Accounting Alert

This Accounting Alert is issued to provide an overview of Philippine Accounting Standard (PAS) 36, Impairment of Assets, to assist preparers of financial statements and those charged with the governance of reporting entities understand the requirements set out in PAS 36 and revisit some areas where confusion has been seen in practice. 

Overview

When the recoverable amount of an asset is less than its carrying amount, the carrying amount of the asset needs to be reduced to its recoverable amount and that reduction is recognized as an impairment loss. 

Recognizing an impairment loss for an individual asset

For assets accounted for using the revaluation model in PAS 16, Property, Plant and Equipment, or PAS 38, Intangible Assets, the impairment loss is treated in the same way as a downward revaluation in accordance with those standards. Accordingly, any impairment is recognized in other comprehensive income to the extent it does not exceed a previous revaluation surplus. Any excess is recognized in profit or loss.

When an entity recognizes an impairment loss for an individual asset, it must:

• adjust the future depreciation (amortization) charge for the asset to allocate the asset’s revised carrying amount, less its residual value (if any) on a systematic basis over its remaining useful life, and,
• determine any related deferred tax assets or liabilities in accordance with PAS 12, Income Taxes,by comparing the revised carrying amount of the asset with its tax base.

Recognizing an impairment loss for a cash-generating unit (CGU)

An impairment loss must be recognized for a CGU when the recoverable amount of the unit is less than its carrying amount. PAS 36 prescribes the impairment loss to be allocated:

• first, to reduce the carrying amount of any goodwill allocated to the CGU, and,
• then, to the other assets of the unit, pro rata on the basis of the carrying amount of each asset in the unit.

However, in allocating the impairment loss, an entity cannot reduce the carrying amount of an individual asset below the highest of:

• its FVLCOD (if measurable),
• its VIU (if determinable), and,
• zero.

Considerations for foreign operations

Any impairment loss is not a partial disposal for the purposes of PAS 21, The Effects of Changes in Foreign Exchange Rates.  The foreign exchange gain or loss recognized in other comprehensive income on translating the foreign operation’s financial statements is not therefore reclassified to profit or loss when recognizing an impairment.

See attached Accounting Alert for further details and illustrative examples.