CMA FINAL-CFR Ind AS-36 CA/CMA Santosh kumar

IND AS-36 - Impairment of assets

OBJECTIVE :- The objective of this Standard is to prescribe the procedures that an entity applies to ensure
that its assets are carried at no more than their recoverable amount.

SCOPE:- Impairment of assets is recognized as per Ind AS 36 for assets including PPE, Intangible assets
and goodwill but excluding:

(a) Inventories

(b) Biological assets (Ind AS 41)

(c) Non-current assets classified as held for sale (Ind AS 105)

(d) Assets arising from construction contracts (Ind AS 11)

(e) Deferred tax assets

(f) Assets arising from employee benefits (Ind AS 19)

(g) Financial assets (Ind AS 109)

important definitions:
1. Carrying amount is the amount at which an asset is recognised after deducting any accumulated depreciation
(amortisation) and accumulated impairment losses thereon.

2. Fair value is the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between
market participants at the measurement date (refer Ind AS 113 Fair Value Measurement).

3. Value in use is the present value of the future cash flows expected to be derived from an asset or cash-generating
unit.

4. Recoverable amount is the higher of the fair value less cost to sell and value in use.
5. Corporate assets are assets other than goodwill that contribute to the future cash flows ofboth the cash-
generating unit under review and other cash-generating units.

When is impairment of asset recognized ?

An asset is impaired when the carrying amount of the asset exceeds its recoverable amount.

COCEDUCATION.COM ENQUIRY NO: 9999631597, 7303445575, 8448322142

 CMA FINAL-CFR Ind AS-36 CA/CMA Santosh kumar

Revision question 1. C Ltd. acquired a machine for ₹ 3.2 crores on 1.1.2023. It has a life of 5 years with a salvage
value of ₹ 40 lakhs. Apply the test of impairment on 31.3.2026:
(a) Present value of future cash flow ₹ 1.3 crores
(b) Fair value less cost to sell ₹ 1.2 crores
Answer : computation of impairment loss as on 31-3-2026:

Cost of the Machine on 1-1-2023 3.20 crores

Less: accumulated depreciation till 31-3-2026 1.82 crores

𝟑.𝟐 𝒄𝒓𝒐𝒓𝒆𝒔−.𝟒𝟎 𝒄𝒓𝒐𝒓𝒆𝒔

( x 39 months)
𝟔𝟎 𝒎𝒐𝒏𝒕𝒉𝒔

Carrying amount as on 31-3-2026 1.38 crores

Recoverable amount: Higher of

(a) Fair value less cost to sell = 1.2 crores

(b) Value in use (Present value of future cash flow) = 1.3 crores 1.30 crores

Impairment loss 0.08 crores

Journal entries:
Particulars Debit Credit

Impairment loss account Dr 0.08 crores

To Machinery account 0.08 crores

Profit and loss account Dr 0.08 crores

To impairment loss account 0.08 crores

Revision question 2. Carrying amount of Machinery and provision for depreciation and revaluation reserve
appeared in the balance sheet as on 31 March 2024 are Rs 8,00,000, Rs 1,50,000 and Rs 40,000 respectively. On
31.3.2024, Fair value less cost of sell and value in use were estimated at Rs 5,40,000 and 5,10,000 respectively.
Show its treatment in the books of account as per Ind AS-36.

Solution: balance sheet as on 31st March 2024( before impairment loss):

Revaluation reserve 40,000 Cost of machinery 8,00,000

Less: provision for dep 1,50,000
Add: profit on revaluation 40,000 6,90,000

Impairment loss = 6,90,000 – 5,40,000 = 1,50,000.

COCEDUCATION.COM ENQUIRY NO: 9999631597, 7303445575, 8448322142
 CMA FINAL-CFR Ind AS-36 CA/CMA Santosh kumar

Journal entries
Particulars Debit Credit

Impairment loss account Dr 1,50,000

To Machinery account 1,50,000

Revaluation reserve account Dr 40,000

Profit and loss account Dr 1,10,000
To impairment loss account 1,50,000

Revision question 3. Mars Ltd. gives the following estimates of cash flows relating to property, plant and
equipment on 31st March, 2024. The discount rate is 15%.

