Question

How could the auditor determine whether or not this asset has not been impaired?

Answer 1

Answer:

Impairment of asset (IFRS 36)

The objective of this Standard is to prescribe the procedures that an entity applies to ensure that its assets are carried at not more than their recoverable amount.

An asset is carried at more than its recoverable amount if its carrying amount exceeds the amount to be recovered through use or sale of the asset.

If this case arises, the asset is described as impaired and the Standard requires the entity to recognise  an impairment loss

The impairment loss can be measured by determining the difference between the carrying amount of an asset and the recoverable amount.

Carrying amount of asset is the Book value less Accumulated depreciation.

Recoverable amount is the Higher of :-

• Fair value of asset less cost to sell the asset (it is the amount obtainable from the sale of an asset or cash-generating unit in an arm’s length transaction between knowledgeable, willing parties, less the costs of disposal)
• Value in use of the asset ( it refers to the present value of future cash flows expected to be derived from an asset.)

Useful life of the asset is either:-

The period 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.

When an impairment of assets be assessed

An entity shall assess at the end of each reporting period whether there is any indication that an asset may be impaired. If any such indication exists, the entity shall

• estimate the recoverable amount of the asset
• test an intangible asset with an indefinite useful life or an intangible asset not yet available for use for impairment annually
• Test the goodwill acquired in a business combination for impairment annually.

In assessing whether there is any indication that an asset may be impaired, an entity shall consider, the following indications:

External sources of information

(a) Whether the asset’s market value has declined significantly more than would be expected as a result of the passage of time or normal use.

(b) Any significant changes (adverse effect) 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.

(c) Whether the 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.

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

Internal sources of information

(a) Obsolescence or physical damage of an asset.

(b) significant 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) with an adverse effect on the entity have taken place during the period, or are expected to take place in the near future.

The auditor could determine whether or not this asset has not been impaired as follows:-

• Consider whether an indicator of impairment exists for each relevant asset
• If an indicator exists , determine the recoverable amount of that asset.
• Identify which assets have specifically identifiable cash flows and which are parts of Cash Generating Units(CGUs)
• Review existing goodwill and allocate it to CGUs.
• Compute the Carrying amount and recoverable amount to determine Impairment loss.
• The auditor shall review the books of account to verify that impairment loss is recognised immediately in profit or loss,
• However, an impairment loss on a revalued asset is recognised in other comprehensive income to the extent that the impairment loss does not exceed the amount in the revaluation surplus for that same asset. Such an impairment loss on a revalued asset reduces the revaluation surplus for that asset.
• When the amount estimated for an impairment loss is greater than the carrying amount of the asset to which it relates, an entity shall recognise a liability if, and only if, that is required by another Standard.
• After the recognition of an impairment loss, the depreciation (amortisation) charge for the asset shall be adjusted in future periods to allocate the asset’s revised carrying amount, less its residual value (if any), on a systematic basis over its remaining useful

The auditor shall also ascertain whether the requirements as specified in IFRS 36 related to recognition ,measurement and disclosure of Impairment of assets being complied with, if not then he may provide comments in the Audit Report.