TABLE OF CONTENTS The principle of prudence dictates that assets should not be carried in the balance sheet of a company at a figure in excess of their recoverable amount. Both the accounting systems we are considering adhere to this principle, and require the carrying value of an asset to be derived by consideration of:
International terminology refers to net realizable value as fair value less costs to sell (e.g. stamp duty) but the terms are synonymous in practice. Value in use is always a difficult concept because it involves estimation of future cash flows generated by the asset and then discounting these to identify a present value.
Although there is a lot of common ground in the concepts underpinning impairment, more differences arise when looking at their application. With the exception of large and unique assets it would not be practical to ask management to conduct individual impairment reviews on every long-term asset in the business. Clearly assets need to be grouped but what are appropriate groupings, and if an impairment is identified how should it be allocated to the assets within the group?
Both IAS 36 Impairment of Assets and FRS 11 Impairment of Fixed Assets and Goodwill give examples of indicators that might suggest that an asset has been impaired. Neither listing is exhaustive and hence different inclusions would not be indicative of differences in accounting practice.
| Note | IAS 36 does specifically include an indicator based on market capitalization which is not seen... |
