 What is impairment, why do you need impairment, cost, loss, okay why the loss, usance, fire, damage, fire, accidents, technological change, obsolescence okay, how do you calculate impairment, do you calculate impairment, are you required to calculate impairment every year, see first of all there are two things, one is indicator of impairment, next is test for impairment, you will test for impairment only if there is a indicator for impairment, if there is no indicator for impairment you are not required to test for impairment okay. So you will check for indicator for impairment every year and do a test of impairment only when there is a indicator, so this exercise will be annual or whenever it happens suppose today accident is done, today indicator is done and this exercise is when indicator exist okay, now what is test for impairment, test for impairment means you have to check whether recoverable amount is greater than or equal to your carrying amount, what is carrying amount, book value, carrying amount is WDV, book value, actual amount whatever you might say, whatever amount is there on your balance sheet basically okay, what is recoverable amount, amount that can be recovered right, what amount can be recovered, if cost of asset can be recovered then recoverable amount will always be greater than WDV, how much output can be taken from that asset, cap value, insurance value, standard says two things, recoverable amount is higher of fair value less cost to sell, fair value means market value, if I want to sell it today what is the market value I will get, minus my cost to sell okay, so we will expect all the yeah, so there is no cost to sell, if there is a cost to sell then you have to subtract from fair value, so whatever is the net value that is one and second is value in use, what is value in use, by using the asset the value of benefits that you can derive by using the asset is value in use, how do you calculate value in use, you have to prepare a cash flow, future cash flow arising out of that asset then discount it to today's value, that present value will be considered as value in use, whichever is higher value in use or fair value less cost to sell will be considered as recoverable amount, recoverable amount if higher or equal to carrying value no impairment, if it is lower then impairment, so suppose this is 50, this is 70, so my recoverable amount become 70, if my carrying amount is 100 then there is an impairment, I have to bring it down to 70, so my impairment is 30 rupees, if this is 60 already then there is no impairment, is this clear? 1 rupees, so how will calculate the carrying amount, carrying amount will be 1 rupee in that case, in case there is a very big loss on assets, see as I said the two options the 1 rupee option you do not follow, you follow the first option which is you put it at gross value, so asset has a gross value it does not have 1 rupee, if you follow second method then there will be no impairment because it is already at 1 rupee, you cannot bring it to 0 rupee or lower value, it is always 1 rupee is equal to 0 value, so then there cannot be any impairment, impairment can only be when carrying amount is greater than recoverable amount, so carrying amount itself is 0, so recoverable amount cannot be less than 0, good method is gross value, but net value method will make the life easier, net value method will make the life easier definitely for sure, but then the only problem is in net value method your balance sheet will be at 1 rupee, situation will have not to be at 1 rupee, so you can calculate any depreciation, no impairment, no headache, absolutely, okay now the question is value in use, I said value in use can be calculated using future cash flows then discount it, can you do for all your assets, can you do for this furniture, this is my asset, this furniture, this room, this is my asset, asset of this institution, can I calculate value in use of this asset, see it says lot of assets, administrative assets see those which are not my equipments, equipments I can definitely use and generate value or say classroom, see suppose a classroom I cannot calculate value in use for every furniture in the classroom, but then there is something called as CGU, what is CGU, CGU is cash generating unit, a unit a smallest unit which can generate cash flows, now what is that unit, can I consider a classroom as a cash generating unit, yes right, so I cannot calculate cash generating capacity of this furniture, this furniture or this furniture, but I can calculate cash generating capacity of this classroom which includes all these furniture, right, so then it says in cases where individual assets cannot generate cash flows, I should combine those individual assets make a cash generating unit and then calculate impairment for that cash generating unit, how will you calculate impairment for cash generating unit, you can know carrying amount of all these assets together, so I have carrying amount, let us calculate recoverable amount, recoverable amount value in use, can I calculate cash flows, future cash flows and discount for this classroom, yes, yes, every