AS 28 — Impairment of Assets

AS 28 prescribes the procedures that an enterprise applies to ensure that its assets are carried at no more than their recoverable amount. An asset is carried at more than its recoverable amount if its carrying amount exceeds the amount to be recovered through use or sale — in which case the asset is impaired, and the standard requires the enterprise to recognise an impairment loss. This is a direct application of prudence: assets should not sit on the balance sheet at values that cannot be recovered.

Objective and scope

The objective is to prescribe the procedures that an enterprise applies to ensure that its assets are carried at no more than their recoverable amount, to define recoverable amount, and to prescribe when an enterprise should recognise or reverse an impairment loss and the related disclosures. The standard applies to a broad range of assets, but excludes assets dealt with by other standards where those already address impairment or valuation — for example, inventories (AS 2), assets arising from construction contracts (AS 7), financial assets (in relevant respects), and deferred tax assets.

Identifying a possible impairment

At each balance sheet date, an enterprise assesses whether there is any indication that an asset may be impaired. If any such indication exists, the enterprise estimates the recoverable amount of the asset. In assessing whether there is an indication of impairment, the enterprise considers, at a minimum, external sources of information (such as a significant decline in market value, adverse changes in the technological, market, economic, or legal environment, increases in market interest rates affecting the discount rate, and the carrying amount of net assets exceeding market capitalisation) and internal sources (such as evidence of obsolescence or physical damage, adverse changes in the extent or manner of use, and internal evidence that economic performance is or will be worse than expected). If there is no indication of impairment, no estimate of recoverable amount is required (with limited exceptions).

Recoverable amount, value in use, and net selling price

The recoverable amount of an asset is the higher of its net selling price and its value in use.

Net selling price is the amount obtainable from the sale of the asset in an arm's-length transaction between knowledgeable, willing parties, less the costs of disposal.

Value in use is the present value of the estimated future cash flows expected to arise from the continuing use of the asset and from its disposal at the end of its useful life. Estimating value in use involves projecting the future cash inflows and outflows from continuing use of the asset and applying an appropriate discount rate (a pre-tax rate reflecting current market assessments of the time value of money and the risks specific to the asset).

Taking the higher of the two reflects the fact that a rational enterprise would recover an asset's value by whichever route — sale or continued use — yields more.

Recognising an impairment loss

If, and only if, the recoverable amount of an asset is less than its carrying amount, the carrying amount is reduced to its recoverable amount, and that reduction is an impairment loss. An impairment loss is recognised as an expense in the profit and loss account immediately, unless the asset is carried at a revalued amount under another standard (for example, a revalued fixed asset), in which case the impairment loss is treated as a revaluation decrease to the extent of any related revaluation surplus. After an impairment loss is recognised, the depreciation (amortisation) charge for the asset is adjusted in future periods to allocate the asset's revised carrying amount, less any residual value, over its remaining useful life.

Cash-generating units

Often it is not possible to estimate the recoverable amount of an individual asset, because the asset does not generate cash inflows largely independently of other assets. In such cases, the enterprise determines the recoverable amount of the cash-generating unit (CGU) to which the asset belongs. A cash-generating unit is the smallest identifiable group of assets that generates cash inflows from continuing use that are largely independent of the cash inflows from other assets or groups of assets. The impairment test is then applied at the level of the CGU: if the recoverable amount of the CGU is less than its carrying amount, an impairment loss is recognised and allocated to the assets of the unit (first to any goodwill allocated to the CGU, then to the other assets pro rata on the basis of their carrying amounts), subject to not reducing any individual asset below its own recoverable amount.

Reversal of an impairment loss

A distinctive feature of AS 28 is that impairment losses (other than on goodwill, in general) can be reversed. At each balance sheet date, the enterprise assesses whether there is any indication that an impairment loss recognised in prior periods may no longer exist or may have decreased. If such an indication exists, the enterprise estimates the recoverable amount, and if it has increased due to a change in the estimates used to determine recoverable amount since the last impairment loss was recognised, the impairment loss is reversed. However, the increased carrying amount due to a reversal must not exceed the carrying amount that would have been determined (net of depreciation) had no impairment loss been recognised in prior years — a reversal restores value only up to where the asset would otherwise have been. A reversal is recognised as income in the profit and loss account (or, for a revalued asset, treated as a revaluation increase).

