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ACCOUNTING STANDARD28
CA. M. P. SARDA
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MEANING
The dictionary meaning of the word to
impairis
to weaken or to damage
The phrase impairment of asset
therefore implies a damage to the value
of the asset or say decline in the value of
the asset.
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OVERVIEW
Applicability
Scope
Objective
Computation
Accounting Treatment
Disclosure Transitional Provisions
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LEVEL I ENTERPRISES
(LARGE)Applicable w.e.f. 01/04/2004
1. All listed enterprises2. Enterprises under process of listing
3. Other enterprises exceeding turnover Rs.50
crores
4. Financial institution, banks, insurance co.
5. Commercial enterprises having
borrowings more than Rs. 10 crores.
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LEVELII ENTERPRISE
(MEDIUM)
Applicable w.e.f. 01/04/2006
1. Turnover (Rs. 40 Lakhs to Rs. 50 Crores)2. Borrowings (Rs. 1 Crore to Rs. 10 Crores)
LEVELIII ENTERPRISES
(SMALL)
Applicable w.e.f. 01/04/2008
To all remaining Enterprises
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AS-28 applies to all assets other than
following:
1. Inventories(AS-2)
2. Assets arising from construction
contract (AS-7)3. Financial assets/Investments(AS-13)
4. Deferred tax assets(AS-22)
SCOPE
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OBJECTIVE
To identify the assets which are sick
or unhealthy.
To ensure that enterprise assets are
carried at not more than their
recoverable amount.
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INDICATIONS
FOR IMPAIRMENTAssessment should be made at each Balance
Sheet date whether an asset is impaired on
the basis of following factors:
Internal Sources of Information
Physical damage or obsolescence of an asset
Significant changes having adverse effect onthe enterprise
Internal reporting indicating poor economic
performance of an asset
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External Sources of Information
Significant decline in the market value of anasset due to passage of time or normal use.
Change in technology, market, economic or
legal environment in which the enterpriseoperates.
Increase in Market interest rate affectingdiscount rate used in calculation of value in
use. Carrying amount of the net assets of the
enterprise is more than its marketcapitalization.
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IMPAIRMENT LOSS
If carrying amount < Recoverable amount:
Asset is not impaired
If carrying amount > Recoverable amount:
Asset is impaired
Impairment Loss = Carrying AmountRecoverable
Amount
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RECOVERABLE AMOUNT
Recoverable amount is the higher ofnet selling priceand its value in use.
Net selling price = The assetsmarketprice less cost of disposal.
Value in use = Present Value of
estimated future net cash flowsarising from use of the asset and itsultimate disposal.
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CASH GENERATING UNIT
If it is not possible to estimate cashflow of an individual asset same isgrouped under a cash-generating unit
to which the asset belongs.
A cash generating unit is thesmallest identifiable group of assets
that generates cash inflow fromcontinuing use that are largelyindependent of the cash inflow from
other assets or group of assets.
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EXAMPLE OF CGUA mining enterprise owns a private railway to
support its mining activities. The private railwaycould be sold only for scrap value & the privaterailway does not generate cash inflows fromcontinuing use that are largely independent of the
cash inflows from the other assets of the mine.It is not possible to estimate the recoverableamount of the private railway because the valuein use of the private railway cannot be determined
& it is probably different from the scrap value.Therefore the enterprise estimates the recoverableamount of the CGU to which the private railwaybelongs i.e. the mine as a whole.
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FUTURE CASH FLOW
Future cash flow should be based on
financial budgets/forecasts approved
by management (not more than 5years).
Extrapolation of data may be used
beyond the period of approved budget.
Steady or declining growth rate may be
used for the purpose of extrapolation.
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COMPOSITION OF
FUTURE CASH FLOWFuture cash flow shall include:
Cash inflows from continuing use of
the asset Cash outflows necessarily incurred to
generate the cash inflows, including
cash outflows to prepare the asset foruse
Net cash flows to be received for the
disposal of the asset
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COMPOSITION OF FUTURE
CASH FLOW (CONTD)
Future cash flow shall exclude:
Cash inflows or outflows from
financing activities
Income tax receipts or payments
Cash flow arising from future
restructuring except when the same is
committed
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DISCOUNT RATE
Weighted average cost of capital forthe enterprise.
Incremental borrowing rate for the
enterprise.Other market borrowing rate.
Should be pretax rate.
Should reflect current marketassessments of the time value ofmoney and the risk specific to theasset.
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TREATMENT OF
IMPAIRMENT LOSS
1. An impairment loss should be recognized
against the revaluation reserve, if any, and
balance, if any, as an exp. in the P/L A/c.
2. Impairment loss for a Cash Generating
Unit should be allocated in the following
order :
a) Goodwill, if any.
b) Balance, if any, to individual assets
in proportion to their carrying cost.
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TREATMENT OF
IMPAIRMENT LOSS (CONTD..)
3. After the recognition of impairment
loss the depreciation charge for theasset should be adjusted in future
periods to allocate the revised
carrying amount, less its residualvalue, on a systematic basis over its
remaining useful life
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REVERSAL OF AN
IMPAIRMENT LOSSAt any balance sheet date if management
assess that the impairment loss considered inprior accounting periods may no longer existor decreased the loss may be reversed
After reversal carrying amount of individualasset/CGU should not exceed carryingamount if no impairment would have been
recognised in the past.Reversal is not required if value in use
increases in subsequent year merely due topattern of cash flow but not due to increase in
the earning potential of the asset
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DISCLOSURE
The amount of impairment loss charged toP/L for each class of asset;
The reversal of impairment loss considered inP/L for each class of asset;
The amount of impairment loss adjustedagainst revaluation surplus;
The reportable segment to which the assetbelongs;
The reasons for changing the Cash GeneratingUnit for an asset and the description of theearlier & the changed Cash Generating Unit;
The discount rate used in reckoning of value inuse.
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On the date this Standard becomesmandatory, an enterprise should assess
whether there is any indication that anasset may be impaired.
If any such indication exists, the
enterprise should determine impairmentloss, if any and recognise the loss sodetermined against the opening balanceof revaluation reserve/revenue reserves.
TRANSITIONAL
PROVISIONS
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IMPACTS OF AS-28
1. Valuation of assets
No up-ward revaluation is permitted
(Only to the extant of impairment lossrecognized in earlier years)
2. Notes to Accounts
Fixed assets are valued at theirhistorical cost less depreciation no
more required to mention.
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CRITERIA FOR
GROUPING OF ASSETS
If an active market exists for the outputproduced by an asset or group of assets, thisasset or group of assets should be identifiedas a separate cash generating unit, even ifsome or all the output is used internally.
When the outputs are used for captiveconsumption the sale value of output in an
active market should be considered in cashflow. Like wise value of inputs alsoconsidered.
Common assets on a reasonable and
consistent basis.
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THANKS
Deloitte Haskins & Sells