Tapovan Institute for CA (9281 100 200) AS –28 Impairment of assets

AS 28 - IMPAIRMENT OF ASSETS

Meaning of word Impairment of Asset –

Reduction in the estimated or nominal value of an asset.

Objective of Accounting Standard

1) To recognise impaired assets at not more than their recoverable amount.

2) An asset is said to be impaired if its carrying amount (book value) is greater than the amount to be
recovered either by way of using the asset in its business or by selling the asset.
3) If the asset is impaired, the entity requires recognising an impairment loss, i.e., the amount by which
the carrying amount of an asset exceeds its recoverable amount.

Scope

• This Standard is applicable for the impairment of all assets - except the following

• Inventories (as it is valued at the lower of cost or NRV as per AS-2)

• Assets arising from construction contracts (as expected loss on contract will be recognised
immediately as per AS-7);
• Financial assets including investments (loss on permanent diminution of long-term investments
will be recognised &t current investments are valued at the lower of cost or FMV whichever is
lower) (other financial assets are covered by Ind AS-109, 32 & 107) and
• Deferred tax assets (as covered by AS-22)

Important concepts & Definitions

Impairment Loss

It is amount by which the carrying amount of an asset exceeds its recoverable amount
(Carrying amount > recoverable amount).

Impairment loss = Carrying amount - recoverable amount;

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Tapovan Institute for CA (9281 100 200) AS –28 Impairment of assets

Impairment Loss

Carrying amount > Recoverable amount

{Accounting Records} {Face Value – cost to sell/value in use}

Carrying Amount - Recoverable Amount = Impairment loss

Net selling price

Sale proceed of an asset at arm's length price between knowledgeable & willing parties XXX

Less: Costs of disposal (Selling expenses) XXX

Net selling price XXX

Costs of disposal

These are incremental (additional) costs directly attributable to the disposal of an asset, excluding finance costs
and income tax expense.

Eg. Legal costs, costs of removing the asset, and direct costs to bring an asset into condition for its sale

Carrying amount (Book value)

Cost of the assets XXX

Less: Accumulated depreciation/ amortization XX
Less: Accumulated impairment losses (which were recognised in previous years) XX
Carrying amount (Thís should be compared with recoverable amount) XXX

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Tapovan Institute for CA (9281 100 200) AS –28 Impairment of assets

Active market

It is a market where ALL the following conditions are satisfied:

(a) the items traded within the market are homogeneous (similar kind);
(b) we can find willing buyers and sellers at any time; and
(c) Prices information is available to the public.
The definitions of depreciation, depreciable amount & useful life e are same as AS-10. Actually we
areleft with few more definitions, I would like to discuss at the relevant time,

Recognition & Measurement

If the recoverable amount of an asset is less than its carrying amount, the carrying amount of the asset should
reduced to its recoverable amount. That reduction is an impairment loss. Asset is reduced by theloss amount and
Impairment loss accounting is explained in the below diagram:

Was the asset revalued any time previous year?

No Yes

Debit the impairment loss Does revaluation reserve exist in BS?to P&L

Yes No

Debit the impairment loss to the Revaluation Debit the impairment loss to P&L Should be
reserve to the extent Available & remaining debited to P&L
loss (if any)

If impairment loss is greater than the carrving amount of the asset, = carrying amount of the assetshould be Nil.

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Tapovan Institute for CA (9281 100 200) AS –28 Impairment of assets

Is the entity revalued assets using Market value

method?

No
Yes

Are selling costs material? It means the entity used other methods to
revalue the assets.

Yes No It is possible that revalued amount is

less or more than recoverable amount.

If selling costs are

In this case, there is a negligible, Fair Maret Hence apply AS-28 i.e. "value in use"
possibility of recoverable Value = Net Ralisable
amount being less than Value
the carrying amount

It means the assets revalued

amount is recoverable
Hence apply AS-28 i.e. on amount.
“Value in use”

Hence no need of AS-28.

If there is any impairment loss first
apply it with revaluation reserve and
then transfer balance P&L.

