Impairment of Fixed Assets According to IAS 36 - Highlights

Outcome

The economic worth of the company’s fixed assets is verified and updated.

Purpose

The purpose of the IAS 36 regulation is to ensure that the value of a tangible fixed asset in the balance sheet (carrying amount) does not exceed its estimated economic worth (recoverable amount).

When

If there is any indication on the balance sheet date that a tangible fixed asset has diminished in value, the company should analyze whether the fixed asset must be impaired. Otherwise, the analysis must be done as a part of the company’s year-end routines.

Companies must impair their fixed assets even when the recoverable amount is only temporarily lower than the carrying amount.

How

The company must estimate the recoverable amount of the asset. If the recoverable amount is less than the carrying amount, the asset is written down to its recoverable amount. The write-down is called impairment.

The impairment loss is an expense in the income statement. Depreciation plans for fixed assets that are impaired must be adjusted for future periods.

Scope of IAS 36

IAS 36 applies to all fixed assets in the following categories:

• Land
• Buildings
• Machinery and equipment
• Investment property carried at cost
• Intangible assets
• Goodwill
• Investments in subsidiaries, associates and joint ventures
• Assets carried at revalued amounts under IAS 16 and 38.

Consequently, IAS 36 does not apply to:

• Inventories (see IAS 2)
• Fixed assets arising from construction contracts (see IAS 11)
• Deferred tax assets (see IAS 12)
• Assets arising from employee benefits (see IAS 19)
• Financial assets (see IAS 39).

Impairment Test on a Group of Fixed Assets

It is often not possible to associate independent cash flows with individual fixed assets. In such a case, the company can test a group of assets that constitute an income-generating unit for impairment instead (an IGU is also called a cash-generating unit, CGU).

The future cash flows for each IGU must be forecast based on the company’s budgets, usually for the next five years. An assumed growth rate can be used after that.

Calculation of Recoverable Amount

The carrying amount for a tangible fixed asset is calculated as follows: Historic cost (or incorporated revaluations) minus accumulated depreciation minus any provision for accumulated impairment losses of the fixed asset.

The recoverable amount is the greatest value of the following two:

• The amount that could be obtained by selling the fixed asset (net selling price, also called net realizable value, NRV); that is, a fixed asset’s fair value minus the costs of selling
• The amount that could be obtained by using the fixed asset and disposing of it at the end of its useful life (value in use).

You calculate the value in use by forecasting the cash flows that the fixed asset is expected to generate and discounting them to their present value. Thus, where a fixed asset is carried at value in use, its carrying value is a discounted amount.

When a fixed asset has been impaired, it should be written down to its recoverable amount. The write-down will normally be reflected in the operating profit (there are some exceptions for revalued fixed assets) in the profit and loss account, as an exceptional item if sufficiently material.

1. Example

   Value	Amount in Euro
   Carrying amount (=depreciated historical cost)	800
   Net realizable value	450
   Value in use	600

   Since it is evident that the asset has been impaired, it must be written down to the recoverable amount of EUR 600.

Indications of the Need for Impairment

The standards do not require annual impairment reviews of fixed assets (other than goodwill and intangibles with a life in excess of 20 years).

Indications for testing a fixed asset for impairment are:

1. — External Sources

   • Market value declines
   • Negative changes in technology, markets, economy or laws
   • Increases in market interest rates
   • Company stock price below book value.

2. — Internal Sources

   • Obsolescence or physical damage
   • The fixed asset is part of a restructuring or held for disposal
   • Poorer economic performance than expected.

Reversal of Impairment Losses

If events turn out better than you predicted earlier and the recoverable amount increases, you can reverse the previous write-down. The reversal must not result in a value higher than the amount the fixed asset would have had if the original impairment had never been recorded. Any depreciation that would have been charged in the meantime must be taken into account.