreciated historical cost. Therefore, the reversal is limited to an amount that does
not result in the carrying amount of the plane exceeding depreciated historical cost.
Schedule 5. Summary of the carrying amount of the plane (Amount in Rs.
lakhs)
Year Depreciated Recoverable Adjusted Impairment Carrying
historical amount depreciation loss amount
cost charge after
impairment
20X0 1,500.00 1,211.28 0 (288.72) 1,211.28
20X1 1,350.00 n.c. (121.13) 0 1,090.15
20X2 1,200.00 n.c. (121.13) 0 969.02
20X3 1,050.00 n.c. (121.13) 0 847.89
20X4 900.00 (121.13)
renewal 250.00 –
1,150.00 1,220.72 (121.13) 173.24 1,150.00
20X5 958.33 n.c. (191.67) 0 958.33
n.c. = not calculated as there is no indication that the impairment loss may have
increased/decreased.
Impairment of Assets 627
Example 7 - Application of the ‘Bottom-Up’ and
‘Top-Down’Tests toGoodwill
In this example, tax effects are ignored.
A58. At the end of 20X0, enterprise M acquired 100% of enterprise Z for
Rs. 3,000 lakhs. Z has 3 cash-generating units A, B and C with net fair
values of Rs. 1,200 lakhs, Rs. 800 lakhs and Rs. 400 lakhs respectively. M
recognises goodwill of Rs. 600 lakhs (Rs. 3,000 lakhs less Rs. 2,400 lakhs)
that relates to Z.
A59. At the end of 20X4,Amakes significant losses. Its recoverable amount
is estimated to be Rs. 1,350 lakhs. Carrying amounts are detailed below.
Schedule 1. Carrying amounts at the end of 20X4 (Amount in Rs. lakhs)
End of 20X4 A B C Goodwill Total
Net carrying amount 1,300 1,200 800 120 3,420
A - Goodwill Can be Allocated on a Reasonable and
Consistent Basis
A60. At the date of acquisition of Z, the net fair values of A, B and C are
considered a reasonable basis for a pro-rata allocation of the goodwill to A,
B and C.
Schedule 2. Allocation of goodwill at the end of 20X4
End of 20X0
A B C Total
Net fair values 1,200 800 400 2,400
Pro-rata 50% 33% 17% 100%
End of 20X4
Net carrying amount 1,300 1,200 800 3,300
Allocation of goodwill
(using the pro-rata above) 60 40 20 120
Net carrying amount
(after allocation of goodwill) 1,360 1,240 820 3,420
628 AS 28 (issued 2002)
A61. In accordance with the ‘bottom-up’ test in paragraph 78(a) of this
Statement,M compares A’s recoverable amount to its carrying amount after
the allocation of the carrying amount of goodwill.
Schedule 3. Application of ‘bottom-up’ test (Amount in Rs. lakhs)
End of 20X4 A
Carrying amount after allocation of goodwill (Schedule 2) 1,360
Recoverable amount 1,350
Impairment loss 10
A62. Mrecognises an impairment loss ofRs. 10 lakhs forA.The impairment
loss is fully allocated to the goodwill in accordancewith paragraph 87 of this
Statement.
B - Goodwill Cannot Be Allocated on a Reasonable and
Consistent Basis
A63. There is no reasonable way to allocate the goodwill that arose on the
acquisition of Z to A, B and C. At the end of 20X4, Z’s recoverable amount
is estimated to be Rs. 3,400 lakhs.
A64. At the end of 20X4,Mfirst applies the ‘bottom-up’ test in accordance
with paragraph 78(a) of this Statement. It compares A’s recoverable amount
to its carrying amount excluding the goodwill.
Schedule 4. Application of ‘bottom-up’ test (Amount in Rs. lakhs)
End of 20X4 A
Carrying amount 1,300
Recoverable amount 1,350
Impairment loss 0
A65. Therefore, no impairment loss is recognised for A as a result of the
‘bottom-up’ test.
A66. Since the goodwill could not be allocated on a reasonable and consistent
basis to A, M also performs a ‘top-down’ test in accordance with paragraph
Impairment of Assets 629
78(b) of this Statement. It compares the carrying amount of Z as a whole to
its recoverable amount (Z as a whole is the smallest cash-generating unit
that includes A and to which goodwill can be allocated on a reasonable and
consistent basis).
Schedule 5. Application of the ‘top-down’ test (Amount in Rs. lakhs)
End of 20X4 A B C Goodwill Z
Carrying amount 1,300 1,200 800 120 3,420
Impairment loss arising
from the ‘bottom-up’ test 0 – – – 0
Carrying amount after the
‘bottom-up’ test 1,300 1,200 800 120 3,420
Recoverable amount 3,400
Impairment loss arising
from ‘top-down’ test 20
A67. Therefore, M recognises an impairment loss of Rs. 20 lakhs that it
allocates fully to goodwill in accordancewith paragraph 87 of this Statement.
Example 8 - Allocation ofCorporateAssets
In this example, tax effects are ignored.
Background
A68. Enterprise M has three cash-generating units: A, B and C. There are
adverse changes in the technological environment in which M operates.
Therefore,Mconducts impairment tests of each of its cash-generating units.
At the end of 20X0, the carrying amounts of A, B and C are Rs. 100 lakhs,
Rs. 150 lakhs and Rs. 200 lakhs respectively.
A69. The operations are conducted froma headquarter.The carrying amount
of the headquarter assets is Rs. 200 lakhs: a headquarter building of Rs. 150
lakhs and a research centre of Rs. 50 lakhs. The relative carrying amounts
of the cash-generating units are a reasonable indication of the proportion of
the head-quarter building devoted to each cash-generating unit.The carrying
amount of the research centre cannot be allocated on a reasonable basis to
the individual cash-generating units.
