The accounting guidance on the treatment of fixed assets impairment charges is provided by International Accounting Standard (IAS) 36 and impairment charges apply to both tangible and intangible fixed assets.
The consequence of impairment is that the carrying value of the fixed asset must be adjusted so that the true value of the fixed asset to the business is reflected on the business’ balance sheet. The value of the fall in the value must be written off on the profit and loss account as an expense just like depreciation and amortisation.
According to IAS 36, a business must undertake an annual review of the business’ fixed assets to ascertain if they have suffered any impairment. All fixed assets must be reviewed for indicators or evidence of impairment in value, for example a housing company or property business would review if there have been any significant falls in property prices generally and if this is the case this could indicate that the business’ portfolio may has suffered impairment too.
If indications exist or if it can be proved that the fixed assets are impaired then the business must write down the carrying value of the fixed assets to the recoverable amount. IAS 36 defines the recoverable amount as the higher of the fair value of the asset minus the costs to sell the asset and the fixed asset’s value in use. The higher value is chosen because logic dictates that the business will sell the asset if it is more beneficial than using the asset internally in the business.
Indications of Impairment
Indicators of impairment can be gleaned from internal factors occurring within the business and also from external factors happening outside the business. Some examples of internal factors leading to impairment are significant adverse changes in the business’ operations, loss of key staff, retrenchments, major reorganization by the business, and losses or net cash outflows from the operating activities of the business which are expected to continue into the foreseeable future.
Some of external factors that may indicate that an asset has suffered impairment are significant falls in the market value of the assets, material adverse changes in the markets that the business operates in, and any significant adverse changes in the regulatory or socio-political environment.
Impairment Tests
As part of ascertaining if impairment has occurred the business must compare the carrying value of the fixed assets to their recoverable amount. If the carrying value is higher than the recoverable amount then there will be no evidence of impairment so the carrying value would be maintained as the value of fixed assets on the balance sheet. However, if the recoverable amount is higher than the carrying amount then the recoverable value becomes the new value for balance sheet reporting.
Impairment tests should be conducted to fixed assets on an individual basis annually. If it is not possible to do these tests on an asset by asset basis then impairment tests should be done to groups of related assets known as cash generating units.
Munya Mtetwa - Munya is an ACCA and IFA qualified accountant with over ten years financial management and accounting experience acquired in a plethora of ...
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