Ind AS on Tangible Assets and Impairment

Why these four standards sit together

Ind AS 2, Ind AS 16, Ind AS 23 and Ind AS 36 each govern a different tangible or near-tangible asset question, but they share a single underlying discipline: each asks, at some point, whether the carrying amount on the balance sheet still reflects genuine future economic benefit, and each supplies its own specific mechanism for writing that carrying amount down when it does not. Inventories are written down to net realisable value; property, plant and equipment is depreciated systematically and, separately, tested for impairment; borrowing costs determine what enters an asset's cost in the first place, which is the starting point every later write-down test measures against.

Ind AS 2: Inventories

Inventories are measured at the lower of cost and net realisable value, and nearly every examinable point in this standard traces back to correctly computing one or both sides of that comparison.

Cost comprises all costs of purchase, costs of conversion, and other costs incurred in bringing the inventories to their present location and condition — purchase price, import duties, and other taxes (other than those subsequently recoverable), less trade discounts and rebates, plus directly attributable conversion costs including a systematic allocation of fixed and variable production overheads. Abnormal amounts of wasted material, labour or other production costs, storage costs (unless necessary in the production process before a further production stage), administrative overheads not contributing to bringing inventories to their present condition, and selling costs are all excluded from cost and expensed as incurred, because they do not represent value genuinely embedded in the inventory itself.

Net realisable value (NRV) is the estimated selling price in the ordinary course of business, less estimated costs of completion and estimated costs necessary to make the sale. NRV is estimated at each subsequent reporting period, and a previous write-down is reversed (but only up to the original cost, never above it) if the circumstances that caused the write-down no longer exist or there is clear evidence of an increase in NRV — inventory is the one major asset category where an impairment-style write-down is explicitly required to be reversed if conditions improve, in direct contrast to how Ind AS 16 revaluation and Ind AS 36 impairment (for goodwill specifically) are treated.

Cost formulas. Where items are not ordinarily interchangeable, or goods and services produced and segregated for specific projects, specific identification of cost is used. For inventories that are ordinarily interchangeable, FIFO or weighted average cost is used — Ind AS 2 does not permit LIFO — and the same cost formula must be used for all inventories of similar nature and use to the entity.

Ind AS 16: Property, Plant and Equipment

Recognition and initial measurement. PPE is recognised when it is probable future economic benefits will flow to the entity and the cost can be measured reliably, and is initially measured at cost, comprising purchase price (after deducting trade discounts and rebates), directly attributable costs of bringing the asset to the location and condition necessary for it to be capable of operating as intended, and the initial estimate of the costs of dismantling, removing and restoring the site on which the asset is located, where the entity has a present obligation to do so — this decommissioning-cost recognition is a recurring Final-level trap, since it requires an asset to be recognised at a cost including a liability the entity has not yet paid.

Subsequent measurement: cost model versus revaluation model. An entity chooses, as an accounting policy applied to an entire class of assets (not asset by asset), either the cost model — cost less accumulated depreciation and accumulated impairment losses — or the revaluation model — fair value at the date of revaluation less subsequent accumulated depreciation and impairment, with revaluations kept sufficiently up to date that carrying amount does not differ materially from fair value.

Revaluation surplus mechanics. When an asset's carrying amount increases as a result of revaluation, the increase is recognised in OCI and accumulated in equity as revaluation surplus, unless it reverses a revaluation decrease of the same asset previously recognised in profit or loss, in which case the increase is recognised in profit or loss to that extent. When an asset's carrying amount decreases as a result of revaluation, the decrease is recognised in profit or loss, unless there is a credit balance in revaluation surplus for that same asset, in which case the decrease is recognised in OCI to the extent of that existing surplus, reducing it, with any excess decrease recognised in profit or loss. This "first offset against the same asset's own history" rule, tested constantly, requires tracking each asset's own individual revaluation history rather than a blanket class-wide approach.

Depreciation. Each significant part of an item of PPE with a cost significant in relation to the total cost of the item is depreciated separately — component accounting — and the depreciation method used must reflect the pattern in which the asset's future economic benefits are expected to be consumed, reviewed at least at each financial year end, with any change treated (as the previous chapter established) as a change in accounting estimate.