Year Cash Flow (₹ in lakh)

2024-2025 2,000

2025-2026 3,000
2026-2027 3,000

2027-2028 4,000
2028-2029 2,000

Residual Value at 31st March, 2029 500

Property, plant & equipment was purchased on 1st April, 2021 for ₹20,000 lakh

Useful Life was 8 Years

Residual value estimated at the end of 8th year ₹500 lakhs

Fair value less cost of disposal ₹10,000 lakhs

Calculate impairment loss, if any on the PPE. Also calculate the revised carrying amount and revised
depreciation on PPE.

Solution: (a) Computation of carrying amount of the PPE as on 31-3-2024:

Cost of PPE as on 1-4-2021 20,000 lakhs

Less: Depreciation till 31-3-2024 (

𝟐𝟎,𝟎𝟎𝟎−𝟓𝟎𝟎
x 3) 7,313 lakhs
𝟖

Carrying amount as on 31-3-2024 12,687 lakhs

(b) Computation of recoverable amount: Higher of

Fair value less cost to sell Value in use

10,000 lakhs 9,507
Recoverable amount = 10,000 lakhs

COCEDUCATION.COM ENQUIRY NO: 9999631597, 7303445575, 8448322142

CMA FINAL-CFR Ind AS-36 CA/CMA Santosh kumar

(c) computation of value in use:

Year Cash inflows PV factor @ 15% Present value

24-25 2,000 .870 1,740
25-26 3,000 .756 2,268
26-27 3,000 .658 1,974
27-28 4,000 .572 2,282
28-29 2,000 .497 994
28-29 500 .497 249
9,507

(d) computation of impairment loss as on 31-3-2024:

Carrying amount as on 31-3-2024 12,687 lakhs

Recoverable amount as on 31-3-2024 10,000 lakhs
Impairment loss 2,687 lakhs
(e) Computation of revised carrying amount:

Carrying amount as on 31-3-2024 ( before impairment loss) 12,687 lakhs

Less: Impairment loss - 2,687 lakhs
Revised carrying amount as on 31-3-2024 10,000 lakhs
𝟏𝟎,𝟎𝟎𝟎−𝟓𝟎𝟎
(f) Revised depreciation/year = ( x 1) = ₹1,900.
𝟓

Special issues about impairment of assets:

1. Recoverable amount is determined for an individual asset. But If the asset does not generate cash inflows that
are largely independent of those from other assets, then recoverable amount is determined for cash generating
unit to which the asset belongs.

A cash generating unit is the smallest identifiable group of assets that generates cash inflows that are largely
independent of cash inflows from other assets or group of assets.

Example: A bus company provides services under contract with a municipality that requires minimum service on each
of five separate routes. Assets devoted to each route and the cash flows from each route can be identified separately. One
of the routes operates at a significant loss.

Since the entity does not have the option to curtail any one bus route, the lowest level of identifiable cash inflows that
are largely independent of the cash inflows from other assets or groups of assets is the cash inflows generated by the
five routes together. The cash-generating unit for each route is the bus company as a whole.

2. The recoverable amount of an asset or a Cash Generating Unit (CGU) is measured whenever there is an indication
that the asset may be impaired.
COCEDUCATION.COM ENQUIRY NO: 9999631597, 7303445575, 8448322142
CMA FINAL-CFR Ind AS-36 CA/CMA Santosh kumar

Following are indications that an asset any be impaired:-

a) External Sources of Indications:-

i. If market value has declined significantly.

ii. Significant technological change( production of Typewriter, mobile phone without touch button)
or change in market( company moving from an existing market), economic or legal environment
in which enterprise operates.
iii. Market interest rate on investments have significantly increased.(running factory of power
generation project with foreign loan and increase in interest expense).
b) Internal Sources of Indications:-
i. Evidence is available of physical damage or obsolescence of an asset.
ii. Plan to discontinue or restructure the operation to which an asset belongs.
iii. Evidence is available that the economic performance of an asset is or will be worse than expected.