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Tapovan Institute for CA (9281 100 200) AS –28 Impairment of assets

Net Selling Price (NSP)

How to calculate Net Selling Price

Net selling price when there is Selling price as per the binding agreement xxx
binding sale agreement Less: Costs of disposal of the asset (xx)
Net selling price xxx

Current market price xxx

If you have current Less disposal cost s (xx)
Net selling price when there is no market /bid prices Net Selling Price xxx
binding sale agreement but available
asset is traded in active market

(Homogeneous items)
If you Don’t have Take recent transaction price
current market/bid & modify it considering
prices available significant change in
economic circumstances from
that date

Net selling price when there is no Compute NSP based on the best information available
binding sale agreement and to reflect the amount the entity can get on disposal of
asset is not traded in active the asset on the balance sheet date Less disposal
market (No Homogeneous costs;
items)

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Tapovan Institute for CA (9281 100 200) AS –28 Impairment of assets

Value In Use

Estimating value in use involves the following two steps:

(a) Estimating the future cash inflows and outflows arising from continuing usage of the asset
during itsuseful life and cash inflows from its sale at the end of the useful life;
(b) Finding the appropriate discounting rate - to bring the net cash flows to present value;

Estimating future cash flows:

i. Cash flow projections should be based on reasonable and supportable assumptions; that
should bethe best estimate based on the economic conditions that will exist over the remaining
useful life ofthe asset.

ii. Consider the most recent financial budgets approved by the management. Generally
maximum five years projections make reliable and reasonable

iii. Cash flow projections beyond the budget period should be estimated by extrapolating the
projections using a steady or declining growth rate for subsequent years.

iv. The growth rate used for extrapolating the projections should not exceed the long-term
average growth rate of products, industry, country, etc.

Foreign Currency Future Cash Flows

Future cash flows are estimated in the currency in which they will be generated and then discounted using a
discount rate appropriate for that currency.

An enterprise translates the present value obtained using the exchange rate at the balance sheet date, i.e., closing
rate.

Discount Rate

As per the Standard, the discount rate should be a pre tax rate and which reflects time value of money and the
risks specific to t the asset. (As we discussed earlier, we have estimated pre tax cash lows; hence we should use
pre tax discount rate)

Risks specific to the asset means it is the rate of the return that an investor requires to earn to choose the asset
(i.e., minimum rate of return considering the risks related to the asset. If the business with that asset or cash
generating unit (CGU) is risky, the entity's expectation of minimum return will be high and vice versa).

It means the entity should use different rates for different assets or CGUs considering t the risks related to those.
When an asset-specific rate is not directly available from the market, an entity uses other bases to estimate the
discount rate.

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Tapovan Institute for CA (9281 100 200) AS –28 Impairment of assets

As a starting point, the entity may use the following rates:

(a) the entity's weighted average cost of capital (WACC) determined using techniques such as the Capital Asset
Pricing Model (CAPM);

(b) the enterprise's incremental borrowing rate (if the entity needs a new loan at what rate it can obtain); and

(c) other market borrowing rates.

The above rates can be adjusted:

(a) by adding the specific risks associated with the projected cash flows; and

(b) by excluding risks that are not relevant to the projected cash flows.

Consideration is given to risks such as country risk, currency risk, price risk and cash flow risk.

CASH GENERATING UNIT (CGU)

Sometimes it is not possible to estimate future cash flows from continuing use of it –we should group some assets
and check whether the group can generate independent cash flows. If not, we should add few more assets and
check the same. That group of identifiable assets which generate independent cash flows is called cash generating
unit, i.e., CGU.
As per the definition of the standard - A CGU is the smallest identifiable group of assets that generates
cash inflows from continuing use that are largely independent of the cash inflows from other assets or
groupsof assets.
Identification of CGU involves professional judgement. An entity considers various factors including

how management monitors the enterprise's operations (such as by product lines

(Segments),businesses, individual locations, districts or regional areas or in some other
way); or

how management makes decisions about continuing or disposing of its assets and operations.

CGUs should be identified consistently from period to period for the same asset or types of assets,
unless achange is justified.
Let us look at the following examples to understand the concept of CGU:
Example 1

Say Sun academy is a CA coaching centre and it has four branches in Bangalore. Each branch has its own
furniture and other facilities, etc. We cannot find the future estimated cash flows from the benches and other
furniture items of the entity. So we should add all the assets of the branch and facilities and check, canwe
generate cash flows independently (independent from other branches). Mostly the answer is YES. Then each
branch is a CGU.

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Example 2

A mining entity owns a private railway to support its mining activities. The private railway could be sold only
for scrap value (negligible value) and the private railway alone 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 and it is probably different from scrap value. Therefore, the entity
estimates the recoverable amount of the CGU to which the private railway belongs, that tis, the mine as a
whole. In this example entire mine is a CGU.

Example 3

A bus company provides services under contract with a municipality that it should provide services at all the
five routes mandatorily. 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.
Because the entity does not have the option to curtail any one bus route, we cannot identify independentcash
flows from each route. The management of the company has to look at all the routes as one. In this case, CGU is
the bus company as a whole.

