FR – May 2024 – L2 – SB – Q4 – Impairment of Assets (IAS 36)

Differentiate between impairment and depreciation, and discuss the indicators and accounting treatment of impairment as per IAS 36.

Question

a. Differentiate between impairment and depreciation. (5 Marks)

b. Discuss the following as contained in IAS 36 – Impairment of Assets: i. Indicators of impairment.
ii. How to identify and account for impairment of assets. (6 Marks)

c. A non-current asset in the statement of financial position of Zamfara Ltd, an SME, at the beginning of the financial year had a carrying amount of ₦800,000. The asset had previously been revalued, and there was a revaluation surplus of ₦50,000 relating to it in the revaluation reserve. At the end of the financial year, Zamfara Ltd suspected that the asset had been impaired. It, therefore, estimated the recoverable amount of the asset and found this to be ₦600,000. The depreciation charge on the asset for the year would be ₦80,000.

Required:
As the finance manager of Zamfara Ltd, explain with relevant computation the accounting treatments required in line with the provisions of IAS 36. (9 Marks)

Answer

Part a:
Difference between impairment and depreciation:

Impairment occurs when the carrying amount of an asset exceeds its recoverable amount, resulting in a reduction in the asset’s value. It is a sudden and unexpected decline in the asset’s value due to external or internal events.
Depreciation, on the other hand, is the systematic allocation of the depreciable amount of an asset over its useful life. Depreciation is calculated annually and represents the gradual consumption of the asset’s economic benefit.

Part b:
i. Indicators of impairment:

Evidence of obsolescence or damage.
Significant adverse changes in the technological, market, economic, or legal environment.
A significant reduction in the expected usage of the asset.
An unexpected decrease in the asset’s market value.

ii. How to identify and account for impairment of assets:

At each reporting date, assess whether there are any indications of impairment.
If such indications exist, estimate the recoverable amount of the asset.
The recoverable amount is the higher of the asset’s fair value less costs to sell and its value in use.
If the recoverable amount is less than the carrying amount, an impairment loss is recognized in the profit or loss.
For revalued assets, the impairment loss is first offset against any revaluation surplus before charging the loss to profit or loss.
Adjust the future depreciation charge to reflect the new carrying amount over the asset’s remaining useful life.

Part c:
Accounting treatment for impairment:

Carrying amount of the asset at the start of the year:
₦800,000
Depreciation for the year:
₦80,000
Carrying amount at year-end before impairment:
₦800,000 – ₦80,000 = ₦720,000
Recoverable amount:
₦600,000
Impairment loss:
₦720,000 – ₦600,000 = ₦120,000

Since the asset was revalued previously, part of the impairment loss will be recognized in other comprehensive income and the remaining in profit or loss:

Revaluation surplus: ₦50,000
Impairment charged to revaluation surplus: ₦50,000
Remaining impairment charged to profit or loss: ₦120,000 – ₦50,000 = ₦70,000

Accounting entries:

Debit impairment loss (profit or loss) ₦70,000
Debit revaluation surplus (OCI) ₦50,000
Credit non-current asset ₦120,000

Tags: Depreciation, Financial Reporting, IAS 16, IAS 36, Impairment
Level: Level 3

Topic: Impairment of Assets (IAS 36)
Series: MAY 2024

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