Introduction

The International Financial Reporting Standards (IFRS) play a vital role in the global financial reporting landscape. One of the key areas covered by these standards is the concept of impairment. Impairment refers to a reduction in the value of an asset or cash-generating unit (CGU) below its carrying amount. Under IFRS, impairment is an important consideration as it affects how entities recognize and measure assets in their financial statements. This article aims to provide an in-depth understanding of impairment under IFRS standards, covering its definition, recognition, measurement, and disclosure requirements.

Definition of Impairment

Impairment, as per IFRS, is the recognized diminution in the value of an asset or CGU. This occurs when the carrying amount of an asset exceeds its recoverable amount, which is the higher of the asset’s fair value less costs to sell or its value in use. Impairment can be caused by a variety of factors, including changes in market conditions, technological advancements, legal or regulatory changes, and changes in the entity’s business plans or strategy.

Recognition of Impairment

Under IFRS, impairment losses are recognized in the statement of profit or loss and other comprehensive income. An impairment loss is determined by comparing the carrying amount of the asset or CGU to its recoverable amount. If the carrying amount exceeds the recoverable amount, an impairment loss is recognized. Impairment losses cannot be reversed in subsequent periods under IFRS, except for certain circumstances outlined in the standards.

Measurement of Impairment

The measurement of impairment under IFRS depends on the type of assets involved. For tangible assets, such as property, plant, and equipment, the impairment loss is measured as the difference between the carrying amount and the higher of the asset’s fair value less costs to sell or its value in use. Intangible assets, including goodwill and indefinite-lived intangible assets, are tested for impairment annually or, in certain situations, whenever there is an indication of potential impairment. The impairment loss for these assets is measured as the excess of the asset’s carrying amount over its recoverable amount.

Impairment of Financial Assets

Financial assets, such as loans and receivables, are subject to impairment under IFRS as well. The impairment of financial assets is assessed using the expected credit loss model, which considers various factors, including historical experience, current market conditions, and forward-looking information. The impairment of financial assets is recognized either individually or collectively, depending on the level of credit risk associated with the asset.

Impairment Testing

Impairment testing is a crucial step in the impairment assessment process. Entities are required to perform impairment tests whenever there is an indication of potential impairment for a particular asset or CGU. Indicators of potential impairment include significant changes in the economic environment, a decline in asset’s market value, technological obsolescence, and adverse changes in legal or regulatory factors. Impairment tests involve comparing the recoverable amount of the asset or CGU to its carrying amount to determine if impairment has occurred.

Disclosure Requirements

IFRS imposes several disclosure requirements related to impairment. Entities are required to disclose information about the nature and amount of impairment losses recognized, the events or circumstances that led to the recognition of impairment, the assumptions used in determining the recoverable amount, and any reversals of impairment losses recognized in prior periods. These disclosures aim to provide users of financial statements with a clear understanding of the impact of impairment on an entity’s financial position, performance, and cash flows.

Challenges and Considerations

Implementing impairment requirements under IFRS can present challenges for entities. It requires judgment and estimates in determining the recoverable amount, selecting appropriate discount rates, and assessing future cash flow projections. The complexity of impairment testing increases when dealing with assets in complex industries or intangible assets without reliable market prices. Entities must carefully consider all available information and consider the potential impact of impairment on their financial statements.

Link to IFRS 9

Impairment under IFRS is closely linked to IFRS 9, which provides guidance on the recognition, measurement, and derecognition of financial assets and liabilities. IFRS 9 introduced the expected credit loss model, which replaced the incurred loss model for recognizing impairment of financial assets. Entities need to align their impairment assessments with the requirements of both IFRS and IFRS 9 to ensure compliance with global financial reporting standards.

Impairment vs. Depreciation

Impairment differs from depreciation in terms of their underlying concepts and application. Depreciation reflects the systematic allocation of an asset’s cost over its useful life, whereas impairment recognizes a reduction in the value of an asset below its carrying amount. Depreciation is a routine and systematic process applied to all assets, while impairment is triggered by specific events or circumstances indicating the potential for a decrease in an asset’s value. Both depreciation and impairment are essential components of an entity’s financial statements and provide valuable information to users.

FAQ

1. Can impairment losses be reversed under IFRS?

No, impairment losses recognized under IFRS cannot be reversed except for certain circumstances mentioned in the standards.

2. How often should entities test for impairment?

Impairment tests should be performed whenever there is an indication of potential impairment. Annual impairment testing is required for goodwill and indefinite-lived intangible assets.

3. What is the expected credit loss model?

The expected credit loss model is a method used to assess impairment of financial assets under IFRS. It considers historical experience, current market conditions, and forward-looking information to estimate the expected credit losses.

4. Are impairment requirements the same for all types of assets?

Impairment requirements differ depending on the type of assets. Tangible assets, intangible assets, and financial assets have specific impairment measurement and recognition guidelines.

5. How does impairment relate to IFRS 9?

Impairment under IFRS is closely linked to IFRS 9, which provides guidance on recognizing and measuring impairment of financial assets. Entities need to comply with the requirements of both standards for impairment assessments.

Conclusion

Impairment is a significant aspect of the IFRS standards, guiding entities in recognizing, measuring and disclosing the reduction in the value of assets or cash-generating units. The concepts of impairment under IFRS are complex, requiring careful consideration of various factors to determine recoverable amounts and recognize impairment losses. Compliance with impairment requirements and disclosure obligations is crucial for entities to provide transparent financial information to stakeholders. By understanding impairment under IFRS, entities can effectively incorporate these standards into their financial reporting processes, ensuring accurate and relevant information is presented to users.