Recoverable and carrying amount of a CGU

There is No change in recoverable amount calculation from an individual asset to a CGU. The above
discussionwas remain useful for CGU's recoverable amount.
How to find out carrying amount of a CGU?
Carrying amount of CGU
1) includes the carrying amount of only those assets that can be attributed directly, or allocated or
reasonable and consistent basis, to the CGU and that will generate the future cash inflows estimated
determining the CGUs value in use; and

2) does not include the carrying amount of any recognised liability in general, unless the recoverable
amountof the CGU cannot be determined without consideration of this liability. (Refer below concept
capsule)

Sometimes recoverable amount of a CGU includes the assets which are generally not part of the CGU e.g.,
receivable or other financial assets liabilities. In such cases, the carrying amount of the CGU, also should include
the assets and liabilities.

Goodwill (GW)

As you know, only acquired goodwill should be recognised in financial statements. Self-generated goodwill does
not satisfy the asset recognition conditions. Goodwill does not generate cash flows independently, therefore
recoverable amount of goodwill as an individual asset cannot be determined.

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Tapovan Institute for CA (9281 100 200) AS –28 Impairment of assets

If there is an indication that goodwill may be impaired, recoverable amount is determined for the CGU to which
goodwill belongs. That amount should be compared to carrying amount of CGU for finding impairment.

The following diagram explains how to allocate the impairment loss in case of CGU

Have you recognised goodwill in Balance sheet?

No Yes

Allocate the impairment loss on pro-rata basis of Can we allocate goodwill to the CGUs on a
carrying amounts; Refer below concept reasonable and consistent basis?

Yes No

Compare recoverable amount of CGU with its

carrying amount (including allocated GW) - If the entity finds it inappropriate or
unreasonable to allocate any portion of GW to
CGU (smallest group of assets generating
If there is any impairment loss independent cash flows);

- The entity will have to move one-step up

Allocate the impairment loss in this order further ie. from a smaller CGU to the next
larger CGU
(a) First apply on the goodwill which is allocated
to CGU; (credit -goodwill a/c) - ADD Some more assets / CGU to the existing
group of assets and check - whether it can
(b) Apply the remaining loss on all other assets of allocate GW on reasonable basis now?
CGU on pro rata basis based on the carrying
amount of each asset in CGU. - If the answer is NO it should add furthermore
assets and check the same until GW is
allocated or it is decided that GW is for the
This is called BOTTOM-UP test entity as a whole.
Refer below concept capsule
(This procedure is called TOP-DOWN test)

If the answer is YES - Allocate impairment loss

like the other option (Refer below capsule)

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Tapovan Institute for CA (9281 100 200) AS –28 Impairment of assets

Corporate assets

Corporate assets are assets other than goodwill that contribute to the future cash flows of both the CGUs under
review and other CGUs. Corporate assets include group or divisional assets such as the headquarters building,
EDP equipment or a research centre.

Corporate assets do not generate cash inflows independently and their carrying amount cannot be fully
attributed to the CGU under review. Because corporate assets do not generate separate cash inflows, the
recoverable amount of an individual corporate asset cannot be determined unless management has decided to
dispose of the asset.

lf there is an indication that a corporate asset may be impaired, recoverable amount is determined for the CGU to
which the corporate asset belongs (after allocation of corporate assets to the CGU), compared to the carrying
amount of this CGU and any impairment loss is recognised on pro rata basis of corporate assets and other assets
of CGU.

Can corporate assets be allocated to CGU on reasonable and consistent basis?

Yes No

The entity should apply bottom up test and The entity should apply bottom up test and top
allocate the corporate assets and test for down tests as explained in case of goodwill
impairment

If the entity has goodwill and corporate assets, the impairment loss should be applied first on goodwill allocated
to the CGU and the remaining impairment loss should be allocated between the corporate assets and other assets
of CGU on pro rata basis of carrying amounts.

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Tapovan Institute for CA (9281 100 200) AS –28 Impairment of assets

Reversal of an impairment loss

An entity should assess at every balance sheet date whether there is any indication that the impairment loss
recognised in previous years may be decreased or no longer exist.
If any such condition exists, the entity should estimate recoverable amount of that asset.

Impairment Loss Reversal Indications

External source of information Internal source of information

1. Market value increased significantly (a) Economic performance is higher than

expectations, due to additional capital
2. Significant changes in technological, market expenditure incurred for improvement;
economic or legal environment - which have
for positive effect on the entity; (b) Withdrawal of commitment restructuring,
3. Discount rate (return on investment rate) discontinuing operations, disposal of assets,
decreased; etc.