classroom can accommodate 60 students, a classroom can have 250 classes in a year, suppose just an example, 50 student, 200 class, one academic year of 50 students, one academic year of 50 students can be in this classroom, I can definitely calculate and I can have a cash flow for this classroom, right, can I calculate fair value less cost to say yes, if I suppose I sell these assets, I will have a fair value less cost to sell for all these assets, so all the three value are in place, if I consider this as a classroom as one unit, if all the three values are in place, then I can calculate impairment, so when will this happen, suppose in this classroom something happened, something happened, okay, then I know that there is an indicator for impairment, when I know there is an indicator for impairment, now definitely in this, 15 benches are burnt, so I cannot calculate impairment for 15 benches, then I calculate impairment for this entire classroom and then I impair the impairment, see I have all the assets listed separately in my balance sheet, furniture is separate, lights is separate, right, so impairment how will it happen, impairment is calculated for classroom, how will I allocate that impairment to 15 benches, are you getting my point, are you getting my question, okay, this classroom has these assets, consumables can be chalks or dusters or whatever I might consider as assets, okay, 100 desks, board, 5 board, 500 consumables, 500 lights, 3 microphone, whatever I have listing, okay, now I calculate I have carrying amount of all these assets in my books, so I will know what is carrying amount of 100 desks, say 1 lakh rupees, 5 boards say 10,000 rupees, 500 consumables say 5000 rupees, 500 lights say 50,000 rupees, 3 microphone I do not know, 3000 rupees suppose, so basically I have carrying amount of all this, this is my total carrying amount of the cash generating unit whatever it might be 1 lakh 50, 60, 68, 1 lakh 68,000, okay, now 15 benches have caught fire or have been damaged, 15 benches, okay, now out of 100 desks, 15 desks have caught fire, I cannot calculate recoverable amount or value in use of 15 desks, I will calculate recoverable amount of this unit, okay, then what to do, then this unit, abhi pehle kapasitittha yeh 200 bachko ek sath ek academic year mein, it can do, but yeh 15 desk jalne ke baad 30 students will reduce, so now it can take only 220 students, right, so 220 students ka, suppose I calculate what is the revenue generated from those 220 students throughout the year, okay, so I do not know, say 10,000 rupees, pehle taw mein, 220 students say it will come to 220,000 something, let us take something less than 168, so 150,000 is the revenue generated or the profits generated of out of using this unit, right, now 150 is my profit generated, 160 is my carrying amount, is there impairment, yes or no, yes, 18,000 is impairment, right, the value which I will derive out of using this classroom is only 1,50,000, the carrying amount of all the assets is 1,68,000, that means there is a 18,000 over evaluation of these assets or 18,000 impairment to be done for all these assets, so my impairment value is 18,000, how do I assign this 18,000 now, I know that the impairment is in this 15 desks and not in all other things, right, so this 18,000 will be distributed among this 15 desks, so this value of 1 lakh will become 82,000, is this clear or any doubts in this, this is how you calculate impairment. This is an illustration for, you know, loss of the furniture and all, but in practical there will be huge loss, loss of revenue, because the hall will not be usable for remaining 200 days, right, it may take time to renovate the hall and 20, 30 days or 40 days classes cannot take place, that loss also will be, how to account for that, see that loss will not, see impairment is for future, that loss is immediate loss, it has to be booked in So calculate the revenue for the balanced period of No, I have calculated for future, suppose I do not get it fixed in 15 benches, classes run like this only. No, classes run like this only, because unless the materials are cleared and things are put in proper shape, classes cannot take place, because students will not sit with the burnt benches in the front or back or middle, so there will be actual loss will be much more than what is projected. See, when you can repair the benches and you can use it for your classroom and then the classroom can generate the normal value which it was generating, okay, and if that is the case, then you add whatever is your, that value you add over here, suppose I have 20,000, 25,000 to repair it, so my carrying amount will become 125, see that 25,000, 25,000 are collected, do you capitalise it or not? Amount spent to repair the machine, all the fixed assets, what do you do with that? Suppose I spent 25,000 to repair this desk, what do I do with that? Add to the cost of the asset? Cost. You know in one of the lines. Right. And if we are improving something, yes, we are repairing or improving. Right. It will not be capitalised in that view. If my future economic benefit remains same before and after