Ind AS 36 – Impairment of Assets Interview Q&A
A. Scope & Core Principles
Q1: What is the primary objective of Ind AS 36 regarding asset impairments?
What the interviewer tests: The interviewer is evaluating your knowledge of accounting standards and their implications for financial reporting.
- Ensure accurate asset valuation
- Prevent overstatement of assets
- Promote transparency in financial statements
The primary objective of Ind AS 36 is to ensure that assets are carried at no more than their recoverable amount, preventing overstatement and promoting transparency in financial statements by requiring timely recognition of impairments.
Q2: How is the recoverable amount of an asset defined under Ind AS 36?
What the interviewer tests: The interviewer wants to gauge your knowledge of asset impairment and recovery assessment under Indian Accounting Standards.
- Higher of fair value less costs to sell
- Value in use
- Impairment testing
Under Ind AS 36, the recoverable amount of an asset is defined as the higher of its fair value less costs to sell and its value in use. This assessment is crucial for impairment testing to ensure that assets are not carried at amounts exceeding their recoverable amounts.
Q3: Which assets are excluded from the scope of Ind AS 36?
What the interviewer tests: The interviewer wants to evaluate your knowledge of asset impairment standards and their applicability.
- Financial assets
- Biological assets
- Investment property
Ind AS 36 excludes certain assets from its scope, notably financial assets as defined by Ind AS 32, biological assets related to agricultural activity, and investment property measured at fair value under Ind AS 40. These exclusions are important for understanding impairment assessments.
Q4: What types of assets must be tested for impairment at least annually, regardless of indicators?
What the interviewer tests: The interviewer is looking for your knowledge of impairment testing requirements and the specific asset categories involved.
- Goodwill
- Indefinite-lived intangible assets
- Long-lived assets with definite lives
Assets that must be tested for impairment at least annually include goodwill and indefinite-lived intangible assets. Additionally, long-lived assets with definite lives should be tested whenever indicators of impairment arise, ensuring compliance with accounting standards.
Q5: Under what circumstances must other assets be tested for impairment?
What the interviewer tests: The interviewer is evaluating your understanding of asset impairment testing and the relevant accounting standards.
- Identification of impairment triggers
- Knowledge of relevant accounting standards
- Ability to apply impairment testing procedures
Other assets must be tested for impairment when there are indications that the carrying amount may not be recoverable, such as significant declines in market value, adverse changes in the business environment, or changes in the use of the asset.
B. Cash-Generating Units (CGUs) & Allocation
Q6: What is a Cash-Generating Unit (CGU), and why is it used?
What the interviewer tests: The interviewer is testing your knowledge of asset impairment and the concept of CGUs in financial reporting.
- Definition of CGU
- Purpose in asset impairment tests
- Relation to recoverable amount
A Cash-Generating Unit (CGU) is the smallest identifiable group of assets that generates cash inflows independently. It is used in impairment testing to assess whether the carrying amount of assets exceeds their recoverable amount, ensuring accurate financial reporting.
Q7: How should goodwill and corporate assets be allocated to CGUs?
What the interviewer tests: The interviewer wants to evaluate your knowledge of accounting principles related to goodwill and asset allocation in financial reporting.
- Identification of CGUs
- Allocation methods
- Impairment testing
Goodwill and corporate assets should be allocated to cash-generating units (CGUs) based on a rational approach that reflects the economic benefits derived from those assets. This often involves using a proportionate method based on the relative fair values of the CGUs, followed by regular impairment testing to ensure that the carrying amounts do not exceed their recoverable amounts.
Q8: What basis should be used when allocating corporate assets to CGUs?
What the interviewer tests: The interviewer is testing your understanding of asset allocation and CGU principles.
- Understanding of cash-generating units (CGUs)
- Knowledge of relevant allocation bases
- Ability to apply accounting standards
Corporate assets should be allocated to cash-generating units (CGUs) based on the relative fair value of the CGUs, ensuring that the allocation reflects the economic benefits derived from those assets.
Q9: Describe the order of testing between individual assets and CGUs when impairment indicators exist.
