Financial Reporting and Analysis
Ind AS 36 – Impairment of Assets
Objective
ensuring
carried at no more than their
that
recoverable amount.
assets
when
are an loss
impairment should be
reversed Scope:
Reversal of Impairment Applies to all asset except
losses arising from Ind AS 2, 11, 12,
19, 41, 104, 105 and 109
Recognition and Requirement for
measurement of an impairment review when
Impairment loss there are inidcations for
impairment
Requirement for annual review
Measurement of recoverable Intangible assets with an indefinite
amount : useful life or not yet available for
use.
Higher of fair value less costs
of diposal and its value in use Goodwill acquired in business
combination
Dr. Abhishek Ranga
FCMA, CPA, MBA, PhD (finance)
Relevant Definitions
1. Carrying amount is the amount at which an asset is recognised after deducting
any accumulated depreciation (amortisation) and accumulated impairment
losses thereon.
2. A cash-generating unit is the smallest identifiable group of assets that
generates cash inflows that are largely independent of the cash inflows from
other assets or groups of assets.
3. Corporate assets are assets other than goodwill that contribute to the future
cash flows of both the cash-generating unit under review and other cash-
generating units.
Dr. Abhishek Ranga
FCMA, CPA, MBA, PhD (finance)
Relevant Definitions
4. Costs of disposal are incremental costs directly attributable to the disposal of
an asset or cash-generating unit, excluding finance costs and income tax
expense.
5. Depreciable amount is the cost of an asset, or other amount substituted for
cost in the financial statements, less its residual value.
6. Depreciation (Amortisation) is the systematic allocation of the depreciable
amount of an asset over its useful life.
Dr. Abhishek Ranga
FCMA, CPA, MBA, PhD (finance)
Relevant Definitions
7. Fair value is the price that would be received to sell an asset or paid
to transfer a liability in an orderly transaction between market
participants at the measurement date (refer Ind AS 113 Fair Value
Measurement).
8. An impairment loss is the amount by which the carrying amount of
an asset or a cash- generating unit exceeds its recoverable amount.
Dr. Abhishek Ranga
FCMA, CPA, MBA, PhD (finance)
Relevant Definitions
9. The recoverable amount of an asset or a cash-generating unit is the higher of its
fair value less costs of disposal and its value in use.
10. Useful life is either:
• the period of time over which an asset is expected to be used by the entity; or
• the number of production or similar units expected to be obtained from the
asset by the entity.
11. Value in use is the present value of the future cash flows expected to be derived
from an asset or cash-generating unit.
Dr. Abhishek Ranga
FCMA, CPA, MBA, PhD (finance)
Impairment of Asset
Dr. Abhishek Ranga
FCMA, CPA, MBA, PhD (finance)
Impairment Loss
Dr. Abhishek Ranga
FCMA, CPA, MBA, PhD (finance)
Asset Impairment
1. Satellite Rights – Movie Zero
2. Pharma R&D
3. Liquor ban in Bihar – United breweries manufacturing unit at Patna
4. Earthquake and damage to shopping complex
5. Aircraft accident (assuming ownership with airlines)
Dr. Abhishek Ranga
FCMA, CPA, MBA, PhD (Finance)
1. Satellite Rights – Movie Zero
On 10.10.2018 Zee Network purchased satellite rights for movie ‘Zero’
from Red Chillies Entertainment for Rs. 70 crores.
Question – How will Zee account for the satellite right?
Dr. Abhishek Ranga
FCMA, CPA, MBA, PhD (Finance)
1. Satellite Rights – Movie Zero
• 21.12.2018 – Movie release
• Movie didn’t do well in theatres (as per estimates total budget Rs. 200
crs. & box office collection Rs. 130 crs.)
• Market expected box office collection of Rs. 300 crs.
Dr. Abhishek Ranga
FCMA, CPA, MBA, PhD (Finance)
1. Satellite Rights – Movie Zero
• Zee network initially estimated advertisement revenue from telecast of
Zero at Rs. 90 crs. (based on TVC rate for 10 seconds slot)
• Almost 70 crs. estimated from TV premier and second screening
Question –
• 90 crs. was estimated revenue pre or post release?
• Based on box office collection should Zee network re-estimate expected
revenue?
