IAS36: IMPAIRMENT OF ASSETS
Dissertation
XXXXXXXXXXXXXXX
(ICB Member ID: XXXXX)
Submitted in partial fulfilment of the requirements for the National Diploma:
FINANCIAL ACCOUNTING
(SAQA ID: 20366)
November 2020
DECLARATION BY STUDENT:
I declare that this mini-dissertation submitted by me, is my own work, that I have referenced
all the sources that I have used and that no part was previously submitted at any tertiary
institution.
Signature: Date:
,TABLE OF CONTENTS
Chapter 1: History of IAS 36 – Impairment of Assets......................………………………….1
Chapter 2: Current Critique - IAS 36 Impairment of Assets……..................…………………5
Chapter 3: The structure of impairment - review………………………………….…..........…7
Chapter 4: Determining impairment of assets………………………………………......……13
Chapter 5: Measuring the recoverable amount of impaired assets………...............................17
Chapter 6: Recognition and reversal of impairment losses……………………......…………23
Chapter 7: Critique with regards to other impairment issues………………..................…….27
Chapter 8: Disclosures – Requirements……………………………………………...............31
Chapter 9: Summary of strengths and weaknesses with respect to IAS 36………….………39
Chapter 10: Conclusion…………………………………………………………....................42
Bibliography………………………………………………………………………….………43
TABLE AND FIGURES
Table 1…....................................................................................................................................2
Figure 1………………………………………………………………………………..............4
Figure 2…………………………………………………………………………………..........6
Figure 3………………………………………………………………………………………16
Figure 4………………………………………………………………………………………18
Figure 5………………………………………………………………………………………25
Figure 6………………………………………………………………………………………25
i
,CHAPTER 1: HISTORY OF IAS 36 – IMPAIRMENT OF ASSETS
An asset is “a resource controlled by the entity as a result of past events and from which
future economic benefits are expected to flow to the entity” (IASB, CF:49). The value may
change over time, but is initially set by the current market and recognised in the balance
sheet.
Impairment of assets is one of the most difficult accounting areas due to its complexity
(Sikstrӧm), due to the application thereof. Companies do not think about potential
impairment tests of fixed assets on a daily basis (Lysér; Roempke & Sandberg) and when
impairment tests become necessary, it’s difficult to identify which assets should be included.
Assets are acquired and held by businesses to generate future economic benefits through its
use or sale. Non-current assets are usually measured in the financial statements at cost or a
revalued amount, which is depreciated over the useful economic life of the asset.
Sometimes the carrying amount of the asset is not the same as the recoverable amount of the
asset. The recoverable amount is defined as the higher of its:
• Fair value minus costs of disposal; or
• Value in use.
Fair value less costs of disposal 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.
Value in use is the present value of future cash flows from using as asset, including its
eventual disposal.
The carrying amount of an asset is the amount at which the asset is recognised after deducting
accumulated depreciation and accumulated impairment losses.
Under IAS 36 – Impairment of Assets, assets should be recorded in the financial statements at
no more than their recoverable amount. IAS 36 is predominantly applicable to property, plant
and equipment, intangible assets and goodwill.
Impairment is a reduction in the value of an asset due to an asset becoming obsolete or
damaged, which will result in a reduction in the benefits a business can derive through the
use or sale of the asset. The carrying value of an asset should always reflect the value which
the entity will derive from its use or sale, which is known as the recoverable amount. If an
asset’s recoverable amount falls below its carrying value, the carrying value of the asset
1
, should be written down to reflect the recoverable amount. The entry to account for
impairment is a debit to a loss or expense account, and a credit to the underlying asset
account.
Before the implementation of IAS 36, impairment of assets was mentioned in IAS 16
Property, Plant and Equipment, however it did not include particular guidance on when to test
for impairment and the measurement thereof.
IAS 36 – Impairment of Assets sets out the requirements to account for and record
impairment of most non-financial assets as well as define when an asset is impaired, how to
recognise an impairment loss, when the loss should be reversed and the information related to
the impairment that should be disclosed in the financial statements of the entity.
IAS 36 was first issued in 1998 and later revised in 2004 and 2008 as part of the International
Accounting Standards Board’s (IASB’s) work on the business combinations project. IAS 36
– Impairment of assets applies to goodwill and intangible assets acquired for which the
agreement date is on or after 31 March 2004 and for all other assets from the beginning of the
first annual period beginning on or after 31 March 2004.
Table 1 – History of IAS 36 – Impairment of assets
May Exposure Draft E55 Impairment of
1997 Assets
June IAS 36 Impairment of Assets Operative for financial statements covering
1998 periods beginning on or after 1 July 1999
31 IAS 36 Impairment of Assets Applies to goodwill and intangible assets in
March revised business combinations for which the
2004 agreement date is on or after 31 March 2004
and for all other assets prospectively from
the beginning of the first annual period
beginning on or after 31 March 2004
22 Amended by Effective for annual periods beginning on or
May Annual Improvements to IFRSs after 1 January 2009
2008 2007 (disclosure of estimates used
to determine a recoverable amount)
16 Amended by Annual Improvements Effective for annual periods beginning on or
April to IFRSs 2009 (units of accounting after 1 January 2010
2009 for goodwill impairment testing
using segments under IFRS 8
before aggregation)
29 Amended by Recoverable Amount Effective for annual periods beginning on or
May Disclosures for Non-Financial after 1 January 2014
2013 Assets (clarification of disclosures
required)
2
Dissertation
XXXXXXXXXXXXXXX
(ICB Member ID: XXXXX)
Submitted in partial fulfilment of the requirements for the National Diploma:
FINANCIAL ACCOUNTING
(SAQA ID: 20366)
November 2020
DECLARATION BY STUDENT:
I declare that this mini-dissertation submitted by me, is my own work, that I have referenced
all the sources that I have used and that no part was previously submitted at any tertiary
institution.