What the interviewer tests: The interviewer is assessing your understanding of impairment testing and the hierarchy of asset evaluation.
- Individual assets first
- Cash-generating units (CGUs)
- Materiality of impairment indicators
When impairment indicators exist, testing begins with individual assets to determine if they are impaired. If impairment is indicated, the next step is to assess the cash-generating units (CGUs) that include these assets, as this helps to evaluate the recoverable amount of the asset group as a whole.
Q10: When could goodwill be impaired even if no individual asset's recoverable amount falls below its carrying amount?
What the interviewer tests: The interviewer is assessing your understanding of goodwill impairment and its implications on financial statements.
- Goodwill is linked to cash-generating units
- Overall performance of the unit can lead to impairment
- Changes in market conditions may affect valuation
Goodwill can be impaired if the overall cash-generating unit's performance declines, even if individual asset values remain intact. Factors like changes in market conditions, economic downturns, or strategic shifts can trigger impairment tests that reveal a need for write-downs.
C. Measuring & Recognising Impairment
Q11: How is fair value less costs of disposal determined, and what does it include?
What the interviewer tests: The interviewer is assessing your understanding of fair value measurement and its components.
- Definition of fair value
- Components of costs of disposal
- Calculation methodology
Fair value less costs of disposal is determined by estimating the price that would be received to sell an asset in an orderly transaction between market participants, subtracting any direct costs associated with the disposal. It includes costs such as legal fees, commissions, and removal costs.
Q12: Explain how to calculate value in use under Ind AS 36.
What the interviewer tests: The interviewer is evaluating your knowledge of Ind AS 36 and your ability to perform impairment testing.
- Understanding of value in use
- Cash flow projections
- Discount rate application
To calculate value in use under Ind AS 36, one needs to estimate the future cash flows expected from the asset, determine the appropriate discount rate for those cash flows, and then apply the present value formula to arrive at the asset's value in use.
Q13: Under what circumstances must you use value in use versus fair value less costs of disposal?
What the interviewer tests: The interviewer is evaluating your knowledge of asset valuation methods and their appropriate applications.
- Impairment testing
- Future cash flows
- Market conditions
Value in use is used when assessing impairment of an asset, focusing on the present value of future cash flows expected from the asset. In contrast, fair value less costs of disposal is appropriate when there is an active market for the asset, reflecting its current market conditions minus any costs to sell.
Q14: How is an impairment loss recognised and allocated within a CGU?
What the interviewer tests: The interviewer is assessing your understanding of accounting principles related to asset impairment.
- Impairment testing
- Cash-Generating Unit (CGU)
- Allocation of loss
An impairment loss is recognised when the carrying amount of a CGU exceeds its recoverable amount. This loss is allocated first to goodwill, if any, and then to the other assets of the CGU on a pro-rata basis based on their carrying amounts.
Q15: Under what conditions can an impairment loss be reversed (excluding goodwill), and how is the reversal limited?
What the interviewer tests: The interviewer is evaluating your knowledge of accounting standards related to impairment and your ability to apply them practically.
- Reversal conditions
- Limitations on reversal
- Accounting standards reference
An impairment loss can be reversed when the conditions that led to the impairment have changed significantly. However, the reversal is limited to the amount that would have been recognized had no impairment loss been recorded, and it cannot exceed the carrying amount that would have been determined if the asset had not been impaired.
D. Key Estimates & Disclosures
Q16: What key assumptions must be disclosed when measuring recoverable amount using value in use or fair value?
What the interviewer tests: The interviewer is assessing your understanding of financial reporting standards and the importance of transparency in valuations.
- Identification of key assumptions
- Impact of assumptions on valuation
- Compliance with accounting standards
Key assumptions that must be disclosed include the discount rate used, growth rate estimates, and cash flow projections. These elements are crucial as they significantly impact the recoverable amount and ensure compliance with relevant accounting standards like IAS 36.
Q17: Why must discount rates used in impairment calculations be disclosed, and should they be pre-tax or post-tax?
What the interviewer tests: The interviewer is evaluating your knowledge of financial reporting standards and the importance of transparency in financial statements.
