28 Impairment of Assets explained: this guide covers what 28 Impairment of Assets means, who it applies to, the step-by-step process, documents required, fees, due dates and penalties in India — so you can stay compliant with confidence and avoid costly mistakes.
What Is AS 28?
Accounting Standard 28 (AS 28), titled "Impairment of Assets," was issued by the ICAI and prescribes the procedures that an enterprise applies to ensure that its assets are carried at no more than their recoverable amount. An asset is impaired when its carrying amount exceeds its recoverable amount. If this occurs, the enterprise must recognise an impairment loss.
Scope
AS 28 applies to all assets except:
- Inventories (AS 2)
- Assets arising from construction contracts (AS 7)
- Financial assets including investments (AS 13)
- Deferred tax assets (AS 22)
Key Definitions
- Impairment Loss — the amount by which the carrying amount of an asset exceeds its recoverable amount
- Recoverable Amount — the higher of an asset's net selling price and its value in use
- Net Selling Price — the amount obtainable from the sale of an asset in an arm's length transaction, less the costs of disposal
- Value in Use — 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
- Cash-Generating Unit (CGU) — the smallest identifiable group of assets that generates cash inflows that are largely independent of cash inflows from other assets or groups of assets
Identifying Impaired Assets
At each balance sheet date, the enterprise should assess whether there is any indication that an asset may be impaired. If any such indication exists, the enterprise must estimate the recoverable amount.
External Indicators
- Significant decline in asset's market value — more than expected from normal use or passage of time
- Significant adverse changes in the technological, market, economic or legal environment
- Increase in market interest rates or other market rates of return affecting the discount rate used to calculate value in use
- Carrying amount of the enterprise's net assets exceeds its market capitalisation
Internal Indicators
- Evidence of obsolescence or physical damage
- Significant adverse changes in the extent or manner of asset use (asset becoming idle, plans for restructuring or discontinuance)
- Internal reporting indicates that the asset's economic performance is or will be worse than expected
Measuring Recoverable Amount
| Step | Action | Result |
|---|---|---|
| 1 | Assess indicators of impairment | If indicator exists, proceed to step 2 |
| 2 | Determine Net Selling Price (NSP) | Market price less disposal costs |
| 3 | Calculate Value in Use (VIU) | PV of estimated future cash flows |
| 4 | Recoverable Amount = Higher of NSP and VIU | The amount that will be compared to carrying amount |
| 5 | Compare Carrying Amount with Recoverable Amount | If carrying > recoverable, recognise impairment loss |
Calculating Value in Use
Value in use is calculated by estimating future cash flows and discounting them to present value:
- Cash flow projections should be based on reasonable and supportable assumptions — reflecting management's best estimate
- Projections should cover a maximum of five years (unless a longer period can be justified)
- Beyond the projection period, cash flows are extrapolated using a steady or declining growth rate
- The discount rate should be a pre-tax rate that reflects current market assessments of the time value of money and the risks specific to the asset
Cash-Generating Units (CGU)
If it is not possible to estimate the recoverable amount of an individual asset, the enterprise should determine the recoverable amount of the cash-generating unit to which the asset belongs. A CGU is the smallest group of assets that generates largely independent cash inflows.
Impairment loss for a CGU is allocated: first to goodwill (if any), then to other assets on a pro-rata basis based on carrying amount. No individual asset should be reduced below the highest of its net selling price, value in use, or zero.
Recognising Impairment Loss
An impairment loss is recognised as an expense in the P&L. After recognising the loss, the depreciation charge for the asset is adjusted for future periods to allocate the revised carrying amount over the remaining useful life.
Reversal of Impairment Loss
At each subsequent balance sheet date, the enterprise should assess whether there is any indication that a previously recognised impairment loss no longer exists or has decreased. If so, the recoverable amount is re-estimated and the impairment loss is reversed. However:
- The carrying amount after reversal should not exceed the carrying amount that would have been determined (net of depreciation) had no impairment loss been recognised
- Reversal of impairment loss for goodwill is prohibited
Disclosure Requirements
- The amount of impairment losses recognised in P&L during the period (and the line item in which included)
- The amount of reversals of impairment losses during the period
- For each material impairment loss — the events leading to the loss, the amount, and whether the recoverable amount is NSP or VIU
- The discount rate used in computing value in use
Conclusion
AS 28 ensures that assets are not carried at more than what they are worth. The impairment testing framework — assessing indicators, measuring recoverable amounts, and applying the CGU concept — provides a systematic approach to identifying and recognising impairment losses. This is critical for presenting a true and fair view of the enterprise's financial position.
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