the repair, that means you are bringing to the same productivity level, then you will not capitalise. So where will that 25,000 go? Expense. Expense. And now your asset is back to the same level, so then there will be no impairment. Impairment will be when the damage is permanent, when the damage cannot be repaired. Suppose there is an equipment which has been damaged and which cannot be repaired, okay, but you can still use it to some productivity level. Suppose it cannot be used, then you will sell it or scrap it and bring a new equipment. Again there is no impairment because you have sold it. Whatever is the loss, you book the loss immediately in profit and loss account. Sorry. Right. Suppose that equipment is not sold as on 31st March. Equipment is damaged but not sold. Then there is an impairment. If you have sold before 31st March, then there is no impairment, then there is loss on sale. If it is standing as on 31st March, then you have to check for impairment and repair it, so that cannot be repaired. Desk if it can be repaired and bring back to the same level, then there is no impairment because you have already charged 25,000 to PNL. So no further charge to PNL because of this. Clear, sir? Recoverable amount if less than net book value. If it is impairment, recoverable amount is calculated as higher of value news or fair value. First you test for indication for impairment. Indication of impairment can be changed in technology. Physical damage or obsolescence. Test for impairment, you calculate value in use or fair value less cost to sell. You compare it with book value and then you decide whether there is impairment or not. Recoverable amount is less than carrying amount. There is an impairment. Then you reduce the carrying amount and charge the difference to income and expenditure account. Then the balance amount in the carrying value will now be depreciated over the balance useful life of the asset. So balance amount in carrying value will be depreciated over balance useful life. Any questions on impairment? That they are middle of the year. So the physical verification team in their final report gives the list of obsolete assets. But I think it is practical approach I am saying since I am in the sector, practical sector. So management is not interested in doing all getting into those impairment troubles. So they declare it an obsolete and we used to write off the asset. This is the practical thing happens actually. You write off the asset? Yeah. Write off the asset. Write off the assets. If you write off it is practically it is same as impairment. In our institute. When you write off the asset it is practically same as impairment. But we never think about the value in use or the fair market value. What is the cost of sales of those assets? We have one big room where broken chairs, computers, table, everything is stacked. So on the basis of obsolete. Keep it aside and scrap it. Bring a new one. So there is a replacement and that is gone. This is a usual practice, past practice of all institute. That is practical approach. Actually this is unimportant accounting standard when it hardly applies. Okay. Let me ask you a question. Okay. Peaks assets related question. So you have a computer which you have purchased around three years back or two years back. Okay. And then there is something called as motherboard. Okay. Suppose there is a damage to motherboard and the computer stops working. You bring in a new motherboard. You have to replace it. You bring in a new motherboard and then you install it and the computer starts working. Okay. That new motherboard has cost you say 7000 rupees. How do you account for that 7000 rupees? Repair. Expense out. That's why I am asking. Is there anyone who capitalizes it? Yes. Okay. And what do we do? What do we do about the old motherboard? That's where it is capitalized. That will remain. There is no scrap. Do you sell it? Scrap means fake. Do you remove it from your books? Do you physically remove it? Fine. Do you remove it from your books? Yes. How do you remove it from your books? One second. One second. Let him answer. How do you remove it from your books? items will be sold now, the depreciated. Do you sell that motherboard? Whatever list issue from the IT department and if it is part of obsolete item, net depreciated amount will be reduced from the asset also. See understand this, you don't capitalise a motherboard, you capitalise entire computer. Right? You capitalise entire computer. How do you calculate value, depreciated value as you said of the motherboard? Now how can you remove that motherboard from the books of accounts? And are you saying that then my computer has two motherboards? You have capitalised two motherboards in that computer, right? That's what my question is. How do you write off? How do you calculate the value, measurement? How do you calculate the value left, sir? I purchase the computer for 30,000 rupees which includes a motherboard, hard disk, keyboard, mouse. It's a computer. I have not purchased the motherboard. Only the motherboard has gone bad. I bring in a new motherboard, install that new