About the allocation of the Impairment of a CGU per IAS 36

Because inventory and receivables are both current assets and current assets are always stated at the lower of cost and net realisable value. Thus, whether they are stated at cost or at net realisable value, that is their recoverable amount and ……. no asset should be reduced to a figure less than their recoverable amount

Does that make sense?

We value a current asset at the lower of cost and net realizable value.

Ok, let’s say that cost is the lower – so nrv is higher. But nrv is one of the measures of recoverable amount. In a situation where we are having to allocate impairment, we come across the receivables balance and see that is is valued at cost and that amount is automatically lower than nrv, so it would not be appropriate to allocate any of the impairment to the receivables. That is, we shall not impair the asset because we shall recover the value (and hopefully an amount in excess of the book value) upon realisation

The same principle applies with inventory. When sold, we know that it shall be sold for a value at least equal to the value at which it is carried. How do we know? Because inventory is always valued at the lower of cost and nrv.

For the receivables illustration, I suggested we consider the receivables balance as being at cost. Now let’s assume the inventory figure is valued at nrv (because that value is lower than cost)

But in the impairment exercise, no asset should be impaired to a value lower than its nrv

In summary, the impairment of current assets is an inappropriate concept in the application of IAS36

Ok?

Inventory carrying value 600, net realisable value 700
Receivables carrying value 800, net realisable value 700

Recoverable amount for inventory 700, for receivables 700

In preparing the year end accounts, when we’re looking at current assets, there’s no adjustment to inventory because it’s already at the lower of cost and net realisable value.

But for receivables, we need to consider the recoverability of the receivable balances by writing off any bad debts and providing for any doubtful debts. This we do before any impairment testing.

For our receivables above we need to write off 100 from the 800 to bring the figure down to the lower of cost and net realisable value ie down to 700

Now, consider an impairment test! For inventory, that’s already being carried at the lower of cost and net realisable value – we can sell it for 700 (recoverable amount) or carry it at 600 (cost)

For receivables the carrying value is now 700 and the recoverable amount is also 700

And it’s the same for all current assets – because they are stated within the annual figures at the lower of cost and net realisable value

If the inventory had a carrying value of 600 and a net realisable value of 550, then we would make a provision / allowance for inventory and write the value down to the lower of cost and net realisable value. But that’s not the same as an impairment under IAS 38

Better?

“Meaning the inventory is valued at the 700 net realisable value?”

NO! If carrying value is 600 and nrv is 700, we will not adjust the carrying value

If carrying value were 600 and nrv was 550, then we would write 50 off the carrying value (dr cost os sales, cr inventory)

“The write off of 100 is the bad debts or debts provision?”

If it’s written off, then it’s bad debts. If it’s provided, then it’s a provision against doubtful debts

For the write off, the double entry is dr bad and doubtful debts in profit of loss and cr receivables

For the provision the double entry is dr bad and doubtful debts in profit or loss and cr provision for doubtful debts

If you struggle to follow those entries, may I ask you to check the free F3 lectures on the subject of “bad and doubtful debts accounting”