- Importance of disclosure
- Pre-tax vs. post-tax considerations
- Impact on financial statements
Discount rates in impairment calculations must be disclosed to provide transparency and allow stakeholders to understand the assumptions underlying asset valuations. They should generally be pre-tax, as this reflects the inherent risk of the cash flows, but the choice may depend on the specific context and applicable accounting standards.
Q18: What information must be disclosed when an asset or CGU is impaired or when impairment is reversed during the period?
What the interviewer tests: The interviewer is assessing your understanding of accounting standards related to asset impairment and the importance of transparency in financial reporting.
- Nature of the asset or CGU
- Amount of impairment loss
- Reasons for impairment or reversal
When an asset or Cash Generating Unit (CGU) is impaired or when impairment is reversed, it is essential to disclose the nature of the asset, the amount of impairment loss recognized, and the reasons for the impairment or its reversal. Additionally, any assumptions used in the impairment test should be disclosed to provide clarity on the underlying judgments.
Q19: When goodwill or indefinite-life intangible assets are material, what recoverable amount disclosures are required even if there’s no impairment?
What the interviewer tests: The interviewer is assessing your understanding of accounting standards related to intangible assets and disclosures.
- Goodwill impairment testing
- Disclosure requirements
- Recoverable amount
Even if there's no impairment, entities must disclose the recoverable amount of goodwill and indefinite-life intangible assets, including the basis for determining that amount, the key assumptions used in the calculation, and sensitivity analyses for those assumptions.
Q20: Why is sensitivity analysis over key assumptions important under Ind AS 36?
What the interviewer tests: The interviewer is evaluating your knowledge of impairment testing and the importance of assumptions in financial reporting.
- Identification of risks
- Impact on financial statements
- Informed decision-making
Sensitivity analysis under Ind AS 36 is crucial as it helps identify the risks associated with key assumptions, quantifies their potential impact on financial statements, and supports informed decision-making by management regarding asset valuations and impairment assessments.
E. Practical & Ethical Scenarios
Q21: A factory is functioning in a regulatory-restricted zone—how might that trigger impairment under Ind AS 36?
What the interviewer tests: The interviewer is assessing your understanding of impairment indicators and the application of accounting standards.
- Regulatory restrictions
- Assessment of recoverable amount
- Impairment loss recognition
When a factory operates in a regulatory-restricted zone, it may face limitations that could affect its future cash flows. Under Ind AS 36, this situation could trigger an impairment assessment if the carrying amount exceeds the recoverable amount, which is the higher of fair value less costs to sell and value in use.
Q23: What considerations arise if a CGU is significantly impacted by climate regulation or physical risk?
What the interviewer tests: The interviewer is testing your awareness of environmental factors affecting financial reporting and asset valuation.
- Impairment assessment
- Regulatory compliance
- Sustainability risks
When a Cash-Generating Unit (CGU) is significantly impacted by climate regulation or physical risk, considerations include the potential for asset impairment due to decreased future cash flows. Companies must assess compliance with environmental regulations and evaluate sustainability risks that could affect long-term viability, potentially leading to increased scrutiny from investors and regulators.
Q24: How would you challenge management’s optimistic cash flow projections showing no impairment margin?
What the interviewer tests: The interviewer is assessing your analytical skills and ability to critically evaluate financial forecasts.
- Understanding of cash flow projections
- Ability to identify risks
- Knowledge of impairment margins
I would conduct a sensitivity analysis to assess the impact of various scenarios on cash flow projections. Additionally, I would compare historical performance against these projections and evaluate the assumptions made by management for realism and potential biases.
Q25: What documentation and governance are critical to support assumptions and estimates in impairment testing?
What the interviewer tests: The interviewer wants to evaluate your knowledge of the importance of documentation and governance in financial reporting.
- Comprehensive documentation
- Clear governance policies
- Regular reviews
Critical documentation for impairment testing includes detailed assumptions, methodologies, and supporting data. Robust governance policies ensure these documents are regularly reviewed and updated, maintaining transparency and compliance with accounting standards.