Dr. Abhishek Ranga
FCMA, CPA, MBA, PhD (Finance)
1. Satellite Rights – Movie Zero
Zee estimate advertisement revenue at Rs. 55 crs.
Question –
Is this a case of asset impairment?
Dr. Abhishek Ranga
FCMA, CPA, MBA, PhD (Finance)
1. Satellite Rights – Movie Zero
News (Hypothetical)
Sony Entertainment Television offered Rs. 80 crs. To Zee for purchasing
satellite rights of Zero.
Question –
• Now, is this a case of asset impairment?
• What if, Sony offer was of Rs. 65 crs.?
Dr. Abhishek Ranga
FCMA, CPA, MBA, PhD (Finance)
2. Pharma R&D
Cipla splits R&D as below –
• Research Phase – Molecule design, Preclinical test, Clinical trials (Phase 0)
• Development Phase – Starts with Clinical trials (Phase I,II &III) ends with filing of
patent right.
Phase I (drug safety): 15 to 30 patients.
Phase II (drug safety and drug efficacy): Large group
Phase III (compare a new drug to the standard-of-care drug): randomized group – control and
test group
Dr. Abhishek Ranga
FCMA, CPA, MBA, PhD (Finance)
2. Pharma R&D
• Since April 1, 2018 Cipla has invested Rs. 250 Mn. on development of
Molecule (CP1X).
• As on March 31, 2019 CP1X is in Phase II of clinical trials.
Question –
How will Cipla account for the development cost?
Dr. Abhishek Ranga
FCMA, CPA, MBA, PhD (Finance)
2. Pharma R&D
Results of Phase II as below –
• Adverse reaction on group of 90 patients (test 1) (date 10.04.2019)
• Adverse reaction on group of 120 patients (test 2) (date 20.05.2019)
Cipla decides to abandon the CP1X project.
Question –
Is this a case of asset impairment?
Dr. Abhishek Ranga
FCMA, CPA, MBA, PhD (Finance)
3. Liquor ban in Bihar – United breweries
manufacturing unit at Patna
News –
16.02.2017
Prohibition forces United Breweries
out of Bihar
Dr. Abhishek Ranga
FCMA, CPA, MBA, PhD (Finance)
3. Liquor ban in Bihar – United breweries
manufacturing unit at Patna
• Beer manufacturing unit of UBL located at Kopakala at Naubatpur
Industrial Area, spread across 42 acres.
• The company invested Rs 300 crore to start production at the 10 lakh
hectolitre plant in 2015.
• UBL decided to discontinue operations.
Question –
Is this a case of asset impairment?
Dr. Abhishek Ranga
FCMA, CPA, MBA, PhD (Finance)
4. Earthquake and damage to shopping complex
• H&H developers constructed shopping mall in Ahmedabad at a cost of
Rs. 450 crores. Reported in the balance sheet of March 31, 2018.
• Revenue stream – Rent (estimated at Rs. 150 crores per annum, for next
5 years)
• During Jan. 2019 shopping mall building was severely damaged,
resulting into zero occupancy. Till March 31, 2019 building is vacant.
Question –
Is this a case of asset impairment?
Dr. Abhishek Ranga
FCMA, CPA, MBA, PhD (Finance)
5. Aircraft accident (assuming ownership with airlines)
Dr. Abhishek Ranga
FCMA, CPA, MBA, PhD (Finance)
Measurement of Recoverable Amount
Dr. Abhishek Ranga
FCMA, CPA, MBA, PhD (finance)
Fair Value Less Costs of Disposal
Example 1:
The carrying value of a building in the books of Sun Ltd. as at Mar 31, 20X1 is Rs. 300 lakhs. As
on that date the value in use is Rs. 250 lakhs and fair value less cost of disposal is Rs. 238 lakhs.
Calculate carrying amount of the building as per Ind AS 36.
Dr. Abhishek Ranga
FCMA, CPA, MBA, PhD (finance)
Example 2:
Jupiter Ltd, a leading manufacturer of steel is having a furnace, which is carried in the
balance sheet on 31.03.20X1 at Rs. 250 lakhs. As at that date the value in use and Fair value is
Rs. 200 lakhs. The cost of disposal is Rs. 13 lakhs.