3. At each reporting date an entity assesses whether there is any indication that an asset or CGU may be impaired.

Irrespective of whether there is any indication of impairment, an entity is required to test following items for impairment
at least annually:
a) intangible asset with an indefinite useful life;
b) intangible asset not yet available for use; and
c) goodwill acquired in a business combination for impairment.

4. When impairment loss is computed for a cash generating unit, it should be allocated to reduce the
carrying amount of the assets of the CGU in the following order:

First, to goodwill (to the extent of the carrying amount of goodwill).

Then to all other assets of the unit in pro-rata basis on the carrying amount of the assets of the unit. Thus
impairment loss is always shown as deduction from individual assets even when it is measured on the CGU.

5. In case of assets of a CGU, for allocation of the impairment loss the revised carrying amount of the
assets should not be reduced below the highest of the following:

(i) Its net selling price

(ii) Its value in use

(iii) zero

If the allocation of impairment loss cannot be made fully, the unallocated part shall again be re- allocated
to other assets pro-rata.

COCEDUCATION.COM ENQUIRY NO: 9999631597, 7303445575, 8448322142

CMA FINAL-CFR Ind AS-36 CA/CMA Santosh kumar

Revision question 4. An entity has the following assets with relevant data on the reporting data : (₹ in Lakhs)

Assets Carrying Fair value less Value in

amount cost to sell use

A 280 300 250

B 460 400 390

C 220 200 170

D 180 115 125

E 100 80 —

Assets C and D were revalued before. The carrying amounts of revaluation surplus are ₹40 Lakhs and ₹30 Lakhs
respectively. Asset E falls in the cash generating unit consisting of goodwill ₹50 Lakhs and intangible asset ₹90 lacs.
The fair value less cost to sell of the CGU is ₹180 Lakhs and value-in-use is ₹170 Lakhs.

Determine impairment loss and revised carrying amount of all the assets stated above. Show the accounting
treatment. (ICMAI Study material)
Solution: Asset ‘A’:

Carrying amount 280

Recoverable amount 300
Impairment loss Nil
Revised carrying amount 280
Asset ‘B’:

Carrying amount 460

Recoverable amount 400
Impairment loss 60
Revised carrying amount (460-60) 400
Journal entry:
Profit and loss account Dr 60
To Asset ‘B’ account 60

Asset ‘C’:

Carrying amount 220

Recoverable amount 200
Impairment loss 20
Revised carrying amount (220-20) 200
Journal entry:

COCEDUCATION.COM ENQUIRY NO: 9999631597, 7303445575, 8448322142

CMA FINAL-CFR Ind AS-36 CA/CMA Santosh kumar

Revaluation surplus account Dr 20

To Asset ‘C’ account 20

Asset ‘D’:

Carrying amount 180

Recoverable amount 125
Impairment loss 55
Revised carrying amount (180-55) 125
Journal entry:
Revaluation surplus account Dr 40
Profit and loss account Dr 15
To Asset ‘D’ account 55

Asset ‘E’ (₹ in Lakhs)

Assets Recoverable amount Impairment loss Revised carrying amount

CGU: 180 60 180

Goodwill -50 NIL

Intangible asset -4.47 85.26

Asset ‘E’ -5.26 94.74

Working Note:
CGU consist of : (₹in lakhs)
Goodwill 50
Intangible asset 90
Asset E 100
Carrying Amount 240
Recoverable Amount 180

Revision question 5. An entity has a machinery on 01.04.2023 with carrying amount of ₹28,00,000 after annual
depreciation of ₹3,00,000 with remaining useful life of 9 years and residual value of ₹1,00,000. Depreciation is
charged on straight line method.

In 31.03.2024 the machine is revalued at ₹29,00,000. On 31.03.2026 the machine has fair value less cost to sell
₹20,00,000 and value in use ₹21,00,000.

