The main scope of IAS 36 in accounting is that an asset must not be carried in the financial statements at more than the highest amount to be recovered through its use or sale. The asset is impaired if the carrying amount exceeds the recoverable amount. Therefore, the entity must reduce the asset’s carrying amount to its recoverable amount and recognise an impairment loss. IAS 36 also applies to groups of assets that do not generate cash flows individually, known as cash-generating units. The accounting experts at GCS Malta provide further insights into IAS 36 in this article.
Accounting insights into IAS 36
IAS 36 applies to all assets except those other Standards that address impairment. The following assets in the scope of IAS 36 must be assessed annually: intangible assets with indefinite useful lives, intangible assets not yet available for use; and goodwill acquired in a business combination. The recoverable amount is the higher fair value less costs to sell and value in use.
- Fair value less costs to sell is the arm’s length sale price between knowledgeable, willing parties less costs of disposal.
- The value in use of an asset is the expected future cash flows that the asset in its current condition will produce, discounted to present value using an appropriate discount rate. Whenever the value in use of an individual asset cannot be determined, the recoverable amount is determined for the cash-generating unit.
An impairment loss is recognised immediately in profit or loss (or in comprehensive income if it is a revaluation decrease under IAS 16 or IAS 38). The carrying amount of the asset (or cash-generating unit) is reduced. In a cash-generating unit, goodwill is reduced first; then, other assets are reduced pro rata. The depreciation (amortisation) charge is adjusted in future periods to allocate the asset’s revised carrying amount over its remaining useful life.
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