motherboard. The new motherboards have cost 7000. If you capitalise that 7000, what happens to the old motherboard? But that computer includes cost of old motherboard, doesn't it? Yes, sir, but it has depreciated from the years. So once it is declared absolute, no? It's depreciating over the years. So and then when we buy a new motherboard, we add to it. So as you know, Pankajji would have said or just now, sir, repeated that when it brings back to the same level of efficiency, you cannot capitalise anything. So 7000 new motherboards will get me the same efficiency as the old motherboards. Live also again increase. Live increase of computers? Yes. Okay. If you have a contention that life increases because of the 7000, then you should remove that old motherboard from your computer. That means you should do both. You cannot keep capitalised both the motherboards. If you capitalise one, then you have to remove the other. I will be capitalised computer not the motherboard. But now we are capitalising motherboard. Right. So can a computer have two motherboards? It can't. Earlier you capitalised computer, but that computer included cost of motherboard. Right. Say suppose my car, my car has four tyres. Suppose one tyre fadga, one tyre kharap ho gaya. I bring in new tyre, I fit in the new tyre. Definitely as you said life increases. Life increases, right. But if I capitalise that tyre, what happens to the old tyre? Cost of that old tyre has to be removed from my books of accounts. Because that has been scrapped. Now how do you, how do I calculate the cost of that old tyre? Okay. Now AS10, AS10 does not tell how to calculate the cost of old tyre. But there are international standards which is IS16 international accounting standard which says that how to do this. Suppose my, as I said new motherboard cost 7000. Okay. I have used the computer already for three years. What is my depreciation rate for computers? 60% right. Now the international standard says that assume that the old motherboard also cost at 7000 rupees. I now depreciate this 7000 for 60% for three years. So 4200 again 60%, again 60% whatever the value comes here, I charge it to PNL, your income and expenditure account. I decapitalise it. Then I capitalise that 7000. This is what international standards say. AS10 is silent on this. It does not guide you how to calculate. But then logically yes, you have to remove the old before capitalising the new. You cannot have both the motherboards in one computer. In fact, new, if you see it is for companies basically Revised Schedule 6. But the new guidelines says that you have to account for a set component wise. It says component accounting. So hard disk separately or mother board separately? Sir, you have taken the example of mother board. The same example is given in the training material which is related to hard disk. It says that if you remove the 40GB hard disk and you install a 500GB hard disk then you have to capitalise the value of the new hard disk. Right. Because the capacity is increased. You will capitalise. But then you have to decapitalise 40GB if you have removed from the computer and it is of no use. If it can be installed in some other computer or 40GB hard disk then you can still use. Then you keep it somewhere else. That 40GB hard disk has been destroyed. If it has been destroyed then you have to decapitalise the value of 40GB hard disk. Then we should go to a valuer to get the value of the 40GB hard disk. You should, you should, you can easily find out the value of 40GB hard disk today. And then you depreciate it for the number of years you have used. And that value you take out from the… That 40GB hard disk are not available in market on any estimated how can we get. We have purchased the computer 5 years ago. How can we get the value of that? If you have purchased the computer 5 years back and you are depreciating it at 60% then whatever is the value is, today the value will be not material. So ignore it. Particularly the cost of the hard disk will be zero at that. At today's value right. Yes. Because 5 years you have already used it. There is no meaning of decapitalising in fact. So then now if you have used it for 5 years then yes the value is almost zero today. So forget it. The device reporting is to be done. This hosting is to be done. The tire is to be separately done. Then AC is to be done separately. Then body is to be done separately. See component accounting logic is there has to be two things. One, the life of the component should be different from the life of other components. So if my life of tire is different from life of engine is different from life of my other body parts of the car. And secondly the component should be material for the amount of the cost of that component should be material for the car. So if my car cost 7 lakh rupees and tire cost 1000 rupees, definitely I will not do component accounting for that. But if my engine cost me 2 lakh rupees and the car cost me 7 lakh rupees then engine and the other parts of the car should be separated if the life of engine is separate from the life of car. This is the logic behind component accounting.