Show how the transactions would be reflected in the financial statements of the entity as on 31.03.24, 31.03.25,
31.03.26 and 31.03.27. (ICMAI Study material)

COCEDUCATION.COM ENQUIRY NO: 9999631597, 7303445575, 8448322142

CMA FINAL-CFR Ind AS-36 CA/CMA Santosh kumar

Solution:

Carrying Amount on 01.04.2023 28,00,000

Less: Depreciation during 2023-24 3,00,000
25,00,000
Add: Revaluation Profit (₹29,00,000 – ₹25,00,000) 4,00,000
Carrying amount on 31-03-2024 29,00,000
Less: Depreciation during 2024-2025 = (₹29,00,000 – ₹1,00,000)/8 3,50,000
Carrying and on 31-03-25 25,50,000
Less: Depreciation during 2025-2026 3,50,000
Carrying amount on 31-03-2026 22,00,000
Less: Impairment loss 1,00,000
(Carrying amt less recoverable amount. = 2200000 - 2100000)
Carrying amt on 31.03.2026 21,00,000
Less: Depreciation during 2026-2027 = (₹21,00,000 – ₹1,00,000)/6 3,33,333
Carrying Amount on 31.3.27 17,66,667

Statement of profit and loss: 31-3-24 31-3-25 31-3-26 31-3-27

Depreciation (–)3,00,000 (–) 3,50,000 (–) 3,50,000 (–) 3,33,333

Other comprehensive Income:

Revaluation Profit + 4,00,000

For Annual realization of revaluation Profit through depreciation transfer from Revaluation profit to
retained earnings

Revaluation Profit (OCI) (–) 50,000 (–) 50,000 (–) 33,333

Retained earning (General Reserve) + 50,000 + 50,000 + 33,333

Impairment loss charged against revaluation profits (–) 1,00,000

PPE – Machinery 29,00,000 25,50,000 21,00,000 17,66,667

Revaluation Profit under Other equity 4,00,000 3,50,000 2,00,000 1,66,667

Note 1: Revaluation Profit under Other equity (Amount in ₹)

Particulars ₹

Revaluation profit (OCI) under other equity carrying amount on 31.03.24 4,00,000

Transfer to Retained Earnings (P & L) for 2024-2025 (50,000)

For 2025-2026 (50,000)

Balance 3,00,000

Less Impairment loss on 31.03.26 1,00,000

COCEDUCATION.COM ENQUIRY NO: 9999631597, 7303445575, 8448322142

CMA FINAL-CFR Ind AS-36 CA/CMA Santosh kumar

Carrying amount on 31.03.26 2,00,000

Less Transfer to P & L 33,333

Carrying amount on 31.03.27 1,66,667

Revision question 6. Mercury Ltd. has an identifiable asset with a carrying amount of ₹1,000. Its recoverable
amount is ₹650. The tax rate is 30% and the tax base of the asset is ₹800. Impairment losses are not deductible
for tax purposes. What would be the impact of impairment loss on related deferred tax asset / liability against the
revised carrying amount of asset?

Solution: The effect of impairment loss is as follows:

Identifiable assets Impairment Identifiable assets

before impairment loss loss after impairment loss
₹ ₹ ₹

Carrying amount 1,000 (350) 650

Tax Base 800 - 800
Taxable (deductible) temporary 200 (350) (150)
difference
Deferred tax liability(asset) at 30% 60 (105) (45)

Revision question 7. Earth Infra Ltd has two cash-generating units, A and B. There is no goodwill within the units’
carrying values. The carrying values of the CGUs are CGU ‘A’ for ₹20 million and CGU ‘B’ for ₹30 million. The
company has an office building which it is using as an office headquarter and has not been included in the above values
and can be allocated to the units on the basis of their carrying values. The office building has a carrying value of ₹10
million. The recoverable amounts are based on value-in-use of ₹18 million for CGU A and ₹38 million for CGU ‘B’.
Determine whether the carrying values of CGU ‘ A’ and ‘ B’ are impaired.

Solution: The office building is a corporate asset which needs to be allocated to CGU A and B on a reasonable
and consistent basis:

A B Total

Carrying value of CGU 20 30 50

Allocation of office building in the 4 6 10

ratio of carrying value of CGU

Carrying value of CGU after 24 36 60

allocation of corporate asset

Recoverable amount 18 38 56

Impairment loss 6 nil

Impairment loss will be allocated on the basis of 4/24 against the building ( ₹1 million) and 20/24 against
the other assets (₹5 milloin).
COCEDUCATION.COM ENQUIRY NO: 9999631597, 7303445575, 8448322142