IAS 36 framework Impairment (financial reporting)

1 ias 36 framework

1.1 incurred loss model
1.2 expected loss model
1.3 effect on depreciation
1.4 consequential asset value increases

ias 36 framework

impairment governed ias 36. impairment cost calculated using 2 methods:

the incurred loss model;
expected loss model



incurred loss model

under incurred loss model, investments recognized impaired when there no longer reasonable assurance future cash flows associated them either collected in entirety or when due. entities evidence of situations indicate impairment, such triggering events include when entity:

is experiencing notable financial difficulties,
has defaulted on or late making interest payments or principal payments,
is undergo major financial reorganization or enter bankruptcy, or
is in market experiencing significant negative economic change.

if such evidence exists, next step estimate investments recoverable amount. impairment cost calculated using formula:

impairment cost

=


recoverable amount

−

carrying value




{\displaystyle {\mbox{impairment cost}}={{\mbox{recoverable amount}}-{\mbox{carrying value}}}}

the carrying value defined value of asset displayed on balance sheet. recoverable amount higher of either asset s future value company or amount can sold for, minus transaction costs.

expected loss model

under expected loss impairment model, estimates of future cash flows used determine present value of investment made on continuous basis , not rely on triggering event occur. though there may no objective evidence impairment loss has been incurred, revised cash flow projections may indicate changes in credit risk. under expected loss model, these revised expected cash flows discounted @ same effective interest rate used when instrument first acquired, therefore retaining cost-based measurement. calculating impairment cost same incurred loss model.

for example, assume company has investment in company bonds carrying amount of $37,500. if market value of bonds falls $33,000, impairment loss of $4,500 indicated. therefore, impairment cost calculated:

$
37500
−
$
33000
=
$
4500


{\displaystyle \$37500-\$33000=\$4500}

this recorded loss of $4,500 in income statement. using t account system, there debit in loss on impairment account , credit in investment account. mean double-entry bookkeeping principle satisfied.

debit: loss on impairment $4,500

credit: investment $4,500



effect on depreciation

to calculate depreciation on asset, new non-current asset value considered. continuing previous example, if using straight line depreciation method @ say, 20%, depreciation be:

$
33000
∗
0.2
=
$
6600


{\displaystyle \$33000*0.2=\$6600}

therefore, there smaller depreciation charge if original non-current asset value had been used.

consequential asset value increases

reversals of impairment losses required investments in debt instruments, no reversals permitted under ifrs impairment changes recognized in net income equity instruments accounted in oci; however, subsequent changes in equity investment s fair value recognized in oci.