01.

Definitions
Impairment loss
It is the amount by which the carrying amount of an asset (or a cash-generating unit) exceeds its
recoverable amount.
Recoverable amount
Recoverable amount of an asset is defined as the higher of its fair value minus costs of disposal, and its
value in use.
Fair value
Fair value is the price that would be received to sell an asset or paid to transfer a liability in an orderly
transaction between market participants at the measurement date.
Value in use
It is the present value of future cash flows from using an asset, including its eventual disposal.

02. Scope of IAS 36

IAS 36 applies to accounting for impairment of all assets except the following:
 Inventories (IAS 2: Inventories);
 Assets arising from contracts with customers that are recognized in accordance with
IFRS 15: Revenue from contracts with customers.
 Investment property that is measured at fair value (IAS 40)

03. Indicators of impairment

•Evidence that the asset is damaged or no longer of use to

Internal sources the entity.
•There are plans to discontinue or restructure the operation
for which the asset is currently used.
•There is a reduction in the asset’s expected remaining
Within the control of useful life.
•There is evidence that the entity’s expected performance is
management worse than expected.

•An unexpected decline in the asset’s market value.

External sources •Significant changes in technology, markets, economic
factors or laws and regulations that have an adverse effect
on the company.
•An increase in interest rates, affecting the value in use of
Outside the control of the asset.
•Net assets have a higher carrying value than the company’s
management market capitalisation
04. Computation of Impairment Loss
Assets having no revaluation surplus Assets having revaluation surplus

An i mpairment l oss recognized i n respect of an asset ca rried

Di fference between Ca rrying a mount & Recoverable a t a previ ously recognized revaluation s urplus is recognized
a mount i n other comprehensive i ncome to the extent that it i s
covered by that s urplus. (Similar to downward revaluation)

05. Measuring fair value less costs of disposal

Fair value of an asset at a particular date is normally its current market value. Direct selling costs
normally include legal costs; costs of removal of the asset; costs of delivery to customer, costs incurred
in bringing the asset to a saleable condition; transaction taxes and costs necessary to bring the asset
into a condition to be sold. However, redundancy and similar costs (for example, where a business is
reorganized following the disposal of an asset) are not direct selling costs.
Note If no active market exists, then Fair value is the amount that the entity could obtain from the
disposal.

06. Calculating value in use

Value in use represents the present value of the expected future cash flows from use of the asset,
discounted at a suitable discount rate or cost of capital.
The following elements should be reflected in the calculation of an asset’s value in use:
 An estimate of the future cash flows the entity expects to derive from the asset
 Expectations about possible variations in the amount or timing of those future cash
flows
 The time value of money (represented by the current market risk-free rate of interest)
 The price for bearing the uncertainty inherent in the asset
 Other factors that market participants would reflect in pricing the future cash flows the
entity expects to derive from the asset.
Estimates of future cash flows should be based on reasonable and supportable assumptions that
represent management’s best estimate of the economic conditions that will exist over the remaining
useful life of the asset.
Estimates of future cash flows
Must include Must not include
Cash inflows from the continuing use of the asset Cash inflows or outflows from financing activities
(finance cost)
Cash outflows that will be necessarily incurred to Income tax receipts or payments
generate the cash inflows from continuing use of the
asset
Net disposal proceeds at the end of the asset’s useful Cash flows expected to arise from a future
life restructuring to which an entity is not yet committed
or improving or enhancing the asset’s performance
until the entity incurs cash outflows that improve or
enhance the asset’s performance
Cash outflows that have already been recognized as
liabilities
 Note Future cash flows are estimated for the asset in its current condition.

The discount rate must be a pre-tax rate that reflects current market assessments of:
 The time value of money; and
 The risks specific to the asset for which the future cash flow estimates have not been
adjusted.
Note Both the expected future cash flows and the discount rate might be adjusted to allow for uncertainty
about the future.

07. Implication of IAS 36

Compute Impairment loss,
whi ch is the difference of Compute further
Look for the i ndicators for
Ca rryi ng a mount and Wri te down the asset to depreciation on the
i mpairment l oss a s
Recoverable a mount (If i ts recoverable a mount. recovera ble amount, if
mentioned below.
Ca rryi ng a mount > i mpaired.
Recoverable a mount).

