Section 22: Impairment of Assets (AASB 1061_04-26)

This section applies to the accounting for the impairment of assets except for impairments addressed by paragraph 1.5 or another section of this Standard. Impairments addressed by another section of this Standard relate to: 

(a) financial assets (see Section 10); and 

(b) non-financial assets regularly revalued to fair value in accordance with paragraph 14.8 (investment property), 15.13 (property, plant and equipment) or 16.14 (intangible assets).

At each reporting date, an entity shall assess whether a non-financial asset (eg inventories and property, plant and equipment) is impaired when, and only when: 

(a) the asset has been damaged physically, or is a perishable item that has spoilt, or become obsolete; or 

(b) the entity has changed its strategy or been affected by a reduction in external demand for its goods or services, and in either case the asset’s capacity to provide services or generate sales revenue might have been affected adversely as a result.

If any of the events in paragraph 22.2 has occurred, the entity shall identify whether the asset’s carrying amount is impaired by determining whether it exceeds the asset’s recoverable amount. If it does, the entity shall reduce the asset’s carrying amount to its recoverable amount. The reduction shall be recorded as an impairment loss in profit or loss. 

An entity shall assess inventory for impairment either individually or grouped on the basis of similar characteristics. An entity shall assess other assets for impairment at an individual asset level.

The recoverable amount of an item of inventory (or group of similar items of inventory) is: 

(a) for inventories held for distribution – cost less loss of service potential. The loss of service potential shall be measured by reference to the cost or current replacement cost of those inventories; and 

(b) for all other inventories – the selling price less the costs to complete and sell.

If one or more of the events in paragraph 22.2 occurs in respect of inventory held for distribution, an entity shall use judgement in assessing whether a loss of service potential of those inventories has occurred, and if so the amount of any loss. In many cases, a loss of service potential of inventory would be identified from a current replacement cost (see paragraph 11.9(b)) that is lower than the original acquisition cost or other subsequent carrying amount of the inventory. In other cases, such as in cases involving obsolescence, the cost of an item might be an appropriate measure of the associated loss of service potential. For example, the cost of damaged inventory that needs to be scrapped might be an appropriate estimate of the inventory’s loss of service potential, while the service potential of superficially damaged inventory might be more appropriately estimated by reference to the inventory’s current replacement cost.

The recoverable amount of an individual non-financial asset other than inventory is the higher of its fair value less costs of disposal and its value in use. There is a rebuttable presumption that an asset’s fair value less costs of disposal is the most appropriate measure of such a non-financial asset’s recoverable amount. 

Section 11 provides guidance on fair value measurement. Costs of disposal are the incremental costs directly attributable to the disposal of an asset, excluding finance costs and income tax expense.

Value in use is the present value of the future cash flows expected to be derived from an asset. The present value calculation involves the following steps: 

(a) estimating the future cash inflows and outflows expected to be derived from: 

(i) continuing use of the asset; and 

(ii) disposal of the asset at the end of its useful life in an orderly transaction between market participants; and 

(b) applying a current market-based risk-adjusted discount rate to those future cash flows. 

An entity may use recent financial budgets or forecasts in estimating the cash flows expected from continuing use of the asset.