Impairment: Recognition & Measurement for IAS 36

Individual Assets

Requirements

The requirements for recognising and measuring an impairment loss are as follows:

  • When the recoverable amount of an asset is less than the carrying amount, the carrying amount should be reduced to the recoverable amount.
  • The difference between the reduction from the previous carrying amount to the recoverable amount is known as an impairment loss.
  • The impairment loss should be recognised in the profit or loss immediately unless the revaluation decrease treatment is prescribed in another accounting standard. This might occur say if the asset was revalued upwards in accordance with IAS 16 – Property, Plant and Equipment in the past, and there’s a revaluation surplus to assign the current impairment against.

Journal entries

1. Asset carried at cost

The journal entry for an asset which hasn’t been depreciated is:

DR Impairment write down (Expense)                     XX
CR    Accumulated Impairment losses (Asset) XX
 

2. Asset which has been depreciated

If you’re writing down the value of an asset which has been depreciated, you do not need to write back any accumulated depreciation and change the value of the asset, and you do not need to create a special accumulated impairment account.

Instead, you’ll credit an account called “Accumulated depreciation and impairment losses”.

The journal entry for this is

DR Impairment write down (Expense)                     XX
CR    Accumulated depreciation and impairment losses XX

Keep in mind for disclosure purposes under IAS 16 – Property, Plant and Equipment you’ll recognise depreciation and impairment losses separately.

3. Revalued Assets

Impairment loss is less than revaluation surplus

The journal entry for a non-depreciated asset where the impairment loss is less than the previous revaluation increase is:

DR Revaluation Surplus                  XX
DR Deferred tax liability XX
CR    Accumulated depreciation and impairment losses XX
 

4. Impairment loss is more than revaluation surplus

The journal entry for a non-depreciated asset where the impairment loss is more than the previous revaluation increase is as follows:

DR Impairment Write Down (Expense)                XX
DR Deferred Tax Asset XX
DR Revaluaion Surplus XX
DR Deferred Tax Liability XX
CR    Asset XX

5. Depreciable asset

When dealing with a depreciable asset where the impairment loss is more than the previous revaluation increase, the journal entries are:

1. Write back accumulated depreciation

DR Accumulated Depreciation                     XX
CR    Deferred Tax Liability XX

2. Recognise the impairment loss where the decrement is less than the previous increments.

DR Revaluation Surplus                   XX
DR Deferred Tax Liability XX
CR    Asset XX
 

Where the decrease in value is greater than the previous increase in value, and the asset was previously depreciated, the journal entries are:

1. Write back accumulated depreciation

DR Accumulated Depreciation                 XX
CR    Asset XX

2. Recognise the impairment loss where the decrease is greater than the previous increase

DR Impairment write down (Expense)                     XX
DR Deferred Tax Asset XX
DR Revaluation Surplus XX
DR Deferred Tax Liability XX
CR    Asset XX
 

Recognising a Liability

When an impairment loss is recognised and the loss is greater than the carrying amount of the asset, the entity should recognise a liability, only if it’s required by another standard.

Once an impairment loss is recognised, the depreciation or amortisation chargeable in future periods should be adjusted to reflect the new carrying amount minus its residual value.

Summary of Impairment of Individual Assets

A quick summary of how to identify and account for impairment of individual assets is as follows:

  1. Assess whether there are any indications of impairment at the end of each reporting period.
  2. If there is evidence of impairment, estimate the recoverable amount of the asset.
  3. When the recoverable amount is less than the carrying value, the asset is impaired. The entity should reduce the carrying amount of the asset to its recoverable amount. The decrease in value is called an impairment loss which is recognised in P&L in the period incurred.
  4. If the impairment loss relates to an asset which was previously revalued upwards, the current loss should be offset against the revaluation surplus for the asset. If this happens, the loss is reported as a negative value other comprehensive income for the period and is not charged against profit.
  5. Adjust the depreciation charges for the impaired asset in future periods.

Working Example

Let’s look at a quick example of this in action.

  • Sligo Limited owns an machine with a carrying amount of €160,000 at the beginning of the financial year.
  • The asset was revalued previously and there’s a revaluation surplus of €10,000 in the revaluation surplus account.
  • During the year, the machine was damaged by a careless employee and is impaired.

The estimated recoverable amount of the machine is now €120,000, the depreciation that would be charged for the asset this financial year is €16,000.

There’s an impairment loss of €40,000, which is €160,000 minus €120,000.

Of this impairment loss, €10,000 may be offset against the revaluation surplus for the asset and reported as a negative figure in other comprehensive income for the year.

The remainder, €30,000 will have to be written off as an expense in the period, and the asset’s carrying amount will now be its recoverable amount, €120,000.

Next year, the depreciation charge will be based on the new carrying amount of the asset, which is €120,000 less any expected residual value.

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