08. Practice Questions

Question 01.
Aba Limited conducts its activities from two properties, a head office in the city centre and a property
in the countryside where staff training is conducted. Both properties were acquired on 1 April 2013
and had estimated lives of 25 years with no residual value. The company has a policy of carrying its
land and buildings at current values. However, until recently property prices had not changed for some
years. On 1 October 2015 the properties were revalued by a firm of surveyors. Details of this and the
original costs are:
Land Buildings
Rs. Rs.
Head Office – cost 1 April 2013 500000 1200000
– revalued 1 October 2015 700000 1350000
Training Premises – cost 1 April 2013 300000 900000
– revalued 1 October 2015 350000 600000
The fall in the value of the training premises is due mainly to damage done by the use of heavy
equipment during training. The surveyors have also reported that the expected life of the training
property in its current use will only be a further 10 years from the date of valuation. The estimated life
of the head office remained unaltered.
Note: Aba Limited treats its land and its buildings as separate assets. Depreciation is based on the
straight- line method from the date of purchase or subsequent revaluation.
Required
Show the extracts of the financial statements of Aba Limited in respect of the above properties for the
year to 31 March 2016.

Question 02.
The assistant financial controller of the Hussain Associates Ltd group has identified the matters below
which she believes may indicate impairment of one or more assets:
Hussain Associates Ltd owns and operates an item of plant that cost Rs. 640,000 and had accumulated
depreciation of Rs. 400,000 at 1 October 2015. It is being depreciated at 12½% on cost.
On 1 April 2016 (exactly half way through the year) the plant was damaged when a factory vehicle
collided into it. Due to the unavailability of replacement parts, it is not possible to repair the plant, but
 it still operates, albeit at a reduced capacity. It is also expected that as a result of the damage the
remaining life of the plant from the date of the damage will be only two years.
Based on its reduced capacity, the estimated present value of the plant in use is Rs. 150,000. The plant
has a current disposal value of Rs. 20,000 (which will be nil in two years’ time), but Hussain
Associates Ltd has been offered a trade-in value of Rs. 180,000 against a replacement machine which
has a cost of Rs. 1 million (there would be no disposal costs for the replaced plant). Hussain Associates
Ltd is reluctant to replace the plant as it is worried about the long-term demand for the product
produced by the plant. The trade-in value is only available if the plant is replaced.
Required
Prepare the extracts from the statement of financial position and statement of profit or loss of Hussain
Associates Ltd in respect of the plant for the year ended 30 September 2016.

Question 03.
On 1 July 2016, Sunshine Limited (SL) acquired four machines namely A, B, C and D. The following
information is available in respect of these machines:
A B C D
Cost (Rs. in millions) 200 230 90 60
Expected useful life 10 years 10 years 6 years 12 years
No active
Active market value at 30 June 2017 (Rs. in millions) 170 300 65
market
Renewal cost (Rs. in millions) 65 85 2 1
i. The renewal would allow SL to use the machines for another five years and it is incurred at the
end of year.
ii. SL uses the revaluation model for subsequent measurement of its assets.
iii. An independent value has estimated the value of machine ‘D’ at Rs. 130 million.
Required
Calculate the amounts that should be recognized in respect of the machines in the statement of
financial position and statement of profit or loss for the year ended 30 June 2017.

Question 04.
Sky-Line Limited (SL) operates a 4 Star Hotel facility in Muree. The hotel was constructed at a cost of
Rs.300 million, 5 years back and it is depreciated on a straight- line basis (total useful life of 15 years
and residual value of 20%). There are indications that the property is not performing as expected due
to;
a) opening of a competing hotel nearby,
b) a significant drop in number of tourists to the area because of terrorism.
There is a 40% probability that the hotel will generate net cash flows of Rs.40 million per annum and
60% probability that the cash flows would only be Rs.20 million per annum.
The property’s net operating income is Rs.30 million which is at the rate of 15%. 5% of the proceeds
from sale would be expended in closing the deal. Appropriate discount rate is 10%.
Required
Compute the impairment of property.

