Introduction to AS 28

AS 28 is a pivotal accounting standard that addresses the impairment of assets. It mandates that the carrying amount of an asset must not exceed its recoverable amount, a principle that must be evaluated at the end of each financial year. Understanding this standard is crucial for businesses to maintain accurate financial statements and ensure compliance with regulatory frameworks.

Applicability of AS 28

Since its inception on April 1, 2004, AS 28 has become a mandatory guideline for various entities, including:

1. Listed Enterprises: Companies whose equity or debt securities are traded on recognized stock exchanges in India, and those planning to issue such securities.
2. Commercial Entities: Any business or industrial enterprise reporting a turnover exceeding Rs. 50 Crores during an accounting period.

By identifying the applicability of AS 28, organizations can better prepare for the necessary evaluations and disclosures.

Understanding Asset Impairment

Asset impairment occurs when the value of an asset decreases below its carrying amount. AS 28 specifies procedures for recognizing such losses, ensuring that the book value of an asset reflects an accurate measure of worth. It also outlines the criteria for reversing impairment losses and emphasizes the importance of disclosures related to impaired assets at year-end.

Excluded Assets

AS 28 does not apply to certain types of assets, including:

• Inventories (governed by AS 2)
• Assets arising from construction contracts (covered under AS 7)
• Financial assets like investments (addressed in AS 13)
• Deferred tax assets (regulated by AS 22)

Understanding these exclusions helps businesses focus on the relevant asset classes when applying AS 28.

Indicators of Impairment

At the conclusion of each financial year, companies must evaluate whether their assets show signs of impairment. Indicators can be classified into external and internal categories:

External Indicators

• Technological Changes: Advancements that may render existing assets obsolete.
• Market Fluctuations: Rising interest rates that could lower asset values.
• Legal Restrictions: Limitations on the use of certain assets due to legal issues.
• Market Capitalization: Situations where the carrying amount exceeds the market capitalization of the entity.

Internal Indicators

• Physical Damage: Any damage to the asset that affects its usability.
• Performance Reports: Internal evaluations indicating an asset is underperforming.
• Operational Changes: Plans for restructuring or discontinuing operations that impact asset usage.

Recognizing these indicators is essential for timely and accurate impairment evaluations.

Measuring Recoverable Amount

The recoverable amount is the greater of an asset's market value or its value in use. If an asset’s market price cannot be determined, the value in use becomes the basis for the recoverable amount. According to the Institute of Chartered Accountants of India (ICAI), this assessment should ideally be conducted for each asset unless it generates cash inflows that are heavily reliant on other assets.

Cash-Generating Units

In cases where individual asset assessments are impractical, cash-generating units (CGUs) must be analyzed instead. The carrying amount of a CGU should never fall below the highest of its net selling price or its value in use.

Cash Flow Projections

Companies should base their cash flow projections on realistic budgets or forecasts extending up to five years, ensuring they consider reasonable assumptions. These projections should encompass:

1. Ongoing net cash flow from asset usage.
2. Net cash flow from the eventual sale of the asset, including scrap value.

Accurate cash flow forecasting is vital for determining recoverable amounts and assessing asset impairment.

Recognizing and Measuring Impairment Loss

When the recoverable amount is less than the carrying amount, the difference is classified as an impairment loss and must be recorded immediately as an expense in the profit and loss account. If the recoverable amount exceeds the carrying amount, no recognition of this difference is necessary.

Reversal of Impairment Loss

At the end of each financial year, organizations are required to reassess any previously recognized impairment losses to determine if reversals are warranted. This ensures that the financial statements reflect the true value of the assets.

Conclusion

AS 28 plays a vital role in ensuring that businesses accurately represent their asset values and manage potential impairments effectively. By adhering to the guidelines set forth in this standard, organizations can enhance their financial reporting and maintain compliance with applicable accounting regulations.