It is essential for businesses to stay up-to-date with the latest financial reporting matters. One area that has gained significant attention in recent years is impairments. This blog post will provide an overview of impairments, including the indicators of impairment, the process of testing for recoverable amounts, and the necessary disclosures.
Impairments are a crucial aspect of financial reporting, as they can significantly impact a company's financial statements. In essence, an impairment occurs when the carrying value of an asset exceeds its recoverable amount. This can happen due to various reasons, such as changes in market conditions, technological advancements, or even natural disasters. To ensure accurate financial reporting, companies must identify and account for impairments in their financial statements.
Indicators of Impairment
The first step in addressing impairments is identifying the indicators that may suggest an asset's value has been impaired. According to FRS 102, there are seven key indicators of impairment:
1. Accelerated decline of market value
2. Significant adverse changes in technology, markets, or laws
3. Increase in interest rates which could affect the discount rate used in calculating value in use
4. Significant changes internally which would make the asset underutilised
5. Management accounts/ other financial reporting show that the economic performance of the asset is lower than expected
6. Obsolescence or physical damage of an asset
7. The net assets of the entity are less than the estimated fair value of the entity as a whole.
Companies should use these indicators as a checklist to assess whether any of their assets may be impaired. It is important to note that these indicators are not exhaustive, and companies should consider any other factors that may affect the value of their assets.
Testing for Recoverable Amounts
Once a company has identified potential indicators of impairment, it must test the recoverable amount of the affected assets. The recoverable amount is the higher of an asset's fair value less costs to sell and its value in use. If the carrying value of an asset exceeds its recoverable amount, the company must recognise an impairment loss in its financial statements.
In some cases, companies may need to group assets together into cash-generating units (CGUs) for impairment testing. This is particularly relevant when individual assets cannot be tested separately or when their cash flows are interdependent. When allocating impairment losses within a CGU, goodwill should be considered first, followed by other assets on a pro-rata basis.
Companies must disclose impairment losses and reversals in their financial statements. Impairment losses should be recognised in the profit and loss, and reversals should be presented separately. Additionally, companies mustdisclose their accounting policies related to impairments, as well as any significant judgments and estimates made during the impairment assessment process.
Impairments are a critical aspect of financial reporting that companies must carefully consider. By identifying indicators of impairment, testing for recoverable amounts, and disclosing the necessary information, businesses can ensure accurate and transparent financial reporting.
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The contents of this article are meant as a guide only and are not a substitute for professional advice. The authors accept no responsibility for any action taken, or refrained from, as a result of the material contained in this document. Specific advice should be obtained before acting or refraining from acting, in connection with the matters dealt with in this article.