Assets Impairment Testing: An Analysis of IAS 36

Abstract

The primary objective of accounting is to provide information about the economic resources of an enterprise, the claims to those resources, and the effects of transactions, events, and circumstances that change the resources and claims. It is therefore considered important to inform users of financial statement of any asset or cash generating unit that lose its capacity to recover its cost. This is necessary so as to provide accounting information users with relevant information about the change in value of the firm’s resources. An asset that loses its capacity to recover cost is said to be impaired and accounting for asset impairment is faced with a few challenges. It can be difficult to determine which measure of value should be used when assessing impairment. Options include current cost (replacement cost), current market value (selling price), net realizable value (selling price minus disposal costs), or the sum of the future net cash flows from the income-generating unit. More so, there is little guidance by IAS 36 on accounting for asset impairments: when to recognize impairments, how impairments should be measured and how impairment should be disclosed. Since assets impairment can distort the usefulness of accounting information for decision making, adequate attention should be made to ensure that the judgment and estimates made by managers are verified by auditing the estimates.

Key words: Asset impairment, testing, IAS 36.