Calculate the Impairment Loss to be recognised in the books of the Company?
Dr. Abhishek Ranga
FCMA, CPA, MBA, PhD (finance)
Example 3:
Mars Ltd. gives the following estimates of cash flows relating to property, plant and equipment on
31-03-20X4. The discount rate is 15%
Year Cash Flow (INR Lakhs)
20X4-20X5 2,000
20X5-20X6 3,000
20X6-20X7 3,000
20X7-20X8 4,000
20X8-20X9 2,000
Residual Value at 31.03.20X9 500
i. Property, plant & equipment was purchased on 1.04.20X1 for Rs. 20,000 lakhs
ii. Useful Life was 8 years as on 1.04.20X1
iii. Residual Value estimated at the end of 8 years Rs. 500 lakhs
iv. Fair value less cost to disposal Rs. 10,000 lakhs
Calculate carrying amount of PPE as on 31.03.20X4 as per Ind AS 36.
Dr. Abhishek Ranga
FCMA, CPA, MBA, PhD (finance)
Example 4:
A company operates a mine in a country where legislation requires that the owner must
restore the site on completion of its mining operations. The cost of restoration includes the
replacement of the overburden, which must be removed before mining operations
commence.
A provision for the costs to replace the overburden was recognised as soon as the overburden
was removed. The amount provided was recognised as part of the cost of the mine and is
being depreciated over the mine’s useful life. The carrying amount of the provision for
restoration costs is Rs. 500, which is equal to the present value of the restoration costs.
The entity is testing the mine for impairment. The cash-generating unit for the mine is the mine
as a whole. The entity has received various offers to buy the mine at a price of around Rs. 800.
This price reflects the fact that the buyer will assume the obligation to restore the overburden.
Disposal costs for the mine are negligible. The value in use of the mine is approximately Rs.
1,200, excluding restoration costs. The carrying amount of the mine is Rs. 1,000.
Calculate impairment loss, if any.
Dr. Abhishek Ranga
FCMA, CPA, MBA, PhD (finance)
Example 5
ABC Ltd. acquired an asset (A1) on April 1, 2015 at Rs. 1 lakh, with an economic life of 10 years
and zero residual value.
On April 1, 2017 company revised its estimates as follows –
Remaining economic life of A1- 3 years
Residual value of A1 – Rs. 5,000
As per estimates fair value of the A1 as on March 31, 2018 is Rs. 45, 000 with insignificant cost
of disposal. Company expects to generate cash inflows as follow with the use of A1
2018-19 – Rs. 27,000
2019-20 – Rs. 25,000
Cost of capital 12%
Calculate carrying amount of A1 as on March 31, 2018.
Dr. Abhishek Ranga
FCMA, CPA, MBA, PhD (finance)
Example 6
ABC Ltd. acquired radio operating license for a period of 5 years. The license renewal fees is
quite insignificant and past trend indicates that renewal process is simple and renewal
probability is very high (almost certain).
Comment on accounting classification of the radio license.
Dr. Abhishek Ranga
FCMA, CPA, MBA, PhD (finance)
Example 7
Tata Motors acquire Jaguar Land Rover company which has 3 manufacturing units
at Birmingham where Jaguar cars are assembled, Halewood where Range Rover are
assembled and Solihull where Land Rover is assembled. Each unit can be
considered to be separate CGU. Acquisition cost was 7800 crore. Determine
Impairment loss if goodwill is not allocable
Birmingham Halewood Solihull
Cost 2000 2500 3000
Recoverable amount
1800 2800 3200
as on 31.3.2015
Dr. Abhishek Ranga
FCMA, CPA, MBA, PhD (finance)
….contd.
Fair value of Birmingham plant increases to 2500 Crore next year and conditions
pertaining to Impairment stands reversed. Can goodwill impairment be reversed?
Dr. Abhishek Ranga
FCMA, CPA, MBA, PhD (finance)
Example 8
Bollymals Ltd. used to provide animals in movies on rent. With the advent of VFX
technology, now industry has started using graphics to recreate animals.
All its animals stand in books as Fixed Assets acquired at cost reflecting at Rs.10
lakhs. Now value in use stands down to Rs.5 lakhs. Sale value of such animals to zoo
authority is Rs.6 lakhs.
