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Deloitte Haskins & Sells

Deloitte Haskins & Sells. ACCOUNTING STANDARD – 28. IMPAIRMENT OF ASSETS. CA. M. P. SARDA Deloitte Haskins & Sells. Deloitte Haskins & Sells. MEANING. The dictionary meaning of the word ‘to impair’ is – ‘to weaken’ or ‘to damage’

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Deloitte Haskins & Sells

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  1. Deloitte Haskins & Sells

  2. ACCOUNTING STANDARD – 28 IMPAIRMENT OF ASSETS CA. M. P. SARDA Deloitte Haskins & Sells

  3. Deloitte Haskins & Sells MEANING The dictionary meaning of the word ‘to impair’ is – ‘to weaken’ or ‘to damage’ The phrase ‘impairment of asset’ therefore implies a damage to the value of the asset or say decline in the value of the asset.

  4. Deloitte Haskins & Sells OVERVIEW • Applicability • Scope • Objective • Computation • Accounting Treatment • Disclosure • Transitional Provisions

  5. Deloitte Haskins & Sells APPLICABILITY • LEVEL 1 ENTERPRISES • LEVEL 2 ETERPRISES • LEVEL 3 ENTERPRISES

  6. Deloitte Haskins & Sells LEVEL I ENTERPRISES (LARGE)Applicable w.e.f. 01/04/20041. All listed enterprises2. Enterprises under process of listing3. Other enterprises exceeding turnover Rs.50 crores4. Financial institution, banks, insurance co.5. Commercial enterprises having borrowings more than Rs. 10 crores.

  7. Deloitte Haskins & Sells LEVEL – II ENTERPRISE (MEDIUM)Applicable w.e.f. 01/04/20061. Turnover (Rs. 40 Lakhs to Rs. 50 Crores)2. Borrowings (Rs. 1 Crore to Rs. 10 Crores)LEVEL – III ENTERPRISES (SMALL)Applicable w.e.f. 01/04/2008To all remaining Enterprises

  8. AS-28 applies to all assets other than following:1. Inventories(AS-2)2. Assets arising from construction contract (AS-7)3. Financial assets/Investments(AS-13)4. Deferred tax assets(AS-22) Deloitte Haskins & Sells SCOPE

  9. Deloitte Haskins & Sells OBJECTIVE • To identify the assets which are sick or unhealthy. • To ensure that enterprise assets are carried at not more than their recoverable amount.

  10. Deloitte Haskins & Sells INDICATIONS FOR IMPAIRMENT Assessment should be made at each Balance Sheet date whether an asset is impaired on the basis of following factors: Internal Sources of Information • Physical damage or obsolescence of an asset • Significant changes having adverse effect on the enterprise • Internal reporting indicating poor economic performance of an asset

  11. Deloitte Haskins & Sells External Sources of Information • Significant decline in the market value of an asset due to passage of time or normal use. • Change in technology, market, economic or legal environment in which the enterprise operates. • Increase in Market interest rate affecting discount rate used in calculation of value in use. • Carrying amount of the net assets of the enterprise is more than its market capitalization.

  12. Deloitte Haskins & Sells IMPAIRMENT LOSS • If carrying amount < Recoverable amount: Asset is not impaired • If carrying amount > Recoverable amount:Asset is impaired Impairment Loss = Carrying Amount – Recoverable Amount

  13. Deloitte Haskins & Sells RECOVERABLE AMOUNT • Recoverable amount is the higher of net selling price and its value in use. • Net selling price = The asset’s market price less cost of disposal. • Value in use = Present Value of estimated future net cash flows arising from use of the asset and its ultimate disposal.

  14. Deloitte Haskins & Sells CASH GENERATING UNIT • If it is not possible to estimate cash flow of an individual asset same is grouped under a cash-generating unit to which the asset belongs. • “A cash generating unit is the smallest identifiable group of assets that generates cash inflow from continuing use that are largely independent of the cash inflow from other assets or group of assets.”

