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Thread: 28 Accounting Standard 28 – Impairment of Assets - AS 28

  1. #31
    Accounting Standards
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    Default Example 2 Calculation of Value in Use and Recognition of an Impairment Loss of Accounting Standard (AS) 28 – Impairment of Assets

    Example 2 - Calculation of Value in Use and Recognition of an Impairment Loss of Accounting Standard (AS) 28 – Impairment of Assets


    In this example, tax effects are ignored.

    Background and Calculation of Value in Use

    A23. At the end of 20X0, enterprise T acquires enterpriseMfor Rs. 10,000 lakhs.Mhas manufacturing plants in 3 countries. The anticipated useful life of the resulting merged activities is 15 years.
    Schedule 1. Data at the end of 20X0 (Amount in Rs. lakhs) End of 20X0 Allocation of Fair value of Goodwill(1) purchase price identifiable assets

    Activities in Country A 3,000 2,000 1,000
    Activities in Country B 2,000 1,500 500
    Activities in Country C 5,000 3,500 1,500
    Total 10,000 7,000 3,000

    (1) Activities in each country are the smallest cash-generating units to which goodwill can be allocated on a reasonable and consistent basis (allocation based on the purchase price of the activities in each country, as specified in the purchase agreement).

    A24. T uses straight-line depreciation over a 15-year life for the Country A assets and no residual value is anticipated. In respect of goodwill, T uses straight-line amortisation over a 5 year life.

    A25. In 20X4, a new government is elected in Country A. It passes legislation significantly restricting exports of T’s main product. As a result, and for the foreseeable future, T’s production will be cut by 40%.

    A26. The significant export restriction and the resulting production decrease require T to estimate the recoverable amount of the goodwill and net assets of the Country A operations. The cash-generating unit for the goodwill and the identifiable assets of the Country A operations is the
    Country A operations, since no independent cash inflows can be identified for individual assets.

    A27. The net selling price of the Country A cash-generating unit is not determinable, as it is unlikely that a ready buyer exists for all the assets of that unit.


    A28. To determine the value in use for the CountryAcash-generating unit (see Schedule 2), T:

    (a) prepares cash flow forecasts derived from the most recent financial budgets/forecasts for the next five years (years 20X5- 20X9) approved by management;

    (b) estimates subsequent cash flows (years 20X10-20X15) based on declining growth rates. The growth rate for 20X10 is estimated to be 3%. This rate is lower than the average longterm growth rate for the market in Country A; and

    (c) selects a 15% discount rate, which represents a pre-tax rate that reflects current market assessments of the time value of money and the risks specific to the Country A cash-generating unit.


    Recognition and Measurement of Impairment Loss

    A29. The recoverable amount of the Country A cash-generating unit is 1,360 lakhs: the higher of the net selling price of theCountryAcash-generating unit (not determinable) and its value in use (Rs. 1,360 lakhs).

    A30. T compares the recoverable amount of the CountryAcash-generating unit to its carrying amount (see Schedule 3).

    A31. T recognises an impairment loss of Rs. 307 lakhs immediately in the statement of profit and loss. The carrying amount of the goodwill that relates to theCountryAoperations is eliminated before reducing the carrying amount of other identifiable assets within the Country A cash-generating unit (see paragraph 87 of this Statement).


    A32. Tax effects are accounted for separately in accordance with AS 22, Accounting for Taxes on Income.


    Schedule 2. Calculation of the value in use of the CountryAcash-generating unit at the end of 20X4 (Amount in Rs. lakhs)

  2. #32
    Accounting Standards
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    Default Examples of Accounting Standard (AS) 28 – Impairment of Assets

    Examples of Accounting Standard (AS) 28 – Impairment of Assets

    Click Here For Examples

    http://www.knowledgebible.com/forum/...ment-of-Assets

  3. #33
    Accounting Standards
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    Default Limited Revision to Accounting Standard of Accounting Standard (AS) 28 – Impairment of Assets

    Limited Revision to Accounting Standard (AS) 28 (issued 2002)

    Impairment of Assets

    The following is the text of the limited revision to AS 28, Impairment of Assets, issued by the Institute of Chartered Accountants of India.