Signature: Date:
,TABLE OF CONTENTS
Chapter 1: History of IAS 36 – Impairment of Assets......................………………………….1
Chapter 2: Current Critique - IAS 36 Impairment of Assets……..................…………………5
Chapter 3: The structure of impairment - review………………………………….…..........…7
Chapter 4: Determining impairment of assets………………………………………......……13
Chapter 5: Measuring the recoverable amount of impaired assets………...............................17
Chapter 6: Recognition and reversal of impairment losses……………………......…………23
Chapter 7: Critique with regards to other impairment issues………………..................…….27
Chapter 8: Disclosures – Requirements……………………………………………...............31
Chapter 9: Summary of strengths and weaknesses with respect to IAS 36………….………39
Chapter 10: Conclusion…………………………………………………………....................42
Bibliography………………………………………………………………………….………43
TABLE AND FIGURES
Table 1…....................................................................................................................................2
Figure 1………………………………………………………………………………..............4
Figure 2…………………………………………………………………………………..........6
Figure 3………………………………………………………………………………………16
Figure 4………………………………………………………………………………………18
Figure 5………………………………………………………………………………………25
Figure 6………………………………………………………………………………………25
i
,CHAPTER 1: HISTORY OF IAS 36 – IMPAIRMENT OF ASSETS
An asset is “a resource controlled by the entity as a result of past events and from which
future economic benefits are expected to flow to the entity” (IASB, CF:49). The value may
change over time, but is initially set by the current market and recognised in the balance
sheet.
Impairment of assets is one of the most difficult accounting areas due to its complexity
(Sikstrӧm), due to the application thereof. Companies do not think about potential
impairment tests of fixed assets on a daily basis (Lysér; Roempke & Sandberg) and when
impairment tests become necessary, it’s difficult to identify which assets should be included.
Assets are acquired and held by businesses to generate future economic benefits through its
use or sale. Non-current assets are usually measured in the financial statements at cost or a
revalued amount, which is depreciated over the useful economic life of the asset.
Sometimes the carrying amount of the asset is not the same as the recoverable amount of the
asset. The recoverable amount is defined as the higher of its:
• Fair value minus costs of disposal; or
• Value in use.
Fair value less costs of disposal 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.
Value in use is the present value of future cash flows from using as asset, including its
eventual disposal.
The carrying amount of an asset is the amount at which the asset is recognised after deducting
accumulated depreciation and accumulated impairment losses.
Under IAS 36 – Impairment of Assets, assets should be recorded in the financial statements at
no more than their recoverable amount. IAS 36 is predominantly applicable to property, plant
and equipment, intangible assets and goodwill.
Impairment is a reduction in the value of an asset due to an asset becoming obsolete or
damaged, which will result in a reduction in the benefits a business can derive through the
use or sale of the asset. The carrying value of an asset should always reflect the value which
the entity will derive from its use or sale, which is known as the recoverable amount. If an
asset’s recoverable amount falls below its carrying value, the carrying value of the asset
1
, should be written down to reflect the recoverable amount. The entry to account for
impairment is a debit to a loss or expense account, and a credit to the underlying asset
account.
Before the implementation of IAS 36, impairment of assets was mentioned in IAS 16
Property, Plant and Equipment, however it did not include particular guidance on when to test
for impairment and the measurement thereof.
IAS 36 – Impairment of Assets sets out the requirements to account for and record
impairment of most non-financial assets as well as define when an asset is impaired, how to
recognise an impairment loss, when the loss should be reversed and the information related to
the impairment that should be disclosed in the financial statements of the entity.
IAS 36 was first issued in 1998 and later revised in 2004 and 2008 as part of the International
Accounting Standards Board’s (IASB’s) work on the business combinations project. IAS 36
– Impairment of assets applies to goodwill and intangible assets acquired for which the
agreement date is on or after 31 March 2004 and for all other assets from the beginning of the
first annual period beginning on or after 31 March 2004.
Table 1 – History of IAS 36 – Impairment of assets
May Exposure Draft E55 Impairment of
1997 Assets
June IAS 36 Impairment of Assets Operative for financial statements covering
1998 periods beginning on or after 1 July 1999
31 IAS 36 Impairment of Assets Applies to goodwill and intangible assets in
March revised business combinations for which the
2004 agreement date is on or after 31 March 2004
and for all other assets prospectively from
the beginning of the first annual period
beginning on or after 31 March 2004
22 Amended by Effective for annual periods beginning on or
May Annual Improvements to IFRSs after 1 January 2009
2008 2007 (disclosure of estimates used
to determine a recoverable amount)
16 Amended by Annual Improvements Effective for annual periods beginning on or
April to IFRSs 2009 (units of accounting after 1 January 2010
2009 for goodwill impairment testing
using segments under IFRS 8
before aggregation)
29 Amended by Recoverable Amount Effective for annual periods beginning on or
May Disclosures for Non-Financial after 1 January 2014
2013 Assets (clarification of disclosures
required)
2