The impairment loss recognised should be reversed if there is a change in estimations of recoverable
amount.

The impairment loss recognised should be reversed if there is a change in estimations of recoverable amount.
Economic performance is higher than expectations, due to additional capital expenditure incurred for
improvement;

A reversal of an impairment loss means an increase in the estimated service potential of an asset, either
from use or sale, from the date of last recognition of an impairment loss for that asset. Hence before reversing
the impairment loss, the entity should enquire whether there is any betterment in service potentiality. If
there is NO such increase, impairment loss should not be reversed.

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Tapovan Institute for CA (9281 100 200) AS –28 Impairment of assets

The topic is divided into three parts, i.e.,

Topic 1: Reversal of impairment loss in case of Individual Asset

Was it Revalued Earlier?

No Yes

(a) Reverse the impairment loss by recording (a) Reverse the impairment loss by recording
below Journal Entry; below Journal Entry;

Asset a/c......Dr Asset a/c......Dr

To Imapirment loss (P&L) To Revaluation reserve a/c
To impairment loss (P&L) (b/f)

(b) Due to reversal of impairment loss – the (b) Due to reversal of impairment loss – the
carrying amount should NOT exceed what it carrying amount should NOT exceed what
would have been without impairment loss;(it it would have been without impairment
means, maximum previously recognised loss loss;(it means, maximum previously
can be reserved) recognised loss can be reserved)

(c) Such reversal profit should be transffered to (c) Credit the revaluation reserve only to the
P&L; extent it was debited at the time of
impairment loss and the remaining
reversal should be credited to P&L.

After a reversal of an impairment loss---

Depreciation (amortisation) charge for the asset should be computed prospectively i.e., the revised
carrying amount after deducting residual value, should be depreciated over the remaining useful lifeof
the asset.

Topic 2: Reversal of impairment loss in case of Cash Generating Unit

A reversal of an impairment loss for a Cash Generating Unit [CGU]should be allocated in the following order:

1. first to ALL assets in CGU (other than goodwill) on a pro-rata basis based on the carrying amount;and
2. Allocation to goodwill only when it satisfies the conditions mentioned below (Refer topic 3).

These increase in carrying amounts should be treated as reversals of impairment losses for individualassets as
discussed in topic 1.

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Tapovan Institute for CA (9281 100 200) AS –28 Impairment of assets

In allocating a reversal of an impairment loss for a CGU, the carrying amount of an asset should not beincreased
above the lower of:

(a) its recoverable amount (if determinable); and

(b) normal level of carrying amount as if impairment loss had not been recognised previously; The amount of
the reversal of an impairment loss should be allocated to each asset on a pro rata basis.

Topic 3: Reversal of impairment loss in case of Goodwill

In general, an impairment loss recognised for goodwill should not be reversed in a subsequent periodunless:

(a) the original impairment loss was caused bya specific external event of an exceptional nature that isno
expected to recur (E.g. new regulations which significantly affecting operating activities, decrease in
profitability etc); and

(b) The subsequent (external) events occurred have reversed the initial effect of that event.

Hence, reversal of goodwill will take place only when there is a clear event which is reversing the initial effect
otherwise it should not be reversed simply because of change in discount rate or timing offuture cash flows.

Impairment in case of Discontinuing Operations (requires understanding in AS-24)

The approval and announcement of a plan for discontinuance is an indication that the assets attributable to the
discontinuing operation may be impaired or that an impairment loss previously recognised for those assets
should be increased or reversed. In such situation, impairment test will beperformed and loss will be recognised
in the following manner.

For example:
(a) if the entity sells the discontinuing operation substantially in its entirety, none of the assets of the
discontinuing operation generate cash inflows independently from other assets within the discontinuing
operation. Therefore, recoverable amount is determined for the discontinuing operationas a whole and an
impairment loss, if any, is allocated among the assets of the discontinuing operationin accordance with this
Standard;

(b) if the entity disposes of the discontinuing operation in other ways such as piecemeal sales, therecoverable
amount is determined for individual assets, unless the assets are sold in groups; and

(c) if the entity abandons the discontinuing operation, the recoverable amount is determined forindividual
assets as set out in this Standard.
The carrying amount (recoverable amount) of a discontinuing operation includes the carrying amount
(recoverable amount) of any goodwill that can be allocated on a reasonable and consistent basis to that
discontinuing operation.

