Identifying an Asset that may be Impaired :
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.
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.
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 Standard does not require an enterprise to make a formal estimate of recoverable amount.
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;
(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.
The list of paragraph 8 is not exhaustive. An enterprise may identify other indications that an asset may be impaired and these would also require the enterprise to determine the asset’s recoverable amount.
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 or maintaining 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;
(c) a significant decline in budgeted net cash flows or operating profit, or a significant increase in budgeted loss, flowing from the asset; or
(d) operating losses or net cash outflows for the asset, when current period figures are aggregated with budgeted figures for the future.
The concept of materiality applies in identifying whether 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
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 amount because 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.
If there is an indication that an asset may be impaired, this may 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 Accounting4 , even if no impairment loss is recognised for the asset.