The objective of IAS 36 will be to assure that the Company's assets are carried at no additional than their recoverable value. The asset is carried at far more than its recoverable value if its carrying value exceeds the amounts to become recovered by way of use or sales with the asset. Provided that the carrying value recoverable amount, the asset must be impaired.
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IAS 36 is regarded as incredibly for financial statement users. Let me demonstrate a situation exactly where no Corporation will not apply IAS 36 appropriately.
Corporation ABC have recorded some machineries in its accounting books for the year ended December 31, 2008. Nevertheless, resulting from excessive usage with the machineries & improper maintenance, machineries are at the end of its life-cycle with around nil value. Corporation ABC is going to scrap-off the machineries in 1 month time. On the other hand, in the book, the Machineries have a net book value of 1 Million U.S dollar.
Some investors are in the process of taking over Corporation ABC. While reviewing the Corporation ABC's financial statement, they are much more than happy to find out that the Corporation has US$1 Million valuation on machineries on hand. As a result, they are willing to pay another US$1 Million on top with the initial offer price!
In the event IAS 36 has been applied adequately, the Corporation should have impaired the Machineries to its recoverable value. Investors would not have settled another US$ 1 Million for the end-of-life machineries. Consequently, it is important to carry out correct impairment assessment for significant assets on the Company's accounting books of record.
