“No man is an island, entire of itself; every man is a piece of the continent, a part of the main.”
It’s another edition of IFRS is easy.
Every item created by man has an expiry date. This doesn’t imply that the item will stop being useful suddenly at the foretold date. The devolvement in its value is a gradual process.
At a point in time, it will not be impossible for an entity to discover that the amount that can be recovered from the continual use of the asset or even its immediate disposal, is less than the purported figure that appears on the financial position. At this point, it will be imprudent for the business to continue to carry such misrepresentation on its financial position. As a result, the concept of IAS 36 –Impairment of assets, cannot be overemphasized.
Robert Schuller shared this funny story in one of his books:
The elevator at the El Cortez in San Diego couldn't handle the traffic. The experts –engineers and architects, were called in. They concluded that they could put another elevator in by cutting a hole in each floor and installing the motor for the new elevator in the basement.
The plans were drawn up. Everything was in order. The architect and the engineer came into the lobby discussing it. The janitor who was there with his mop, heard them say they were going to drop holes in the floors.
The janitor said, "That’s gonna make a mess."
"Of course", the engineer said, “but we'll get help for u, don't worry".
The janitor replied, "You’ll have to close the hotel for a while."
"Well, if we have to close the hotel for a while, we'll close the hotel. We can't possibly survive without another elevator."
The janitor held the mop in his hands and said, "do you know what I would do if I were you?"
The architect arrogantly asked, "What?"
"I'd build the elevator on the outside."
The architect and the engineer just looked at each other.
They built the elevator on the outside –the first time in the history of architecture that an elevator was built on the outside of a building.
Yeah, I would argue that the experts had an impairment in their imagination…that’s on a lighter mood though.
IAS 36 proffers an awesome dissection to the issue of an impaired asset and its treatment in the financial statements. For a complete dosage, detailed examples and better clarification on the subject matter of IAS 36 – Impairment of Assets, click below to view or download the pdf.
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