AS 28 Impairment of Asset

1. The AS is applicable to all entities.

Partial exemption is available for SMC and Level II & III entities.

Exemption : While calculating recoverable amount ( RA), Value in use is not to be calculated but it

can be estimated.

2. Impairment means reduction in value of assets.

Impairment loss means excess of carrying amount in comparison to recoverable amount.

Impairment Loss = Carrying Amount – Recoverable Amount

3. This AS is not applicable on following assets :

• Stock, Work in Progress ( AS 2 )

• Investments ( AS 13)

• Financial Assets ( Cash, bank, debtors, prepaid )

• Deferred Tax Assets ( AS 22)

• Deferred Revenue Exp ( as this in not any asset )

4. At every Balance Sheet Date, entity should check for any indicators of impairment. In case any indicator exists formal estimate for impairment loss should be made.

External Indicators :i. Market Price of assets have Declined substantially. It should be tested for major assets.

ii. Rate of Interest have increased substantially thereby increasing discount rate.

iii. Adverse market conditions prevailing for entity in respect to demand, technology etc.

iv. Ratio between market competition and Net Asset is less than one.

Internal Indicators :

v. Physical damage to assets have occurred during the period. Such damage should be significant.

vi. Poor economic performance.

vii. Entity have made plans of restructuring like Demerger, Sale of Plant, Internal Reconstruction etc.

Note: There can be other indicators also but for exam purpose, we need to consider these 7 Indicators only.

5. Impairment Loss is calculated by deducting Recoverable amount from Carrying amount.

Impairment Loss = Carrying Amount – Recoverable Amount

Note 1: Carrying Amount is Book value of asset after charging current year Depreciation and Revaluation if any.

Note 2: We always assume revaluation on 1st day of year.

Note 3: Depreciation on Appreciated value will be charged as follows :

# Dep. On Cost : P&L A/c

# Dep. On Appreciation : Revaluation A/c

Note 4: Recoverable Amount is higher of :

# Net Selling Price

# Value in Use

Note 5: Net Selling Price is calculated by deducting Sales Expenses from expected Sales Price.

NSP = Expected Sale Price – Cost of Disposal

Estimated Sales Price :

i) Quoted Price of Asset is considered as Estimated Selling Price. Such quotation should be recent.

ii) If such quotes are not available, consider price of similar asset in similar transaction.

iii) If similar asset are not available, consider managements estimates.

iv) If management estimate is not available, ignore NSP.

Value in Use means present value of expected Cash flows along with Terminal value ( scrap value).

• Cash Flow are considered for period of 5 Years.

Higher Value can be considered, if justified.

In any case growth rate in cash flows beyond 5 years should not exceed industry growth rate.

• Cash flows are Inflows – Outflows.

• Treatment of Major Repairs in Cash Flows.

If management is committed for such major repair, cash outflow will include major repairs.

If management is not committed than ignore such Repair Cost.

• If Cash Flows are in FOREX than such Forex will be converted in local currency using rate on the date of impairment loss.

• Discount rate used will be Pretax rate as per CAPM