NFRA Issues Guidance on Impairment of Non-Financial Assets Under Ind AS 36

1. Introduction

The National Financial Reporting Authority (NFRA) has commenced the series of “Auditor-Audit Committee Interactions” to suggest measures for improvement in overall audit quality and to promote awareness and significance of accounting and auditing standards. In the interaction series 4, NFRA has drawn the attention of auditors to the potential questions the Audit Committees/Board of Directors may ask them in respect of impairment of non-financial assets as required by Ind AS 36, Impairment of Assetsand SA 540, Auditing Accounting Estimates, Including Fair Value Accounting Estimates, and Related Disclosures.

2. Ind AS 36, Impairment of Assets

An asset whose carrying amount exceeds the amount to be recovered through its use or sale is said to be impaired. Ind AS 36, Impairment of Assets prescribes the procedures that an entity should follow to ensure that its assets are not carried at an amount more than their recoverable amount. Further, it prescribes the method for recognition of impairment loss and also specifies when an entity should reverse an impairment loss. However, the accounting for impairment of assets as per Ind AS 36 shall not be applicable in case of inventories, assets arising from construction contracts, deferred tax assets, assets arising from employee benefits and assets classified as held for sale as there is specific Ind AS for these assets.

3. Key terms of Ind AS 36

(a) Cash Generating Unit

A cash-generating unit (CGU) 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.

(b) Carrying Amount

Carrying amount is the amount at which an asset is recognised after deducting any accumulated depreciation (amortisation) and accumulated impairment losses thereon.

(c) Recoverable Amount

The recoverable amount of an asset or a cashgenerating unit is the higher of its fair value less costs of disposal and its value in use.

(d) Impairment Loss

An impairment loss is the amount by which the carrying amount of an asset or a cash-generating unit exceeds its recoverable amount.

Fundamental elements of Ind AS 36 along-with the checklist of potential questions that Audit Committee may pose to Auditors

4. Indicator of Impairment

Ind AS 36describes some indications that suggests an impairment loss may have occurred. If any of these indications is present, an entity is required to make a formal estimate of recoverable amount. These indicators may be identified from either through external sources of information or from internal sources of information.

The external sources of information that act as an indicator of impairment of assets includes the following:

(a) Significant changes with an adverse effect has taken place in the entity during the period or will take place in the near future.

(b) 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.

(c) The carrying amount of the net assets of the entity is more than its market capitalisation.

The internal sources of information that act as an indicator of impairment of assets includes the following:

(a) The evidence with regard to obsolescence or physical damage of an asset is available.

(b) 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.

(c) The internal report indicates that the economic performance of an asset is, or will be, worse than expected.

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