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AS 10: Accounting Standard On Property, Plant & Equipment

C ‘s market share will grow during the budget period by 6 per cent per year as a result of increased advertising expenditure and the benefits from the protection of the 10-year patent on its primary product. The purpose of this example is to illustrate the disclosures required by paragraphs 134 and 135 of Ind AS 36. That in 20X4, costs of Rs 25,000 will be incurred to enhance the machine’s performance by increasing its productive capacity. It owns a headquarters building that used to be fully occupied for internal use. After down-sizing, half of the building is now used internally and half rented to third parties. C 3 Testing for impairment involves comparing the recoverable amount of a cash-generating unit with the carrying amount of the cash-generating unit.

  • The asset’s value in use can be estimated to be close to its fair value less costs to sell and fair value less costs to sell can be determined.
  • However, paragraph 134 requires an entity to disclose information about the estimates used to measure the recoverable amount of a cash-generating unit when goodwill or an intangible asset with an indefinite useful life is included in the carrying amount of that unit.
  • Then, to the other assets of the unit pro rata on the basis of the carrying amount of each asset in the unit .
  • If the discount rate excludes the effect of price increases attributable to general inflation, future cash flows are estimated in real terms .

Therefore, no calculation of recoverable amount is required to be performed. IE12 It is likely that A is a separate cash-generating unit because there is an active market for its products (see Example B – Plant for an intermediate step in a production process, Case 1). IE5 A significant raw material used for plant Y’s final production is an intermediate Do Owner Withdrawals Go on a Balance Sheet product bought from plant X of the same entity. X’s products are sold to Y at a transfer price that passes all margins to X. Eighty per cent of Y’s final production is sold to customers outside of the entity. Sixty per cent of X’s final production is sold to Y and the remaining 40 per cent is sold to customers outside of the entity.

Information provided about impairment:

IE63 The assets of Subsidiary together are the smallest group of assets that generate cash inflows that are largely independent of the cash inflows from other assets or groups of assets. Because the cash-generating unit comprising Subsidiary includes goodwill within its carrying amount, it must be tested for impairment annually, or more frequently if there is an indication that it may be impaired . The carrying amount of assets are reviewed at each Balance Sheet date if there is any indication of impairment based on internal/external factors. An asset is impaired when the carrying amount of the asset exceeds the recoverable amount. An impairment loss is charged to the Statement of Profit and Loss in the year in which an asset is identified as impaired.

impairment loss meaning

Therefore, when the basis used to estimate the discount rate is post-tax, that basis is adjusted to reflect a pre-tax rate. In each case, the estimated expected cash flow is likely to provide a better estimate of value in use than the minimum, most likely or maximum amount taken alone. The estimated amount falls somewhere between Rs. 50 and Rs. 250, but no amount in the range is more likely than any other amount. Based on that limited information, the estimated expected cash flow is Rs. 150 [(50 + 250)/2]. The basis on which the unit’s (group of units’) recoverable amount has been determined (i.e. value in use or fair value less costs to sell). The main events and circumstances that led to the recognition of these impairment losses and reversals of impairment losses.

Reversal of Impairment Loss

Accordingly, the two models include the Cost Model and the Revaluation Model. In assessing whether there is any indication that an asset may be impaired, an entity… In the case of an intangible asset, the term amortisation is generally used instead of depreciation.

  • Depreciable amount is the cost of an asset, or other amount substituted for cost in the financial statements, less its residual value.
  • Management assesses the reasonableness of the assumptions on which its current cash flow projections are based by examining the causes of differences between past cash flow projections and actual cash flows.
  • A14 Assertions like the one just outlined reflect underlying disagreement with the measurement objective.
  • An entity shall assess at the end of each reporting period whether there is any indication that an asset may be impaired.
  • Cash flow projections during the budget period for both A and B are also based on the same expected gross margins during the budget period and the same raw materials price inflation during the budget period.

A19 The discount rate is independent of the entity’s capital structure and the way the entity financed the purchase of the asset, because the future cash flows expected to arise from an asset do not depend on the way in which the entity financed the purchase of the asset. An entity is encouraged to disclose assumptions used to determine the recoverable amount of assets (cash-generating units) during the period. However, paragraph 134 requires an entity to disclose information about the estimates used to measure the recoverable amount of a cash-generating unit when goodwill or an intangible asset with an indefinite useful life is included in the carrying amount of that unit. It may be necessary to consider some recognised liabilities to determine the recoverable amount of a cash-generating unit. In this case, the fair value less costs to sell of the cash-generating unit is the estimated selling price for the assets of the cash-generating unit and the liability together, less the costs of disposal.

How impairment charges can affect a company’s stock price

Management believes that any reasonably possible change in any of these key assumptions would not cause the aggregate carrying amount of A and B to exceed the aggregate recoverable amount of those units. The recoverable amount of unit C has also been determined based on a value in use calculation. That calculation uses cash flow projections based on financial budgets approved by management covering a five-year period, and a discount rate of 9.2 per cent.

Appendix A provides additional guidance on estimating the discount rate in such circumstances. 23 In some cases, estimates, averages and computational short cuts may provide reasonable approximations of the detailed computations illustrated in this Standard for determining fair value less costs of disposal or value in use. Paragraphs 18–57 set out the requirements for measuring recoverable amount. These requirements also use the term ‘an asset’ but apply equally to an individual asset and a cash-generating unit. IE68G Because Z includes goodwill within its carrying amount, both from Subsidiary and from previous business combinations, it must be tested for impairment annually, or more frequently if there is an indication that it might be impaired . IE 17 A publisher owns 150 magazine titles of which 70 were purchased and 80 were self-created.

Period Of Charging Depreciation

Cash flow projections should be based on the recent budgets or forecasts and should be for a maximum of 5 years. The management should take reasonable and supportable assumptions for making the cash flow. Amortization occurs when the consumption of a product for a limited period of time and it is a systematic plan to write off an intangible asset over a period of time at their market value. In other words, such a depreciation method is used when the value of assets is incidental to the units produced by the asset and not its useful life.

An asset’s value in use may become greater than the asset’s carrying amount simply because the present value of future cash inflows increases as they become closer. Therefore, an impairment loss is not reversed just because of the passage of time (sometimes called the ‘unwinding’ of the discount), even if the recoverable amount of the asset becomes higher than its https://1investing.in/ carrying amount. An impairment loss recognised in prior periods for an asset other than goodwill shall be reversed if, and only if, there has been a change in the estimates used to determine the asset’s recoverable amount since the last impairment loss was recognised. The machine s value in use can be estimated to be close to its fair value less costs to sell.

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