    Accounting Standard (AS) 13
    ,

    Accounting for Investments, which deals with accounting for investments including an investment in a subsidiary, associate or joint venture, also contains specific requirements for recognising impairment on such investments. On Accounting Standard (AS) 30, Financial Instruments: Recognition and Measurement, becoming mandatory, AS 13 would stand withdrawn except to the extent it relates to accounting for investment properties. Thus, accounting for an investment in a subsidiary, associate and joint venture would no longer be covered by AS 13. The same would be dealt with in AS 21, AS 23 and AS 27. Accordingly, with the issuance of AS 30, Limited Revisions are also made to AS 21, AS 23 and AS 27. The impairment of an investment in a subsidiary, associate or joint venture in separate financial statements would be covered under AS 28, Impairment of Assets. With a view to require the same, AS 28 (issued 2002) is modified as under (modifications are shown as double-underline/ strike-through)

  4. #34
    Accounting Standards
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    Default Impairment of Assets of Accounting Standard (AS) 28 – Impairment of Assets

    Limited Revision to Accounting Standard (AS) 28 (issued 2002)

    Impairment of Assets of Accounting Standard (AS) 28 – Impairment of Assets


    The following is the text of the limited revision to AS 28, Impairment of Assets, issued by the
    Institute of Chartered Accountants of India. Accounting Standard (AS) 13, Accounting for Investments, which deals with accounting for investments including an investment in a subsidiary, associate or joint venture, also contains specific requirements for recognising impairment on such investments. On Accounting Standard (AS) 30, Financial Instruments: Recognition and Measurement, becoming mandatory, AS 13 would stand withdrawn except to the extent it relates to accounting for investment properties. Thus, accounting for an investment in a subsidiary, associate and joint venture would no longer be covered by AS 13. The same would be dealt with in AS 21, AS 23 and AS 27. Accordingly, with the issuance of AS 30, Limited Revisions are also made to AS 21,
    AS 23 and AS 27. The impairment of an investment in a subsidiary, associate or joint venture in separate financial statements would be covered under AS 28, Impairment of Assets. With a view
    to require the same, AS 28 (issued 2002) is modified as under (modifications are shown as double-underline/ strike-through): Under the heading ‘Scope’, paragraph 1 is amended and a new paragraph 2A is added after paragraph 2 as below:

    1. This Statement should be applied in accounting for the impairment of all assets, other than:

    (a) inventories (see AS 2, Valuation of Inventories);
    (b) assets arising from construction contracts (see AS 7, Accounting for Construction Contracts6);

  5. #35
    Accounting Standards
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    Default Accounting Standard (AS) 28 – Impairment of Assets

    (c) financial assets Financial Instruments: Recognition and Measurement; and

    (d) deferred tax assets (see AS 22, Accounting for Taxes on Income).

    2A. This Statement applies to financial assets classified as investments in:

    (a) subsidiaries, as defined in AS 21, Consolidated Financial Statements and Accounting for Investments in Subsidiaries in Separate Financial Statements;

    (b) associates, as defined in AS 23, Accounting for Investments in Associates; and

    (c) joint ventures, as defined in AS 27, Financial Reporting of Interests in Joint Ventures.


    For impairment of other financial assets, refer to AS 30, Financial Instruments:

    Recognition and Measurement.

    The limited revision comes into effect in respect of accounting periods commencing on or after the date on which Accounting Standard (AS) 30, Financial Instruments: Recognition and Measurement, comes into effect.

  6. #36
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    Default Announcement Applicability of Accounting Standard (AS) 28, Impairment of Assets to SMEs Announcement

    Announcement Applicability of Accounting Standard (AS) 28, Impairment of Assets to SMEs Announcement

    Applicability of Accounting Standard (AS) 28, Impairment of Assets, to Small and Medium Sized Enterprises (SMEs)

    1. Accounting Standard (AS) 28, Impairment of Assets, issued by the Council of the Institute of Chartered Accountants of India, comes into effect in respect of accounting periods commencing on or after 1-4-2004. The Standard is mandatory in nature from different dates for different levels of enterprises as below:

    (i) To Level I enterprises- from accounting periods commencing on or after 1.4.2004.

    (ii) To Level II enterprises- from accounting periods commencing on or after 1.4.2006.

    (iii) To Level III enterprises- from accounting periods commencing on or after 1.4.2008.

    The criteria for different levels are given in Annexure I.