  15. Deloitte Haskins & Sells EXAMPLE OF CGU A mining enterprise owns a private railway to support its mining activities. The private railway could be sold only for scrap value & the private railway does not generate cash inflows from continuing use that are largely independent of the cash inflows from the other assets of the mine. It is not possible to estimate the recoverable amount of the private railway because the value in use of the private railway cannot be determined & it is probably different from the scrap value. Therefore the enterprise estimates the recoverable amount of the CGU to which the private railway belongs i.e. the mine as a whole.

  16. Deloitte Haskins & Sells FUTURE CASH FLOW • Future cash flow should be based on financial budgets/forecasts approved by management (not more than 5 years). • Extrapolation of data may be used beyond the period of approved budget. • Steady or declining growth rate may be used for the purpose of extrapolation.

  17. Deloitte Haskins & Sells COMPOSITION OF FUTURE CASH FLOW Future cash flow shall include: • Cash inflows from continuing use of the asset • Cash outflows necessarily incurred to generate the cash inflows, including cash outflows to prepare the asset for use • Net cash flows to be received for the disposal of the asset

  18. Deloitte Haskins & Sells COMPOSITION OF FUTURE CASH FLOW (CONTD…) Future cash flow shall exclude: • Cash inflows or outflows from financing activities • Income tax receipts or payments • Cash flow arising from future restructuring except when the same is committed

  19. Deloitte Haskins & Sells DISCOUNT RATE • Weighted average cost of capital for the enterprise. • Incremental borrowing rate for the enterprise. • Other market borrowing rate. • Should be pre–tax rate. • Should reflect current market assessments of the time value ofmoney and the risk specific to the asset.

  20. Deloitte Haskins & Sells TREATMENT OF IMPAIRMENT LOSS • An impairment loss should be recognized against the revaluation reserve, if any, and balance, if any, as an exp. in the P/L A/c. 2. Impairment loss for a Cash Generating Unit should be allocated in the following order : • Goodwill, if any. • Balance, if any, to individual assets in proportion to their carrying cost.

  21. Deloitte Haskins & Sells TREATMENT OF IMPAIRMENT LOSS (CONTD..) 3. After the recognition of impairment loss the depreciation charge for the asset should be adjusted in future periods to allocate the revised carrying amount, less its residual value, on a systematic basis over its remaining useful life

  22. Deloitte Haskins & Sells REVERSAL OF AN IMPAIRMENT LOSS • At any balance sheet date if management assess that the impairment loss considered in prior accounting periods may no longer exist or decreased the loss may be reversed • After reversal carrying amount of individual asset/CGU should not exceed carrying amount if no impairment would have been recognised in the past. • Reversal is not required if value in use increases in subsequent year merely due to pattern of cash flow but not due to increase in the earning potential of the asset

  23. Deloitte Haskins & Sells DISCLOSURE • The amount of impairment loss charged to P/L for each class of asset; • The reversal of impairment loss considered in P/L for each class of asset; • The amount of impairment loss adjusted against revaluation surplus; • The reportable segment to which the asset belongs; • The reasons for changing the Cash Generating Unit for an asset and the description of the earlier & the changed Cash Generating Unit; • The discount rate used in reckoning of value in use.

  24. On the date this Standard becomes mandatory, an enterprise should assess whether there is any indication that an asset may be impaired. If any such indication exists, the enterprise should determine impairment loss, if any and recognise the loss so determined against the opening balance of revaluation reserve/revenue reserves. Deloitte Haskins & Sells TRANSITIONAL PROVISIONS

  25. Deloitte Haskins & Sells IMPACTS OF AS-28 1. Valuation of assets No up-ward revaluation is permitted (Only to the extant of impairment loss recognized in earlier years) 2. Notes to Accounts Fixed assets are valued at their historical cost less depreciation no more required to mention.

  26. Deloitte Haskins & Sells CRITERIA FORGROUPING OF ASSETS • If an active market exists for the output produced by an asset or group of assets, this asset or group of assets should be identified as a separate cash generating unit, even if some or all the output is used internally. • When the outputs are used for captive consumption the sale value of output in an active market should be considered in cash flow. Like wise value of inputs also considered. • Common assets on a reasonable and consistent basis.

  27. THANKS Deloitte Haskins & Sells

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