a. Differences between impairment and depreciation

i. Impairment occurs when the carrying amount of an asset exceeds its recoverable amount, resulting in an economic reduction in the value of the asset.

ii. Impairment is recognised when there is evidence that an asset’s value has declined below its carrying amount, and the asset must be written down to its recoverable amount.

iii. Impairment losses are typically unexpected and result from specific events or circumstances, such as market declines, technological obsolescence, or legal restrictions.

While

iv. Depreciation is the systematic allocation of the depreciable amount of an item of property, plant and equipment over its estimated useful life.

v. It represents the estimated portion of the depreciable amount of an asset consumed on a yearly basis over the number of years with which the asset will generate economic benefit to the entity.

vi. Depreciation is accounted for annually, based on the asset’s estimated useful life and residual value.

b. Indicators of impairment:

IAS 36 requires that at each reporting date, an entity must assess whether there are indicators of impairment. Indications that impairment might have happened can come from external or internal sources:

Internal sources: External sources:

 Evidence of obsolescence or damage.

 Unexpected decrease in an asset’s market value.

 There is, or about to be, a material reduction in the usage of an asset.

 Significant adverse changes have taken place, or are about to take place, in the technological market, economic or legal environment.

 Evidence that the economic performance of an asset has been, or will be worse than expected.

 An increase in interest rates affecting the value-in-use of the asset.

 There is a reduction in the assets expected remaining useful life.

 The carrying amount of the net assets of the entity is more than its market capitalisation

i) Identifying and accounting for impairment of assets:

 At the end of each reporting period, the entity should assess whether there are any indications that an asset may be impaired;

 If there are such indications, the entity should estimate the asset’s recoverable amounts;

 When the recoverable amount is less than the carrying amount of the assets, the entity should reduce the assets’ carrying amount to its recoverable amount. The amount by which the value of the assets is written down is an impairment loss;

 The impairment loss shall be recognised immediately in the statement of 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; and

 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 life.

c. According to IAS 36, an asset is said to be impaired when its recoverable amount is less than its carrying amount in the statement of financial position. The recoverable amount of an asset is the higher of its fair value less costs of disposal and its value-in-use.

Zamfara LTD non-current asset recoverable amount of N600,000 is less than its carrying amount of N720,000 (wk 1) hence there is an impairment loss. See computation below.

The non-current asset must still be written down by N120,000. However, N50,000 of this would be recognised in other comprehensive income and the remaining N70,000 (N120,000 – N50,000) would be charged to the statement of profit or loss as an impairment loss.

The accounting entry is as follows:

Debit Credit

N N Impairment loss (Statement of profit or loss) 70,000

Revaluation surplus (other comprehensive income) 50,000

Non-current asset

120,000

The recoverable amount of the non-current asset of N600,000 will be subject to depreciation going forward over the remaining useful life on a systematic basis.

Working 1: Calculation of carrying amount of non-current asset

N Carrying amount at the beginning 800,000 Depreciation for the year (80,000) Carrying amount at the end of the year 720,000