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Tapovan Institute for CA (9281 100 200) AS –28 Impairment of assets

Disclosure requirement

(a) The amount of impairment losses recognised directly against revaluation reserve during the
period,
(b) the amount of impairment loss recognised or reversed in the P&L. during the period.
(C) the amount of reversals of impairment losses recognised directly in revaluation reserve during
theperiod

(d) impairment loss elating to segment should be disclosed separately, while giving segment
information under AS 17
(e) Notes to account should also disclose:

1) the events and circumstances that led to the recognition or reversal of the impairment
loss.
2) method of calculating Impairment loss
3) method of calculating Net selling price, value in use and discount rate.

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Tapovan Institute for CA (9281 100 200) AS –28 Impairment of assets

Questions for Practice

Question No. 1

A publisher owns 150 magazine titles of which 70 were purchased and 80 were self-created. The price paid for a
purchased magazine title is recognized as an intangible asset. The costs of creating magazine titles and
maintaining the existing titles are recognized as an expense when incurred. Cash inflows from direct sales and
advertising are identifiable for each magazine title.

Titles are managed by customer segments. The level of advertising income for a magazine title depends on the
range of titles in the customer segment to which the magazine title relates. Management has a policy to abandon
old titles before the end of their economic lives and replace them immediately with new titles for the same
customer segment. What is the cash-generating unit for an individual magazine title?

Question No. 2

An asset does not meet the requirements of environment laws which have been recently enacted. The asset has to
be destroyed as per the law. The asset is carried in the Balance Sheet at the year end at ₹ 6,00,000. The estimated
cost of destroying the asset is ₹ 70,000. How is the asset to be accounted for?

Question No. 3
Venus Ltd. has a fixed asset, which is carried in the Balance Sheet on 31.3.20X1 at ₹ 500 lakhs. As at that
date the value in use is ₹ 400 lakhs and the net selling price is ₹ 375 lakhs.
From the above data:

(i) Calculate impairment loss.

(ii) Prepare journal entries for adjustment of impairment loss.

(iii) Show, how impairment loss will be shown in the Balance Sheet.

Question No. 4
Good Drugs and Pharmaceuticals Ltd. acquired a sachet filling machine on 1st April, 20X1 for ₹ 60 lakhs.
The machine was expected to have a productive life of 6 years. At the end of financial year 20X1-20X2 the
carrying amount was ₹ 41 lakhs. A short circuit occurred in this financial year but luckily the machine did
not get badly damaged and was still in working order at the close of the financial year. The machine was
expected to fetch ₹ 36 lakhs, if sold in the market.

The machine by itself is not capable of generating cash flows. However, the smallest group of assets
comprising of this machine also, is capable of generating cash flows of ₹ 54 crore per annum and has a
carrying amount of ₹ 3.46 crore. All such machines put together could fetch a sum of ₹ 4.44 crore if disposed.
Discuss the applicability of Impairment loss.

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Tapovan Institute for CA (9281 100 200) AS –28 Impairment of assets

Question No. 5

From the following details of an asset

(i) Find out impairment loss
(ii) Treatment of impairment loss

(iii) Current year depreciation

Particulars of asset:

Cost of asset ₹ 56 lakhs

Useful life period 10 years

Salvage value Nil
Current carrying value ₹ 27.30 lakhs
Useful life remaining 3 years
Recoverable amount ₹ 12 lakhs
Upward revaluation done in last year ₹ 14 lakhs

Question No. 6

A plant was acquired 15 years ago at a cost of ₹ 5 crores. Its accumulated depreciation as at 31st March, 20X1
was ₹ 4.15 crores. Depreciation estimated for the financial year 20X1-20X2 is ₹ 25 lakhs. Estimated Net Selling
Price as on 31st March, 20X1 was ₹ 30 lakhs, which is expected to decline by 20 per cent by the end of the next
financial year.

Its value in use has been computed at ₹ 35 lakhs as on 1st April, 20X1, which is expected to decrease by 30 per
cent by the end of the financial year.

(i) Assuming that other conditions for applicability of the impairment Accounting Standard are satisfied,
what should be the carrying amount of this plant as at 31st March, 20X2?
(ii) How much will be the amount of write off for the financial year ended 31st March, 20X2?
(iii) If the plant had been revalued ten years ago and the current revaluation reserves against this plant were
to be ₹ 12 lakhs, how would you answer to questions (i) and (ii) above?
(iv) If the value in use was zero and the enterprise were required to incur a cost of ₹ 2 lakhs to dispose of the
plant, what would be your response to questions (i) and (ii) above?

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