How do I impair an asset in Xero

Some assets will need to be booked at recoverable amount

Paragraph 9 of AASB 136/IAS 36 states:

An entity shall assess at the end of each reporting period whether there is any indication that an asset may be impaired. If any such indication exists, the entity shall estimate the recoverable amount of the asset.

An impairment test is not necessarily undertaken at the end of each reporting period or at the end of any set period of time. The impairment test is undertaken when there is an indication that an asset may be impaired. An entity, therefore, has to determine — after analysing certain sources of information — whether there is sufficient evidence to suspect that an asset may be impaired.

If there is insufficient evidence, then an entity can assume no impairment has occurred, and no impairment test is conducted.

For most assets, the need for an impairment test can be assessed by analysing sources of evidence. However, paragraph 10 of AASB 136/IAS 36 specifies some assets for which an impairment test must be undertaken every year. These assets are:

1. Intangible assets with indefinite useful lives
2. Intangible assets not yet available for use (e.g. capitalised development outlays)
3. Goodwill acquired in a business combination.

The reason for singling these assets out for annual impairment tests is that the carrying amounts of these assets are considered to be more uncertain than those of other assets. Other assets tend to be reduced each year as a result of annual depreciation/amortisation charges. The listed assets, however, are not subject to depreciation/amortisation reductions.

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So how do you do it in Xero?

There will need to be expense accounts and asset accounts.

Report codes are:

Expense accounts = EXP.IMP

Asset accounts = ASS.NCA.INT.IMP

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How do you test and asset?

You need the carrying amount AND the recoverable amount.

What is the recoverable amount?

There are 2.

Fair value, less costs of disposal.

Value in use.

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Fair value, less costs of disposal.

See Fair Value.

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Value In Use

Value in use is the present value of future cash flows relating to the asset being measured. Paragraph 30 of AASB 136/IAS 36 notes the following.

The following elements shall be reflected in the calculation of an asset’s value in use:

(a) an estimate of the future cash flows the entity expects to derive from the asset;

(b) expectations about possible variations in the amount or timing of those future cash flows;

(c) the time value of money, represented by the current market risk-free rate of interest;

(d) the price for bearing the uncertainty inherent in the asset; and

(e) other factors, such as illiquidity, that market participants would reflect in pricing the future cash flows the entity expects to derive from the asset.

The objective is to measure the present value of the cash flows relating to the asset; in other words, to determine the cash flows and apply a discount rate.

Some of the elements noted — particularly (b), (d) and (e) — may affect either the measurement of the cash flows or the discount rate.