Determine Impairment loss if any
Dr. Abhishek Ranga
FCMA, CPA, MBA, PhD (finance)
Example 9
On 1st April 20X1, Venus ltd acquired 100% of Saturn ltd for Rs. 4,00,000. The fair value of the net identifiable assets
of Saturn ltd was Rs. 3,20,000 and goodwill was Rs. 80,000. Saturn ltd is in coal mining business. On 31st March 20X3
the government has cancelled licenses given to it in few states.
As a result Saturn’s ltd revenue is estimated to get reduce by 30%. The adverse change in market place and regulatory
conditions is an indicator of impairment. As a result, Venus ltd has to estimate the recoverable amount of goodwill and
net assets of Saturn ltd on 31st March 20X3.
Venus ltd uses straight line depreciation. The useful life of Saturn’s ltd assets is estimated to be 20 years with no
residual value. No independent cash inflows can be identified to any individual assets. So the entire operation of Saturn
ltd is to be treated as a CGU. Due to the regulatory entangle it is not possible to determine the selling price of Saturn ltd
as a CGU. Its value in use is estimated by the management at Rs. 2,12,000.
Suppose by 31st March 20X5 the government reinstates the licenses of Saturn ltd. The management expects a
favourable change in net cash flows. This is an indicator that an impairment loss may have reversed. The recoverable
amount of Saturn’s ltd net asset is re- estimated. The value in use is expected to be Rs. 3,04,000 and net selling price is
expected to be Rs. 2,90,000. Dr. Abhishek Ranga
FCMA, CPA, MBA, PhD (finance)
External source of Information
i. During the period, an asset’s market value has declined significantly more than would be
expected as a result of the passage of time or normal use.
ii. Significant changes with an adverse effect on the entity have taken place during the
period, or will take place in the near future, in the technological, market, economic or
legal environment in which the entity operates or in the market to which an asset is
dedicated;
iii. Market interest rates or other market rates of return on investments have increased
during the period, and those increases are likely to affect the discount rate used in
calculating an asset’s value in use and decrease the asset’s recoverable amount
materially; and
iv. The carrying amount of the net assets of the entity is more than its market capitalisation
Dr. Abhishek Ranga
FCMA, CPA, MBA, PhD (finance)
Internal source of Information
i. Evidence is available of obsolescence or physical damage of an asset
ii. Significant changes with an adverse effect on the entity have taken place during the
period, or are expected to take place in the near future, in the extent to which, or manner
in which, an asset is used or is expected to be used. These changes include the asset
becoming idle, plans to discontinue or restructure the operation to which an asset
belongs, plans to dispose of an asset before the previously expected date, and
reassessing the useful life of an asset as finite rather than indefinite
iii. Evidence is available from internal reporting that indicates that the economic
performance of an asset is, or will be, worse than expected. Such evidence may include:
Dr. Abhishek Ranga
FCMA, CPA, MBA, PhD (finance)
….contd.
a. cash flows for acquiring the asset, or subsequent cash needs for operating or
maintaining it, that are significantly higher than those originally budgeted
b. actual net cash flows or operating profit or loss flowing from the asset that are
significantly worse than those budgeted
c. a significant decline in budgeted net cash flows or operating profit, or a significant
increase in budgeted loss, flowing from the asset
d. operating losses or net cash outflows for the asset, when current period amounts are
aggregated with budgeted amounts for the future.
Dr. Abhishek Ranga
FCMA, CPA, MBA, PhD (finance)
Assignment questions -
1. What is impairment of assets and how it is different from depreciation / amortization?
2. What is reversal of impairment loss?
3. What are internal and external indicators of impairment? List down few.
4. How impairment testing is done? (you are supposed to explain different methods)
5. How to measure impairment loss? (explain with the help of an example – not from any
annual report, create your own illustration)
6. What disclosures are required in the ‘notes to accounts’ with regards to impairment testing
as per Ind AS 38?
7. Implication of inadequate disclosures. (Hint – explain in terms of earnings management.
You need to know what is earnings management to answer Q7)
Dr. Abhishek Ranga
FCMA, CPA, MBA, PhD (finance)