Ind AS 23: Borrowing Costs

Borrowing costs directly attributable to the acquisition, construction or production of a qualifying asset — an asset that necessarily takes a substantial period of time to get ready for its intended use or sale — are capitalised as part of the cost of that asset; all other borrowing costs are expensed as incurred.

Capitalisation mechanics. Capitalisation begins when expenditure on the asset is being incurred, borrowing costs are being incurred, and activities necessary to prepare the asset for its intended use or sale are in progress; it is suspended during extended periods in which active development is interrupted, and ceases when substantially all the activities necessary to prepare the qualifying asset for its intended use or sale are complete.

Specific versus general borrowings. Where funds are borrowed specifically for a qualifying asset, the borrowing cost eligible for capitalisation is the actual cost incurred on that borrowing during the period, less any investment income earned on the temporary investment of those unused funds. Where general borrowings are used, the capitalisation rate applied to expenditure on the asset is the weighted average of the borrowing costs applicable to the entity's general borrowings outstanding during the period, and the amount capitalised in a period never exceeds the total borrowing costs actually incurred during that period — a ceiling this standard tests directly, since general-borrowing capitalisation is a computation, not merely a definitional point.

Ind AS 36: Impairment of Assets

The core test. At each reporting date, an entity assesses whether there is any indication that an asset may be impaired; if such an indication exists (or annually, regardless of indication, for goodwill and indefinite-life intangible assets), the entity estimates the asset's recoverable amount and compares it to carrying amount. Recoverable amount is the higher of an asset's fair value less costs of disposal and its value in use — the rationale being that an entity would rationally choose whichever of these two routes, sell the asset or keep using it, yields the greater benefit, so recoverable amount should reflect the better of the two available paths, not either one in isolation.

Value in use is the present value of the future cash flows expected to be derived from an asset (or cash-generating unit), discounted using a pre-tax rate reflecting current market assessments of the time value of money and the risks specific to the asset. Cash flow projections used must be based on reasonable and supportable assumptions, giving greater weight to external evidence, and generally should not extend beyond five years without justification.

Cash-generating units (CGUs). Where an individual asset does not generate cash inflows largely independent of other assets, recoverable amount is estimated for the cash-generating unit to which the asset belongs — the smallest identifiable group of assets that generates cash inflows largely independent of other assets or groups. Goodwill, which cannot generate cash flows independently at all, is allocated to CGUs (or groups of CGUs) for impairment testing purposes, and never tested for impairment on a standalone basis.

Allocating an impairment loss. When a CGU's carrying amount exceeds its recoverable amount, the impairment loss is allocated first to goodwill allocated to that unit, and only after goodwill is reduced to zero is any remaining loss allocated to the other assets of the unit pro rata based on their carrying amounts, subject to no individual asset being reduced below the highest of its own fair value less costs of disposal, value in use (if determinable), or zero.

Reversal. An impairment loss recognised for an asset other than goodwill is reversed if there has been a change in the estimates used to determine recoverable amount since the last impairment loss was recognised, with the increased carrying amount capped at what the carrying amount, net of depreciation, would have been had no impairment loss been recognised in prior years. Goodwill impairment is never reversed, on the reasoning that an apparent subsequent increase in goodwill's recoverable amount is far more likely to reflect internally generated goodwill building up afterward, which Ind AS 38 explicitly prohibits recognising, than a genuine recovery of the specific goodwill originally impaired — allowing reversal would risk backdoor recognition of internally generated goodwill through the impairment reversal mechanism.

How these four standards connect in one integrated question

A qualifying asset under construction (Ind AS 23 capitalises the borrowing cost into its cost) becomes an item of PPE once complete (Ind AS 16 governs its subsequent depreciation and any revaluation), and if the entity later identifies an indicator of impairment — a downturn in the market the asset serves, physical damage, or an adverse change in how the asset is used — Ind AS 36's recoverable amount test is applied against that same carrying amount. Inventories sit slightly apart from this three-standard chain, since they are governed by their own lower-of-cost-and-NRV rule rather than Ind AS 36, but the underlying discipline — is the carrying amount still supported by genuine future economic benefit — is identical across all four, and recognising which of the four standards' specific mechanism applies to a given asset, before attempting any write-down computation, is the organising skill this chapter is built around.