Disclosure

Disclosures include, for each class of assets, the amount of impairment losses recognised in the profit and loss account during the period and the line item(s) in which they are included, and the amount of reversals of impairment losses. Where an impairment loss or reversal is material, additional information is disclosed, such as the events and circumstances that led to it, the amount, the nature of the asset or CGU, and whether the recoverable amount is net selling price or value in use (and, if value in use, the discount rate used).

A full worked example

A machine has a carrying amount of ₹40,00,000. Following a downturn, the company tests it for impairment. Its net selling price (what it would fetch, less selling costs) is ₹30,00,000, and its value in use is estimated below.

Step 1 — Calculate value in use as the present value of future cash flows. The machine will generate ₹9,00,000 a year for 4 years, discounted at 10%.

Year	Cash flow (₹)	PV factor @ 10%	PV (₹)
1	9,00,000	0.9091	8,18,182
2	9,00,000	0.8264	7,43,802
3	9,00,000	0.7513	6,76,183
4	9,00,000	0.6830	6,14,712
Value in use	—	—	28,52,879

Step 2 — Determine recoverable amount as the higher of net selling price and value in use.

Measure	Amount (₹)
Net selling price	30,00,000
Value in use	28,52,879
Recoverable amount (higher)	30,00,000

Step 3 — Compare and recognise impairment.

Item	Amount (₹)
Carrying amount	40,00,000
Recoverable amount	(30,00,000)
Impairment loss	10,00,000

Account	Debit (₹)	Credit (₹)
Impairment loss (P&L)	10,00,000
Accumulated impairment		10,00,000

The AS 28 rule is that recoverable amount is the higher of net selling price and value in use — a rational owner keeps the asset if using it beats selling it, and sells otherwise. Here selling (₹30,00,000) beats using (₹28,52,879), so the impairment is limited to ₹10,00,000. Like Ind AS 36, to which it corresponds, AS 28 permits a later reversal if the recoverable amount recovers.

How AS 28 compares with Ind AS 36

AS 28 corresponds to Ind AS 36, Impairment of Assets, and the two are closely aligned — the same core rule (carry assets at no more than recoverable amount), the same definition of recoverable amount as the higher of net selling price (fair value less costs of disposal, in Ind AS terms) and value in use, the same use of cash-generating units, and the same ability to reverse impairment losses (other than on goodwill). The differences are largely a consequence of the broader Ind AS framework. Under Ind AS 36, goodwill (which under Ind AS 103 is not amortised) must be tested for impairment at least annually, regardless of whether there is an indication of impairment, and impairment of goodwill can never be reversed. Ind AS 36 also requires an annual impairment test for intangible assets with indefinite useful lives and intangibles not yet available for use. AS 28's approach to goodwill differs because the AS framework amortises goodwill. Ind AS 36 additionally uses "fair value less costs of disposal" (aligned with Ind AS 113) in place of "net selling price". For most individual operating assets, however, the impairment mechanics under the two standards are substantially the same.

Common pitfalls

Recurring issues include failing to assess for indications of impairment at each balance sheet date; testing an individual asset in isolation when it does not generate independent cash flows (a CGU test is needed); using an inappropriate discount rate or over-optimistic cash flow projections in value in use; reversing an impairment above the notional carrying amount that would have existed without the impairment; and omitting the required disclosures for material impairments and reversals.

Why this is cleaner on a unified system

Impairment testing requires reliable carrying amounts and the cash flow information needed to estimate value in use — far easier when the fixed asset register, the operational data that drives cash flow projections, and the ledger sit in one connected system. When carrying amounts and the data behind recoverable-amount estimates come from a single source of truth, identifying indications of impairment, testing at the asset or CGU level, and recognising or reversing impairment losses is more reliable than reconciling asset records and projections held in separate tools.

This article is a detailed educational summary of AS 28 in plain language. It is not a substitute for the full text of the standard. Accounting standards are amended from time to time; always verify the current, authoritative text of AS 28 as issued by the ICAI before relying on it, and consult a qualified chartered accountant for application to your specific circumstances.