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LEVEL 1 ENTERPRISES (LARGE) APPLICABLE w.e.f 1/4/2004 1. ALL LISTED ENTERPRISES 2.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.
LEVEL – II ENTERPRISES (MEDIUM) APPLICABLE w e f 01/04/2006 1.TURNOVER (Rs.40LAKHS TO Rs.50CRORES) 2.BORROWINGS (Rs.1CRORE TO Rs.10CRORES) LEVEL – III ENTERPRISES (SMALL) APPLICABLE w e f 01/04/2008 TO ALL REMAINING ENTERPRISES
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.Defered tax assets(AS-22) SCOPE
To identify the assets which are sick / unhealthy
To ensure that enterprise assets are carried at not more than their recoverable amount.
Indications for Impairment
Assessment should be made at each Balance Sheet date whether an asset may be impaired on the basis of following factors:
Internal Sources of Information
Physical damage of an asset
When the enterprise plans to discontinue or restructure the operation.
Internal reporting on economic performance of an asset
External Sources of Information
An asset’s market value has declined significantly due to passage of time or normal use.
Change in technology, market, economic or legal environment in which the enterprise operates.
Market interest rate.
Carrying amount of the net assets of the enterprise is more than its market capitalization.
If carrying amount < = Recoverable amount : Asset is not impaired
If carrying amount > Recoverable amount : Asset is impaired
Impairment Loss = Carrying Amount – Recoverable Amount
Recoverable amount is the higher of net selling price and its value in use
Net selling price = The asset’s market price less cost of disposal.
Value in use = Present Value Factor *(estimated future net cash flows arising from use of the asset
+ disposal value)
Cash Generating Unit
If it is not possible to estimate cash flow of an individual assets same is grouped under a cash-generating unit to which the asset belongs.
“ A cash generating unit is the smallest identifiable group of assets that generates cash inflow from continuing use that are largely independent of the cash inflow from other assets or group of assets.”
Future Cash Flow
Future cash flow should be based on financial budgets/forecasts approved by management (not more than 5 years)
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
Composition of Future Cash Flow
Future 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 for use
Net cash flows to be received for the disposal of the asset
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
Cash flow arising from capital exp. unless incurred
May be determined considering the following rates:
weighted average cost of capital to the enterprise
Enterprise’s incremental borrowing rate
Other market borrowing rate
Treatment of Impairment loss
An impairment loss should be recognized against the revaluation reserve, if any, and balance, if any, as an expense in the P/L A/c
2. Impairment loss for a Cash Generating Unit should be allocated in the following order
Goodwill, if any.
Balance, if any, to individual assets in proportion to their carrying cost
3. After the recognition of impairment loss the depreciation charge for the asset should be adjusted in future periods to allocate the asset’s revised carrying amount, less its residual value, on a systematic basis over its remaining useful life
Reversal of an impairment loss
At any balance sheet date if management assess that the impairment loss considered in prior accounting periods may no longer exist or decreased the loss may be reversed
Indications of a potential decrease in an impairment loss mainly mirrors the indications of a potential impairment loss
Reversal is not required if value in use increases in subsequent year merely due to pattern of cash flow but not due to increase in the earning potential of the asset
The amount of impairment loss charged to P/L for each class of asset;
The reversal of impairment loss considered in P/L for each class of asset;
The amount of impairment loss adjusted against revaluation surplus;
The reportable segment to which the asset belongs;
The reasons for changing the Cash Generating Unit for an asset and the description of the earlier & the changed Cash Generating Unit;
The discount rate used in reckoning of value in use.
On the date this Standard becomes mandatory, an enterprise should assess whether there is any indication that an asset may be impaired.
If any such indication exists, the enterprise should determine impairment loss, if any and recognise the loss so determined against the opening balance of revaluation reserve/revenue reserves.
Impacts of AS-28
1. Valuation of assets
No up-ward revaluation is permitted
(Only to the extant of impairment loss recognized in earlier years)
2. Notes to Accounts
Fixed assets are valued at their historical cost less depreciation no more required to mention .
Criteria for grouping of assets If an active market exists for the output produced by an asset or group of assets, this asset or group of assets should be identified as a separate cash generating unit, even if some or all the output is used internally. When the outputs are used for captive consumption the sale value of output in an active market should be considered in cash flow. Like wise value of inputs also considered. Common assets on a reasonable and consistent basis.