International Accounting Standard 36

What’s the Deal with IAS 36?

IAS 36, so-called International Accounting Standard 36, makes sure businesses don’t inflate their asset values. This keeps the numbers real. Let’s break down why it’s important and what you need to know.

Why Bother with IAS 36?

IAS 36’s thing is making sure assets on the books are not higher than their real worth. Fairly simple, right? They use the “recoverable amount,” which is basically what you can sell it for or what it’s worth if you keep it. This way, your company’s balance sheet reflects a true picture of financial health.

It’s mandatory for all assets, especially goodwill and some intangibles, to undergo annual impairment tests. Following IAS 36 helps you stay legit and avoid overestimating what you own.

The Jargon Made Simple

To get IAS 36, you’ve gotta get the lingo. Here’s the lowdown:

1. Recoverable Amount: The highest value between what you’d get selling it (fair value minus costs) and what it’s worth keeping (value in use).

2. Fair Value Less Costs to Sell: What you’d pocket from a sale after all those pesky fees.

3. Value in Use: The present value of the cash flow the asset will generate.

4. Carrying Amount: What’s listed in the books after you’ve deducted depreciation and any impairment.

5. Impairment Loss: The hit you take when the asset’s book value is more than its recoverable amount.

Stay sharp with frequent impairment tests and keep an eye out for hints of possible asset value drops. This diligence ensures you’re not logging higher-than-actual values.

Check out more on our sections for how to review impaired assets and handling losses for a deeper dive. Grasping these concepts is key to staying in line with IAS 36 and giving an honest financial report.

Checking for Asset Impairment

Alright, let’s cut through the accounting jargon and get to the heart of what you really need to know about impairment tests according to International Accounting Standard 36 (IAS 36). This section explains when you need to test for impairment and how to figure out an asset’s recoverable amount. Sound complicated? Don’t worry, we’ll break it down.

When to Test for Impairment

First off, when should you even bother testing for impairment? Simple: whenever there’s a hint that an asset might be worth less than what it’s recorded at. Here are some red flags that might signal it’s time:

• The asset’s market value takes a nosedive
• Big changes in technology, the market, economy, or even legal stuff that hurt your business
• Rising interest rates or market rates
• Signs that your asset is outdated or damaged
• The asset isn’t performing like you thought it would
• You’re planning to sell or get rid of the asset or the part of the business it’s in

Some assets need a check-up every year—intangible ones with no set lifespan, those not yet in use, and goodwill from business deals, just to name a few.

Figuring Out the Recoverable Amount

To know if an asset is impaired, you need to figure out its recoverable amount. This is simply the higher of these two numbers: its Fair Value Less Costs of Disposal (FVLCOD) and its Value in Use (VIU).

Fair Value Less Costs of Disposal (FVLCOD)

Think of FVLCOD as what you’d get if you sold the asset today, minus any selling costs. Here’s what you’d consider:

• Market value from active sales or similar items recently sold
• Auction prices or bids
• Legal fees and removal costs

Value in Use (VIU)

VIU is a bit more math-heavy. It’s the present value of the future cash flows you expect the asset to generate. What does this include?

• Expected cash inflows and outflows from using the asset
• Possible variations in cash flow amounts or timing
• The current market risk-free rate (think time value of money)
• Risk adjustments specific to the asset

Here’s a quick comparison between FVLCOD and VIU:

Aspect	FVLCOD	VIU
Basis	Market transactions	Future cash flow projections
Disposal Costs	Deducted	Not included
Time Value of Money	Not considered directly	Discounted to present value
Risk Adjustments	Inherent in market value	Explicitly adjusted

IAS 36 says you need to recognize impairment losses if the carrying amount of an asset is higher than its recoverable amount. If you want more details on handling these losses, check out our section on handling impairment losses and related accounting standards.

Stick to these guidelines, and you’ll stay on the right side of IAS 36, giving everyone reliable financial reports that actually reflect what’s going on with your assets.

Got more questions? Dive deeper into related standards like International Accounting Standards 37 and International Accounting Standards 16 for more juicy details.

Impairment of Goodwill

Annual Goodwill Testing

Goodwill is what you get when you pay more to buy a company than its tangible assets are worth. Think of it like the good vibes or the reputation that come with it. According to the International Accounting Standard 36, you need to check if this goodwill is worth what’s on the books at least once a year. Basically, you compare what you have on your records with what you could sell it for—or what it makes you in cash.

If the numbers don’t match up, and your booked goodwill is higher, then you’ve got an impairment on your hands. That just means you need to write it down to the real value. Simple as that.

Test Frequency	Requirement
Annual Check	Give goodwill a yearly check-up to see if it’s worth what you say it is.
Extra Check-ups	Look again if something big happens that might change its value.

Allocation of Impairment Loss

When goodwill takes a hit, you’ve got to make it right by adjusting your records. First, chop down the value of goodwill itself. Sometimes the hit is bigger than your goodwill. When that happens, spread the loss over the other assets in the cash-generating unit (CGU) evenly. But don’t reduce any asset’s value below the higher of its sellable value, its cash-generating value, or zero.

Allocation Order	Description
1. Goodwill	Knock down goodwill value first.
2. Other CGU Assets	Spread any leftover loss to the other assets in the CGU.

Need more info on how to handle your finances? Check out International Accounting Standard 40 and International Accounting Standard 19. They’re good reads for fine-tuning your accounting game.

Sticking to these rules not only keeps you in line with the accounting standards council but also helps you stay on the good side of other regulators.

Nailing IAS 36

Getting IAS 36 right is all about making sure your assets are valued properly. This means taking a hard look at whether anything’s lost its shine and needs a write-down.

How to Check for Impairment

IAS 36 has a no-nonsense method for checking if your assets are worth what you think. It’s a two-step dance: first, look for hints something’s off, then test to see if it really is.

Here’s how it goes:

1. Spot the Red Flags:

   • Every reporting period, you gotta see if there’s any red flags. Maybe the market’s tanked, new tech’s outdated your stuff, or internal metrics are throwing shade.

2. Run the Numbers:

   • If you find any red flags, it’s time to test those assets.
   • This test can be done on one thing or a whole group of things, known as a CGU (Cash-Generating Unit).

3. Figure Out the Value:

   • Compare the fair value (minus selling costs) to the value in use. The higher number is what you go with.

4. Crunch the Numbers:

   • If the carrying amount is higher than the recoverable number, you’ve got an impairment loss.

This system keeps everyone honest and ensures your books don’t look better than they really are.

Dealing with the Loss

So, you’ve found an impairment? Here’s how you handle it by the book.

1. Book It Fast:

   • Impairment losses go straight to your profit or loss statement.
   • Goodwill is a bit tricky, but there are special rules for that.

2. Spread the Pain:

   • For CGUs, hit goodwill first, then spread the rest out as needed.

3. Say It Out Loud:

   • You need to clearly state the impairment loss and why it happened in your financial statements.
   • Explain how you figured out the recoverable amounts.

Asset	Profit/Loss Statement	Hit List
Solo Asset	Fast Track	N/A
CGU	Fast Track	Goodwill first, then others equally

Sticking to these steps keeps you in line with IAS 36 and makes sure your financial reporting stays clear and trustworthy.

For more on related standards, check out our article on IAS 39.