    2. Considering the feedback received from various interest-groups and the concerns expressed at various forums, it is felt that relaxation should be given to Level II and Level III enterprises (referred to as ‘Small and Medium Sized Enterprises’ (SMEs)), from the measurement principles contained in AS 28, Impairment of Assets.

    3. AS 28 defines, inter alia, the following terms: An impairment loss is the amount by which the carrying amount of an asset exceeds its recoverable amount.

    Recoverable amount is the higher of an asset’s net selling price and its value in use. Net selling price is the amount obtainable from the sale of an asset in an arm’s length transaction between knowledgeable, willing parties, less the costs of disposal. Value in use is the present value of estimated future cash flows expected to arise from the continuing use of an asset and from its disposal at the end of its useful life.

    4. The relaxations for SMEs in respect of AS 28 have been decided as below:

    (i) Considering that detailed cash flow projections of SMEs are often not readily available, SMEs are allowed to measure the ‘value in use’ on the basis of reasonable estimate thereof instead of computing the value in use by present value technique. Therefore, the definition of the term ‘value in use’ in the context of the SMEs would read as follows:

    “Value in use is the present value of estimated future cash flows expected to arise from the continuing use of an asset and from its disposal at the end of its useful life, or a reasonable estimate thereof”.

    (ii) The above change in the definition of ‘value in use’ implies that instead of using the present value technique, a reasonable estimate of the ‘value in use’ can be made. Consequently, if an SME chooses to measure the ‘value in use’ by not using the present value technique, the relevant provisions of AS 28, such as discount rate etc., would not be applicable to such an SME. Further, such an SME need not disclose the information required by paragraph 121(g) of the Standard.
    Subject to this, the other provisions of AS 28 would be applicable to SMEs.

    5. An enterprise, which, pursuant to the above provisions, does not use the present value technique for measuring value in use, should disclose, the fact that it has measured its ‘value in use’ on the basis of the reasonable estimate thereof and the manner in which the estimate has been arrived at including assumptions that govern the estimate.

    6. Where an enterprise has been covered in Level I and subsequently, ceases to be so covered, the enterprise will not qualify for relaxation/exemption from the applicability of this Standard, until the enterprise ceases to be covered in Level I for two consecutive years.

    7. Where an enterprise has previously qualified for the above relaxations (being not covered in Level 1) but no longer qualifies for relaxation in the current accounting period, this Standard becomes applicable from the current period without the above relaxations. However, the corresponding previous period figures in respect of the relevant disclosures need not be provided.
    The above provisions are applicable in respect of the accounting periods commencing on or after 1-4-2006 (for Level II enterprises) and 1-4-2008 (for Level III enterprises). However, if an enterprise being a Level II enterprise starts applying AS 28 from accounting periods beginning on or after 1-4-2006, it will continue to apply this Standard even if it ceases to be covered in Level II and becomes a Level III enterprise.

    Annexure I

    Criteria for classification of enterprises Level I Enterprises

    Enterprises which fall in any one or more of the following categories, at any time during the accounting period, are classified as Level I enterprises:

    (i) Enterprises whose equity or debt securities are listed whether in India or outside India.

    (ii) Enterprises which are in the process of listing their equity or debt securities as evidenced by the board of directors’ resolution in this regard.

    (iii) Banks including co-operative banks.

    (iv) Financial institutions.

    (v) Enterprises carrying on insurance business.

    (vi) All commercial, industrial and business reporting enterprises, whose turnover for the immediately preceding accounting period on the basis of audited financial statements exceeds Rs. 50 crore. Turnover does not include ‘other income’.

    (vii) All commercial, industrial and business reporting enterprises having borrowings, including public deposits, in excess of Rs. 10 crore at any time during the accounting period.

    (viii) Holding and subsidiary enterprises of any one of the above at any time during the accounting period.

    Level II Enterprises

    Enterprises which are not Level I enterprises but fall in any one or more of the following categories are classified as Level II enterprises:

    (i) All commercial, industrial and business reporting enterprises, whose turnover for the immediately preceding accounting period on the basis of audited financial statements exceeds Rs. 40 lakhs but does not exceed Rs. 50 crore. Turnover does not include ‘other income’.

    (ii) All commercial, industrial and business reporting enterprises having borrowings, including public deposits, in excess of Rs. 1 crore but not in excess of Rs. 10 crore at any time during the accounting period.

    (iii) Holding and subsidiary enterprises of any one of the above at any time during the accounting period.


