1. Issues in Accounting Practices
IAS 36 Impairment of Assets
Submitted to : Sir Zaheer Swati
Submitted by : Shahnaz
COMSATS ABBOTTABAD

2. • Objective of IAS 36
• To ensure that assets are carried at no more
than their recoverable amount and to define
how recoverable amount is determined.

4. • Impairment loss
Amount by which carrying amount of an asset or cash generating
unit exceeds its recoverable amount.
• Carrying amount
The amount at which as asset is recognized after deducting any
accumulated deprecation and accumulated impairment losses
thereon.
Book value OR value displayed in balance sheet.

5. Recoverable amount
The amount which is expected to be recovered by use or sale of the asset, whichever
is higher.
• The recoverable amount of an asset is the greater of the two calculations shown
below:
• Recoverable Amount = Fair Value - Cost of Disposal
• Recoverable Amount = Value in Use
Fair value less costs to sell
Fair value is the price that would be received to sell an asset.
Costs to sell would include legal costs to selling and direct incremental costs e.g. costs
which would necessarily be incurred if the asset is sold

6. • Example: Company A
• Building purchased = $ 2 million ; using straight line deprecation
• Estimated life = 20 years
• Used years by building = 5 years
• Selling cost of building = $ 1 million
• Cost incurred = $ 50,000 or $ 0.05 million
• PV of net cash flows the building = $ 1.2 million ( alternatively )
• The basic rule is to recognize impairment if carrying amount exceeds the
recoverable amount.
• The building has a cost of $2 million, useful life of 20 years and is used for 5 years. The
accumulated depreciation is $2/20*5 or 0.5 million
• Carrying amount = building purchased – accumulated depreciation
• = 2 M – 0.5 M
• = $ 1.5 M

7. • Recoverable amount is the higher of fair value less costs to sell and value in use.
• Fair value less costs to sell = $1 million - $0.05 million
• = $0.95 million.
• OR
• Value in use is the present value of future cash flows = $1.2 million.
• Carrying amount is $1.5 million while recoverable amount is $1.2 million. An
impairment loss of $0.3 million is to be recognized. The journal entry would be:
Impairment loss 300,000
Accumulated impairment
loss 300,000

8. • Impairment loss
• Indicators of Impairments
Carrying
amount
Recoverable
amount
Impairment
loss
External
factors
Internal
factors
Impairment
loss

9. • External Factors
• Significant decline in market
value of the asset
• Changes in technological
environment
• Changes in legal environment
• Internal Factors
• Physical damage of obsolescence
of the asset.
• Significant changes have taken
place or are likely to take place
which have an adverse affect on
the entity or the manner of using
the assets.

10. • Cash Generating Unit ( CGU)
Cash
Generating
Unit
Formed with
group of
assets
Capable of generating
cash flows
independently of
other CGU’s

11. • CGU’s examples
A bus operator acquires 4 licenses to operate buses in 4 different
routes. Of these routes, 3 are profitable routes and 1 is not
profitable route.
The government, to ensure that transport service is available at all
the routes for the public, has put a condition that all the routes
must be run together. Otherwise the bus operate cannot be
allowed to run any transport facilities.