Reversal of Impairment Loss is INCREASING the value of a previously impaired asset when there is a change in circumstances indicating that the impairment loss is no longer necessary.
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What is Impairment? (As Per IAS 36)
Impairment OCCURS when the carrying amount of an asset, such as property, plant, equipment, or intangible assets, exceeds its recoverable amount. The RECOVERABLE amount is the higher of an asset’s fair value less costs to sell or its value in use.
Impairment loss is RECOGNIZED as an expense in the Income Statement, reducing the asset’s value on the Balance Sheet.
IAS 36 – Reversal of Impairment Loss
According to IAS 36, it involves INCREASING the value of a previously impaired asset when there is a change in circumstances indicating that the impairment loss is no longer necessary.
1. Criteria for Reversal
Here are some key criteria to consider:
- Change in Economic Conditions; There should be a SIGNIFICANT change in the economic environment or market conditions that indicate a recovery in the asset’s value. This could include improvements in the industry outlook, increased demand for the asset, or stabilization of market prices.
- Internal Factors; Internal factors, such as technological advancements, operational improvements, or management initiatives, can contribute to the REVERSAL of impairment loss. These factors should demonstrate that the asset’s recoverable amount has increased.
- External Evidence; Objective evidence, like the market prices of similar assets or transactions involving comparable assets, can support the case for reversing an impairment loss. It provides an EXTERNAL benchmark against which the recoverable amount can be assessed.
- No Future Impairment Risk; The reasons for the initial impairment loss, such as legal or regulatory changes, should no longer pose a risk to the asset’s value. Any potential FUTURE impairment should be eliminated for a reversal to be justified.
2. Accounting – IAS 36 Considerations
When the criteria for Reversal of Impairment Loss MET, the INCREASE in value is recognized as a gain in the Income Statement. The carrying amount of the asset is adjusted, but the increase is limited to the amount of impairment loss previously recognized.
The reversal CANNOT exceed the asset’s initial carrying amount before impairment.
The Bottom Line
Reversal of Impairment Loss provides companies with the opportunity to RESTORE the value of previously impaired assets. It reflects the dynamic nature of the ‘business environment‘ to allow an ACCURATE representation of an asset’s value.
Chartered Accountant (Institute of Chartered Accountants of Pakistan)
Bachelor of Accounting Honours (Asia e University, Malaysia)