Question 05.
Premier Limited (PL) owns a plant which has a carrying amount of Rs.248 million as at 1 April 2019.
It is being depreciated at 12½% per annum on a reducing balance basis.
The plant is used to manufacture a specific product which has been suffering a decline in sales due to
obsolescence. PL has estimated that the plant will be retired from use on 31 March 2023. The
estimated net cash flows from the use of the plant and their present values are:
Net Cash Present
Flows Value
Rs. In million
Year to 31 March 2020 120 109.2
Year to 31 March 2021 80 66.4
Year to 31 March 2022 52 39
252 214.6
On 1 April 2020, PL had an alternative offer from the competitor to purchase the plant for Rs.200
million.
Required
Compute the impairment of plant.
Question 06.
Naveed Limited has an item of plant which has a carrying value of Rs.1,800,000 as at the end of the
year December 2020. It has undergone an impairment review and the following estimates were
produced:
Fair value of plant = Rs.1,400,000 Costs to sell 2% of selling price Revenue and associated costs per
annum for remaining useful life: (assume all cash flows occur at the end of the year).

Revenue Costs
Rs. Rs.
2021 960000 240000
2022 880000 220000
2023 700000 290000

the plant has an estimated residual value of Rs.50,000. A discount rate of 10% is applicable to
investments equivalent in risk to this plant (Appropriate discount rate is 10%).
Required
Compute the impairment of plant.
ICAP Past Paper Questions
Question no 1
Property, plant and equipment as disclosed in the draft financial statements of Apricot limited (APL)
for the year ended 30 June 2018 include a plant having a carrying value of Rs. 610 million. The
performance of the plant has been deteriorating since last year which is affecting APL’s sales.
Following information/estimates relate to the plant for the year ending 30 June 2019:
Rs in million
Inflows from sale of product under existing condition of the plant 250
Operational cost other than depreciation 25
Depreciation 170
Expense to be paid in respect of 30 June 2018 accruals 8
Cost of increasing the plant’s capacity 60
Additional inflows (net) expected from the upgrade 40
Interest on loan 30
Maintenance cost 15
Tax payment on profits 18
Cash flows from the plant are expected to decrease by 15% each year from 2020 and onward. The
plant’s residual value after its remaining useful life of 3 years is estimated at Rs. 100 million.
An offer has been received to buy the plant immediately for Rs. 570 million but APL has to incur the
following costs.
Rs. in million
Cost of delivery to the customer 45
Legal cost 10
Costs to re-organize the production process after disposal of plant 50
Applicable discount rate is 9%
Required:
Calculate the amount of impairment loss (if any) on plant, for the year ended 30 June 2018. (7)
(Far-2 Autumn 2018 Q6b)
Question no 2
Dominant Fertilizers has two plants. Following information is available for the purpose of impairment
testing:
i. The remaining useful life of both plants is expected to be 3 years.
ii. The fair values and written down values of the plants as on 31 December 2012 were as follows:
WDV Fair value Incremental selling cost
Plants
Rs. in million
P-1 220 210 7
P-2 160 150 4

iii. Expected cashflows from each plant in next three years are as follows:
P-1 P-2
Rs. in million
Annual inflows 105 55
Annual outflows 11 5
Sale proceeds at end of year 3 8 3
Disposal costs at end of year 3 2 1
iv. Present value factor, based on a discount factor of 10% for year 1, year2 and year 3 are 0.909,
0.826, 0.751 respectively.
Required:
Compute impairment (if any) on each plant. (11)
(Far-2 Spring 2013 Q5)
Question no 3
On March 1, 2007 Style Textiles imported an automatic plant for Rs. 27 million. The
commencement of the plant was completed in December 2007 with a cost of Rs. 3 million. The
commercial production commenced on January 1, 2008and at that time, the economic life of the
plant was estimated as 8 years.
During an exercise carried out to determine the impairment in the value of plant as on December
31, 2009 the following estimates have been made:
 Due to lack of demand the estimated plant utilization is reduced from 80% to 70%.
 It is estimated that due to underutilization of the plant, the life of the plant will be
increased by 2 years but an overhauling of the plant would have to be carried out at the
end of year 2015 at a cost of Rs. 1 million.
 The applicable discount rate is 10%
 The net annual cashflows (excluding overhauling cost) have been estimated as under:
Years 2010 2011 2012 2013 2014 2015 2016 2017
Net cash flows (Rs in
5 4 3.5 3.2 3 2.5 2.3 2
million)

The current selling price of a similar plant in the local market is Rs. 15 million. The present
decommissioning cost of the plant is estimated at Rs. 0.2 million.
Required:
Work out the impairment (if any) in the value of the plant as on December 31, 2009.
(11)
(Far-2 Spring 2010 Q6)