Question

In the context of IAS 36, the external and internal indicators that impairment of non-current assets or goodwill may have occurred. Briefly give one example each.

External sources of information

• Observable indications that the asset’s value has declined during the period significantly more than would be expected as a result of the passage of time or normal use.
• Significant changes with an adverse effect on the entity in the technological, market, economic or legal environment in which the entity operates or in the market to which an asset is dedicated.
• 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.
• The carrying amount of the net assets of the entity is higher than its market capitalization.

External sources of information​​​​​​​

• Obsolescence or physical damage of an asset.
• Significant changes with an adverse effect on the entity related to the use of an asset, for example: an asset becoming idle, plans to discontinue or restructure the operation to which an asset belongs, plans to dispose of an asset before the previously expected date, and reassessing the useful life of an asset as finite rather than indefinite.
• Evidence is available from internal reporting that indicates that the economic performance of an asset is, or will be, worse than expected.

Answer 1

IAS 36 Impairment of Assets seeks to ensure that an entity's assets are not carried at more than their recoverable amount (i.e. the higher of fair value less costs of disposal and value in use). With the exception of goodwill and certain intangible assets for which an annual impairment test is required, entities are required to conduct impairment tests where there is an indication of impairment of an asset, and the test may be conducted for a 'cash-generating unit' where an asset does not generate cash inflows that are largely independent of those from other assets.

Indications of impairment [IAS 36.12]

External sources:

• market value declines
• negative changes in technology, markets, economy, or laws
• increases in market interest rates
• net assets of the company higher than market capitalisation

Internal sources:

• obsolescence or physical damage
• asset is idle, part of a restructuring or held for disposal
• worse economic performance than expected
• for investments in subsidiaries, joint ventures or associates, the carrying amount is higher than the carrying amount of the investee's assets, or a dividend exceeds the total comprehensive income of the investee

Explations for the above points are:

External sources of information::

• Observable indications that the asset’s value has declined during the period significantly more than would be expected as a result of the passage of time or normal use.
• Significant changes with an adverse effect on the entity in the technological, market, economic or legal environment in which the entity operates or in the market to which an asset is dedicated.
• 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.
• The carrying amount of the net assets of the entity is higher than its market capitalization.
• Obsolescence or physical damage of an asset.
• Significant changes with an adverse effect on the entity related to the use of an asset, for example: an asset becoming idle, plans to discontinue or restructure the operation to which an asset belongs, plans to dispose of an asset before the previously expected date, and reassessing the useful life of an asset as finite rather than indefinite.

Internal sources of Information:

• Evidence is available from internal reporting that indicates that the economic performance of an asset is, or will be, worse than expected.
• When the intangible asset put to use in the company has become obsolete or they have suffered physical damage over the period of time, it calls for impairment of assets
• If the economic performance of the asset is worse than what was expected out of it denotes that the asset does not provide enough economic benefits for the company expected out of it and it needs to be impaired by the company.