Impairment and asset valuation has long been one of the most challenging areas of financial statement preparation. However, it is a key area of focus for both investors and regulators, so directors need to be familiar with the estimates and judgments required. This article sets out the key requirements and highlights some common problem areas.
AASB 136 Impairment of Assets sets out the procedures required to ensure that an entity’s non-financial assets are carried at no more than their recoverable amount, and the related disclosures concerning that assessment.
It requires a 4-step process:
- Identify which assets are captured by the standard.
- Determine whether there are any internal or external indicators of impairment.
- If indicators exist, or if the assets are goodwill or other intangibles with indefinite useful lives, which must be tested every year, compare the recoverable amount (RA) to the carrying amount (CA).
- If CA exceeds RA, recognise an impairment loss.
Complications arise where the RA for an individual asset cannot be readily determined, and where RA calculations involve significant judgment.