Difference Between IAS 36 Under Going Concern and IAS 36 Under Liquidation

Introduction

IAS 36, “Impairment of Assets,” provides guidelines for the recognition, measurement, and disclosure of impairment losses on assets. This report explores the key differences in applying IAS 36 under a going concern assumption and during liquidation.

IAS 36 Under Going Concern

Core Principle

Under IAS 36, the core principle is to ensure that an entity’s assets are not carried at more than their recoverable amount. Recoverable amount is defined as the higher of an asset’s fair value less costs of disposal and its value in use. The standard requires entities to assess at the end of each reporting period whether there is any indication that an asset may be impaired.

Identification of Impairment Indicators

Entities must assess at each reporting date whether there is any indication that an asset may be impaired. External and internal sources of information must be considered, including:

• Significant declines in market value.

• Adverse changes in the technological, market, economic, or legal environment.

• Increases in market interest rates or other market rates of return.

• Evidence of obsolescence or physical damage to the asset.

• Changes in the use of the asset or expected use.

Example: A company notices a significant drop in the market value of its machinery due to new technological advancements, indicating a potential impairment.

Measurement of Recoverable Amount

The recoverable amount is the higher of an asset’s fair value less costs of disposal and its value in use. Value in use is the present value of the future cash flows expected to be derived from the asset.

Example: A company calculates the fair value less costs of disposal of a piece of equipment at R400,000 and its value in use at R450,000. The recoverable amount is R450,000.

Recognition of Impairment Loss

If the carrying amount of an asset exceeds its recoverable amount, an impairment loss is recognized in profit or loss. The carrying amount of the asset is reduced to its recoverable amount.

Example: If the carrying amount of a building is R700,000 and its recoverable amount is R600,000, an impairment loss of R100,000 is recognized.

Reversal of Impairment Loss

IAS 36 allows for the reversal of impairment losses if there is an indication that the impairment loss recognized in prior periods may no longer exist or may have decreased. The reversal is recognized in profit or loss.

Example: If the market conditions improve and the recoverable amount of a previously impaired asset increases, the impairment loss may be partially or fully reversed.

Disclosures

Entities must disclose information about:

• The amount of impairment losses recognized and reversed during the period.

• The events and circumstances that led to the recognition or reversal of impairment losses.

• The nature of the asset and the segment to which it belongs.

Example: A company discloses an impairment loss of R50,000 recognized on its machinery and the market decline that led to the impairment.

IAS 36 Under Liquidation

Core Principle

During liquidation, the focus shifts from the ongoing use of assets to their immediate realization. The measurement of recoverable amount changes to reflect the urgency of liquidation sales, often resulting in lower values.

Identification of Impairment Indicators

The indicators of impairment remain the same, but the likelihood of impairment increases due to the distressed conditions of liquidation. All assets must be assessed for impairment as part of the liquidation process.

Example: A company in liquidation reassesses all its assets for impairment due to the expected decline in market value from forced sales.

Measurement of Recoverable Amount

The recoverable amount during liquidation is typically the fair value less costs of disposal, as the value in use becomes less relevant. This reflects the expected proceeds from the sale of the assets under liquidation conditions.

Example: A company in liquidation estimates the fair value less costs of disposal of its equipment at R300,000, which becomes the recoverable amount.

Recognition of Impairment Loss

Impairment losses are more likely to be recognized during liquidation due to the lower expected sale prices. The carrying amount of each asset is reduced to its recoverable amount, which may be significantly lower than under going concern.

Example: If the carrying amount of a warehouse is R500,000 and its liquidation value is R350,000, an impairment loss of R150,000 is recognized.

Reversal of Impairment Loss

During liquidation, the reversal of impairment losses is less common due to the continued decline in asset values. However, if market conditions improve unexpectedly, reversals may still occur.

Example: If the market for industrial equipment improves and the liquidation value of a previously impaired asset increases, an impairment loss reversal may be recognized.

Disclosures

Disclosures during liquidation should reflect the changes in the measurement of recoverable amounts, the impairment losses recognized, and the impact of liquidation on asset values. The goal is to provide transparency about the basis for valuations during liquidation.

Example: A company in liquidation discloses the impairment losses recognized on its assets, the basis for the recoverable amounts, and any changes due to liquidation conditions.

Immediate Realization and Settlement

The focus during liquidation is on the immediate realization of assets. Entities must adjust their financial statements to reflect the expected proceeds from the sale or liquidation of assets, often resulting in frequent impairment assessments and adjustments.

Example: A company in liquidation sells its machinery for R200,000, which is lower than its carrying amount. The financial statements are adjusted to reflect the sale proceeds and the resulting impairment loss.

Loss of Future Economic Benefits

As the liquidation process progresses, entities no longer consider the future economic benefits of assets, focusing instead on their immediate liquidation value.

Example: A company in liquidation no longer considers the potential future revenue from its patented technology, focusing solely on the expected sale proceeds.

Conclusion

The application of IAS 36 under a going concern assumption and during liquidation involves the same fundamental principles but different practical considerations. Under going concern, the focus is on ensuring that assets are not carried at more than their recoverable amounts, with an emphasis on future economic benefits and value in use. In contrast, during liquidation, the emphasis shifts to the immediate realization of assets at fair value less costs to sell, with adjustments reflecting the urgency and conditions of liquidation sales. Entities must carefully reassess their asset values and make necessary adjustments to ensure accurate and transparent financial reporting during liquidation. This adjustment ensures that stakeholders receive a true and fair view of the entity’s financial position and performance during the liquidation process.

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