    Level III Enterprises

    Enterprises which are not covered under Level I and Level II are considered as Level III enterprises.

  7. #37
    Accounting Standards
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    Default Basis of charging depreciation subsequent to recognition of impairment loss of Accounting Standard (AS) 28 – Impairment of Assets

    Basis of charging depreciation subsequent to recognition of impairment loss of Accounting Standard (AS) 28 – Impairment of Assets

    A. Facts of the Case

    1. A multi-locational manufacturing company having an annual turnover of approximately Rs. 1800 crore is in operation for the last six decades. The company has adopted Accounting Standard (AS) 28, ‘Impairment of Assets’, issued by the Institute of Chartered Accountants of India, as part of its accounting policy, with effect from 1st April, 2004. It has identified few assets as on April 1, 2004, for carrying out impairment test as per the Standard. Following this exercise, an amount of Rs. 12 crore has been recognised as impairment loss in respect of an asset and adjusted against the opening balance of revenue reserves as on April 1, 2004. This particular asset was commissioned in September 1996, at a cost of Rs. 23 crore. Accumulated depreciation for this asset as on March 31, 2004, following the straight-line method of depreciation as per the company’s accounting policy, is Rs. 9 crore. The useful life considered for the purpose of depreciation is 19 years.

    2. According to the querist, as per paragraph 61 of AS 28, the accumulated impairment loss is to be adjusted against the carrying amount of the asset which will be systematically amortised over its remaining useful life.

    3. The querist has mentioned that the carrying value of Rs. 2 crore mentioned above actually represents the recoverable amount ascertained following the requirement of AS 28. The querist has mentioned that in this specific case it represents the net selling price of the asset as ascertained by the management.

    4. The accounting policy of the company so far as it relates to depreciation continues to read as follows:

    "Depreciation on fixed assets is calculated on straight-line basis at rates, which are in conformity with the requirements of the Companies Act, 1956".

    5. In view of the above, according to the querist, the charge for depreciation from April 2004 as per the accounting policy of the company continues to be Rs. 1.2 crore p.a. (Rs. 23 crore depreciated over 19 years) in respect of this particular asset. The implication of continuing the existing practice of charging depreciation is that the adjusted carrying value will be charged off over a period of one year and eight months. This will mean, if the existing basis of charging depreciation is followed, charge for depreciation will cease after one year and eight months in respect of this asset.

    6. The querist has expressed the view that the requirement under paragraph 61 of AS 28 militates against the provisions of the Companies Act, 1956, insofar as the straight-line method of charging depreciation is concerned. Moreover, in the view of the querist, as per paragraph 6 of AS 28, an enterprise is required to assess at each balance sheet date the status of impairment and, if necessary, estimate the recoverable amount of the relevant asset. According to the querist, there will be continuous updation of adjusted carrying value (which is nothing but recoverable amount) of the asset making enough room for accommodating depreciation charge under straight-line method. The querist has illustrated this in the Annexure to this query, with regard to the asset in question in subsequent years. According to the querist, the exercise illustrated in the Annexure goes on till the end of the useful life of the asset. Hence, in the view of the querist, providing for depreciation on straight-line method in a situation like this does not conflict with the requirement. The querist has expressed the view that the above treatment is also supported by the view of the ICAI, as mentioned in an announcement relating to Accounting Standard (AS) 11 (revised 2003) which reads as "……..where a requirement of an accounting standard is different from the applicable law, the law prevails." Accordingly, a requirement of an accounting standard is not applicable to the extent it is in conflict with the requirement of the relevant law.

    B . Query

    7. The querist has sought the opinion of the Expert Advisory Committee as to whether it is correct on the part of the company to continue charging depreciation on the same basis as was followed till March 31,2004, or change the basis of charging depreciation so that the adjusted carrying value is charged over the remaining useful life of the asset as prescribed in paragraph 61 of AS 28.

    D. Opinion

    16. On the basis of the above, the Committee is of the opinion that it is not correct on the part of the company to continue charging depreciation on the same basis as was followed in March 2004. The depreciation should be charged over the remaining useful life of the asset as prescribed in paragraph 61 of AS 28, with appropriate disclosure in respect of the rate of depreciation having been changed in view of the requirements of AS 28.

    Opinion finalised by the Committee on 27.12.2004

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