Impairment of Assets (AS 28)

The Institute of Chartered Accountants of India has made it mandatory for all entities to account for impairment of assets. The institute has brought about such requirement vide its Accounting Standard 28 (AS 28)

It is clear that with effect from 1.4.2005 the Accounting Standard becomes applicable to all enterprises notwithstanding its status on a stock exchange or its turnover. We present hereunder the implications of the applicability of the accounting standard to your enterprise.

Where any business enterprise falls under any of the criterion, the Accounting Standard requires it to do the following:

Assess at each balance sheet date if any indications exist that an asset may be impaired.

Such indications could be a significant decline in market value; adverse changes in the technological market, economic or legal environment; increase in rate of return on investment or even technological obsolescence.

Identify and recognize the impaired assets.

Where any such indications exist, the management must identify if the asset has been rendered impaired. An asset is impaired when its carrying amount is higher than both its value in use and its net selling price. Value in use is calculated as the present value of estimated future cash flows expected to arise from the continuing use of an asset and from its disposal at the end of its useful life. Net selling price is the amount obtainable from the sale of an asset in an arm’s length transaction.

Measure the impairment loss.

An impairment loss is measured as the amount by which the asset’s carrying amount exceeds the higher of the value in use and the net selling price of that asset.

Account for or recognize the impairment loss in its books.

An impairment loss on a revalued asset is recognized as an expense in the statement of profit and loss. However, an impairment loss on a revalued asset is recognized directly against any revaluation surplus for the asset to the extent that the impairment loss does not exceed the amount held in the revaluation surplus for that same asset. After the recognition of an impairment loss, the depreciation (amortization) charge for the asset should be adjusted in future periods to allocate the asset’s revised carrying amount, less its residual value (if any), on a systematic basis over its remaining useful life.

Thus AS 28 entails an extensive procedure of identifying impaired assets and undertaking their valuation.

We at Anmol Sekhri Consultants Pvt Ltd have assisted several top companies in complying with AS 28.