630 AS 28 (issued 2002)
A70. The remaining estimated useful life of cash-generating unit A is 10
years. The remaining useful lives of B, C and the headquarter assets are 20
years. The headquarter assets are depreciated on a straight-line basis.
A71. There is no basis on which to calculate a net selling price for each
cash-generating unit. Therefore, the recoverable amount of each cashgenerating
unit is based on its value in use. Value in use is calculated using a
pre-tax discount rate of 15%.
Identification of Corporate Assets
A72. In accordance with paragraph 85 of this Statement,Mfirst identifies
all the corporate assets that relate to the individual cash-generating units
under review. The corporate assets are the headquarter building and the
research centre.
A73. M then decides how to deal with each of the corporate assets:
(a) the carrying amount of the headquarter building can be allocated
on a reasonable and consistent basis to the cash-generating units
under review. Therefore, only a ‘bottom-up’ test is necessary;
and
(b) the carrying amount of the research centre cannot be allocated
on a reasonable and consistent basis to the individual cashgenerating
units under review. Therefore, a ‘top-down’ test will
be applied in addition to the ‘bottom-up’ test.
Allocation of Corporate Assets
A74. The carrying amount of the headquarter building is allocated to the
carrying amount of each individual cash-generating unit. A weighted
allocation basis is used because the estimated remaining useful life of A’s
cash-generating unit is 10 years, whereas the estimated remaining useful
lives of B and C’s cash-generating units are 20 years.
Impairment of Assets 631
Schedule 1. Calculation of a weighted allocation of the carrying amount of
the headquarter building (Amount in Rs. lakhs)
End of 20X0 A B C Total
Carrying amount 100 150 200 450
Useful life 10 years 20 years 20 years
Weighting based on useful life 1 2 2
Carrying amount after
weighting 100 300 400 800
Pro-rata allocation of the building 12.5% 37.5% 50% 100%
(100/800) (300/800) (400/800)
Allocation of the carrying
amount of the building
(based on pro-rata above) 19 56 75 150
Carrying amount (after
allocation of the building) 119 206 275 600
Determination of Recoverable Amount
A75. The ‘bottom-up’ test requires calculation of the recoverable amount
of each individual cash-generating unit. The ‘top-down’ test requires
calculation of the recoverable amount of M as a whole (the smallest cashgenerating
unit that includes the research centre).
Value in use 199 164 271
632 AS 28 (issued 2002)
Schedule 2. Calculation of A, B, C and M’s value in use at the end of 20X0
(Amount in Rs. lakhs)
A B C M
Year Future Discount Future Discount Future Discount Future Discount
cash at 15% cash at 15% cash at 15% cash at 15%
flows flows flows flows
1 18 16 9 8 10 9 39 34
2 31 23 16 12 20 15 72 54
3 37 24 24 16 34 22 105 69
4 42 24 29 17 44 25 128 73
5 47 24 32 16 51 25 143 71
6 52 22 33 14 56 24 155 67
7 55 21 34 13 60 22 162 61
8 55 18 35 11 63 21 166 54
9 53 15 35 10 65 18 167 48
10 48 12 35 9 66 16 169 42
11 36 8 66 14 132 28
12 35 7 66 12 131 25
13 35 6 66 11 131 21
14 33 5 65 9 128 18
15 30 4 62 8 122 15
16 26 3 60 6 115 12
17 22 2 57 5 108 10
18 18 1 51 4 97 8
19 14 1 43 3 85 6
20 10 1 35 2 71 4
720(1)
(1) It is assumed that the research centre generates additional future cash flows
for the enterprise as a whole. Therefore, the sum of the value in use of each
individual cash-generating unit is less than the value in use of the business as a
whole. The additional cash flows are not attributable to the headquarter building.
Impairment of Assets 633
Calculation of Impairment Losses
A76. In accordance with the ‘bottom-up’ test, M compares the carrying
amount of each cash-generating unit (after allocation of the carrying amount
of the building) to its recoverable amount.
Schedule 3. Application of ‘bottom-up’ test (Amount in Rs. lakhs)
End of 20X0 A B C
Carrying amount (after allocation
of the building) (Schedule 1) 119 206 275
Recoverable amount (Schedule 2) 199 164 271
Impairment loss 0 (42) (4)
A77. The next step is to allocate the impairment losses between the assets
of the cash-generating units and the headquarter building.
Schedule 4. Allocation of the impairment losses for cash-generating units
B and C (Amount in Rs. lakhs)
Cash-generating unit B C
To headquarter building (12) (42*56/206) (1) (4*75/275)
To assets in cash-generating unit (30) (42*150/206) (3) (4*200/275)
(42) (4)
A78. In accordance with the ‘top-down’ test, since the research centre
could not be allocated on a reasonable and consistent basis to A, B and C’s
cash-generating units,Mcompares the carrying amount of the smallest cashgenerating
unit to which the carrying amount of the research centre can be
allocated (i.e., M as a whole) to its recoverable amount.
634 AS 28 (issued 2002)
Schedule 5. Application of the ‘top-down’ test (Amount in Rs. lakhs)
End of 20X0 A B C Building Research M
centre
Carrying amount 100 150 200 150 50 650
Impairment loss arising
from the ‘bottom-up’ test – (30) (3) (13) – (46)
Carrying amount after
the ‘bottom-up’ test 100 120 197 137 50 604
Recoverable amount
(Schedule 2) 720
Impairment loss arising
from ‘top-down’ test 0
A79. Therefore, no additional impairment loss results from the application
of the ‘top-down’ test. Only an impairment loss of Rs. 46 lakhs is recognised
as a result of the application of the ‘bottom-up’ test.
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