Accounting Standard 28

8/11/2019 Accounting Standard 28

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Deloitte

Haskins

Sells


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ACCOUNTING STANDARD28

CA. M. P. SARDA

Deloitte Haskins Sells


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MEANING

The dictionary meaning of the word to

impairis

to weaken or to damage

The phrase impairment of asset

therefore implies a damage to the value

of the asset or say decline in the value of

the asset.

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OVERVIEW

Applicability

Scope

Objective

Computation

Accounting Treatment

Disclosure Transitional Provisions

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LEVEL I ENTERPRISES

(LARGE)Applicable w.e.f. 01/04/2004

1. All listed enterprises2. Enterprises under process of listing

3. Other enterprises exceeding turnover Rs.50

crores

4. Financial institution, banks, insurance co.

5. Commercial enterprises having

borrowings more than Rs. 10 crores.

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LEVELII ENTERPRISE

(MEDIUM)

Applicable w.e.f. 01/04/2006

1. Turnover (Rs. 40 Lakhs to Rs. 50 Crores)2. Borrowings (Rs. 1 Crore to Rs. 10 Crores)

LEVELIII ENTERPRISES

(SMALL)

Applicable w.e.f. 01/04/2008

To all remaining Enterprises

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AS-28 applies to all assets other than

following:

1. Inventories(AS-2)

2. Assets arising from construction

contract (AS-7)3. Financial assets/Investments(AS-13)

4. Deferred tax assets(AS-22)

SCOPE

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OBJECTIVE

To identify the assets which are sick

or unhealthy.

To ensure that enterprise assets are

carried at not more than their

recoverable amount.

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INDICATIONS

FOR IMPAIRMENTAssessment should be made at each Balance

Sheet date whether an asset is impaired on

the basis of following factors:

Internal Sources of Information

Physical damage or obsolescence of an asset

Significant changes having adverse effect onthe enterprise

Internal reporting indicating poor economic

performance of an asset

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External Sources of Information

Significant decline in the market value of anasset due to passage of time or normal use.

Change in technology, market, economic or

legal environment in which the enterpriseoperates.

Increase in Market interest rate affectingdiscount rate used in calculation of value in

use. Carrying amount of the net assets of the

enterprise is more than its marketcapitalization.

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IMPAIRMENT LOSS

If carrying amount < Recoverable amount:

Asset is not impaired

If carrying amount > Recoverable amount:

Asset is impaired

Impairment Loss = Carrying AmountRecoverable

Amount

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RECOVERABLE AMOUNT

Recoverable amount is the higher ofnet selling priceand its value in use.

Net selling price = The assetsmarketprice less cost of disposal.

Value in use = Present Value of

estimated future net cash flowsarising from use of the asset and itsultimate disposal.

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CASH GENERATING UNIT

If it is not possible to estimate cashflow of an individual asset same isgrouped under a cash-generating unit

to which the asset belongs.

A cash generating unit is thesmallest identifiable group of assets

that generates cash inflow fromcontinuing use that are largelyindependent of the cash inflow from

other assets or group of assets.

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EXAMPLE OF CGUA mining enterprise owns a private railway to

support its mining activities. The private railwaycould be sold only for scrap value & the privaterailway does not generate cash inflows fromcontinuing use that are largely independent of the

cash inflows from the other assets of the mine.It is not possible to estimate the recoverableamount of the private railway because the valuein use of the private railway cannot be determined

& it is probably different from the scrap value.Therefore the enterprise estimates the recoverableamount of the CGU to which the private railwaybelongs i.e. the mine as a whole.

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Haskins & Sells

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FUTURE CASH FLOW

Future cash flow should be based on

financial budgets/forecasts approved

by management (not more than 5years).

Extrapolation of data may be used

beyond the period of approved budget.

Steady or declining growth rate may be

used for the purpose of extrapolation.

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COMPOSITION OF

FUTURE CASH FLOWFuture cash flow shall include:

Cash inflows from continuing use of

the asset Cash outflows necessarily incurred to

generate the cash inflows, including

cash outflows to prepare the asset foruse

Net cash flows to be received for the

disposal of the asset

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COMPOSITION OF FUTURE

CASH FLOW (CONTD)

Future cash flow shall exclude:

Cash inflows or outflows from

financing activities

Income tax receipts or payments

Cash flow arising from future

restructuring except when the same is

committed

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DISCOUNT RATE

Weighted average cost of capital forthe enterprise.

Incremental borrowing rate for the

enterprise.Other market borrowing rate.

Should be pretax rate.

Should reflect current marketassessments of the time value ofmoney and the risk specific to theasset.

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TREATMENT OF

IMPAIRMENT LOSS

1. An impairment loss should be recognized

against the revaluation reserve, if any, and

balance, if any, as an exp. in the P/L A/c.

2. Impairment loss for a Cash Generating

Unit should be allocated in the following

order :

a) Goodwill, if any.

b) Balance, if any, to individual assets

in proportion to their carrying cost.

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TREATMENT OF

IMPAIRMENT LOSS (CONTD..)

3. After the recognition of impairment

loss the depreciation charge for theasset should be adjusted in future

periods to allocate the revised

carrying amount, less its residualvalue, on a systematic basis over its

remaining useful life

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REVERSAL OF AN

IMPAIRMENT LOSSAt any balance sheet date if management

assess that the impairment loss considered inprior accounting periods may no longer existor decreased the loss may be reversed

After reversal carrying amount of individualasset/CGU should not exceed carryingamount if no impairment would have been

recognised in the past.Reversal is not required if value in use

increases in subsequent year merely due topattern of cash flow but not due to increase in

the earning potential of the asset

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DISCLOSURE

The amount of impairment loss charged toP/L for each class of asset;

The reversal of impairment loss considered inP/L for each class of asset;

The amount of impairment loss adjustedagainst revaluation surplus;

The reportable segment to which the assetbelongs;

The reasons for changing the Cash GeneratingUnit for an asset and the description of theearlier & the changed Cash Generating Unit;

The discount rate used in reckoning of value inuse.

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On the date this Standard becomesmandatory, an enterprise should assess

whether there is any indication that anasset may be impaired.

If any such indication exists, the

enterprise should determine impairmentloss, if any and recognise the loss sodetermined against the opening balanceof revaluation reserve/revenue reserves.

TRANSITIONAL

PROVISIONS

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IMPACTS OF AS-28

1. Valuation of assets

No up-ward revaluation is permitted

(Only to the extant of impairment lossrecognized in earlier years)

2. Notes to Accounts

Fixed assets are valued at theirhistorical cost less depreciation no

more required to mention.

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CRITERIA FOR

GROUPING OF ASSETS

If an active market exists for the outputproduced by an asset or group of assets, thisasset or group of assets should be identifiedas a separate cash generating unit, even ifsome or all the output is used internally.

When the outputs are used for captiveconsumption the sale value of output in an

active market should be considered in cashflow. Like wise value of inputs alsoconsidered.

Common assets on a reasonable and

consistent basis.

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THANKS

Deloitte Haskins & Sells

Documents

Accounting Standard 28