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Accounting Standards are written documents, policy documents issued by expert accounting body or by Government or other regulatory body covering the aspects of recognition, measurement, treatment, presentation and disclosure of accounting transactions in the financial statements. Accounting Standards in India are issued by the Institute of Chartered Accountants of India. (D.S.Rawat, 2010)
Impairment of Assets falls under Accounting Standard 28(AS 28). A company may derive economic benefits from an asset by either using it or disposing it. It is better to use the asset if value in use is more than the net selling price or if the net selling price is greater then it is more advisable that it is sold off. The net selling price will then be the recoverable value of the asset. Assets should not be mentioned over their recoverable values in financial statements. An asset, whose mentioned value in the financial statement is less than the recoverable amount, is said to be impaired. The reduction in value is the impairment loss. According to Paragraph 6 of AS 28, before preparing a balance sheet, each company should check whether any of their assets are impaired. If such is the case, then as per Paragraph 58, the asset should be written down to its recoverable value and the impairment loss should be treated as an expense in the profit and loss account. (Rakshit, 2007)
As per ICAI, the applicability of this Standard to other enterprises is as below:
The Standard comes into effect in respect of accounting periods commencing on or after 1-4-2004 and is mandatory for Level I enterprises from such date.
To Level II enterprises- from accounting periods commencing on or after 1.4.2006.
To Level III enterprises- from accounting periods commencing on or after 1.4.2008.
The accounting standards apply only to material items. Therefore, if there are impairment indicators or even actual impairment losses, but which are not material, then the AS-28 does not apply to such items.
A company should resort to assess whether an asset has been impaired or not by checking external and internal sources of information. The external factors include:-
An unusual or abnormal decline in the market value of assets during the period under consideration.
When there are chances of unfavourable effect on the enterprise due to impending changes in technological, market, economic or legal environment in which the enterprise operates.
Increase in market interest rates which may affect the discount rate to be applied in determining impairment losses.
Carrying amount of net assets is more than its market capitalisation.
The internal factors include:-
If an asset gets obsolete or suffers from physical damage.
Changes in manner of use in cases of winding up or restructuring of the enterprise.
Poor or sub-standard performance of the asset.
Accounting Treatment for Reversal of Impairment Loss (D.S.Rawat, Students Guide to Accounting Standards, 2010)
Reversal of Impairment Loss for Individual Asset:-
Step 1: Calculation of amount of Impairment Loss = Recoverable Amount-Carrying Amount
Step 2: Asset A/c Dr.
To Reversal of Impairment
Reversal of Impairment Dr.
To Profit & Loss A/c
(Being reversal of impairment loss for asset to be treated as income)
[Note: If asset is carried at revalued amount, reversal of impairment loss to be treated as revaluation increase. After reversal, increased carrying amount of an asset should not exceed the carrying amount that would have been determined had no impairment loss been recognised for the asset earlier.]
Reversal of Impairment Loss for a Cash Generating Unit:-
Step 1: Reversal of impairment loss should be allocated to increase the carrying amount of the assets of the unit.
Step 2: Reversal of impairment loss to be treated as income.
Step 3: After allocation of reversal of impairment loss, carrying amount should be increased lower of recoverable amount and the carrying amount that would have been determined had no impairment loss been recognised.
Reversal of Impairment Loss for Goodwill
As per Para 108 of AS-28, impairment loss of goodwill should be reversed only if impairment loss earlier recognised is not expected to occur again and if a specific external event, which caused an impairment loss earlier, has reversed by another external event.
Disclosure to the Shareholders (Singhal, Proffesional Approach to Accounting Standards, 2005)
For each class of assets an enterprise is required to disclose:
The amount of impairment losses recognised in the profit and loss statement during the period.
The amount of reversal of impairment losses recognised in the profit and loss statement during the period.
The amount of impairment losses recognised directly against revaluation surplus during the period.
The amount of reversal of impairment losses recognised directly against revaluation surplus during the period.
If an impairment loss for an individual or a cash generating unit is recognised or reversed is material, the following disclosures are required :-
The events and circumstances that led to the recognition or reversal of the impairment loss.
The amount of the impairment loss recognised or reversed.
For an individual asset: the nature of individual asset and reportable segment to which it belongs.
For a cash generating unit: description of CGU, amount of impairment loss recognised or reversed by class and reportable segment and whether recoverable amount of an asset is its Net Selling Price or Value in Use and the basis of determining the selling price or value in use.
Impairment as a concept has always been existent under various international accounting pronouncements, such as the International Accounting Standards (now IFRS), US Statements on Financial Accounting Standards, etc. IAS addresses impairment related provisions in IAS 36, and US GAAP in SFAS No. 144. The AS-28 issued by the ICAI is very similar to IAS 36. However, both AS-28 and IAS 36 differ from SFAS No. 144. The differences between Indian GAAP and IAS on the one hand, and US GAAP on the other, primarily pertain to different approaches taken, as regards recognition, measurement and reversal of impairment losses. The application of AS-28/IAS 36 would result in impairment losses being recognised earlier, than under US GAAP. Another key difference between AS-28/IAS 36, and SFAS No.144, is that under AS-28/IAS 36, reversal of previously recognized impairment losses is permitted, under certain circumstances. However, no reversal of impairment losses is allowed under US GAAP.
The Standard has been issued by the Institute to bring it in line with the accounting practices followed world over. The standard can be called a landmark standard that moves the Indian accounting practices from the traditional historical cost concept to a realizable value concept. The concepts outlined by the standard are backed by sound logic and reasoning. It will be a challenge for many companies on the first time adoption of the standard, but as time goes by, and the Indian accountants wake up to the realizable value concept, the standard will form part of the "ordinary course of business".