Impairment FRS criticised

The Accounting Standards Board has pressed ahead with its new procedures for valuing fixed assets and goodwill despite warnings from critics that they are unworkable.

FRS11: Impairment of Fixed Assets and Goodwill, published today, sets out procedures for conducting impairment reviews to establish whether the ‘recoverable value’ of assets have fallen below their carrying value on the balance sheet (see box).

Critics such as Ernst & Young technical partner Ron Paterson attacked FRS11 for introducing speculative and arbitrary elements in the current valuation test.

‘Because it’s so complicated, it will be done badly – either deliberately or accidentally,’ said Paterson. ‘My concern is that a gap would appear between the test theory and what was done in real life.’

ASB chairman Sir David Tweedie countered: ‘Underneath it all, it’s quite simple and it’s got anti-avoidance built in. It’s changing the geography of the balance sheet by saying if an asset is affected, bring it down – don’t stick in a phoney liability that you may not have to pay. It’s a new way of thinking.’


An asset is impaired if its value drops below the amount at which it is recorded on the balance sheet.

Fixed assets and capitalised goodwill must be reviewed if events mean the carrying amount may not be recoverable.

Assets must be written down to their recoverable amount.

Discounted cashflow forecasts should be used to assess the asset’s value in use. Forecasting should be done at business unit level and compared with the aggregate carrying values of the unit. Impairment should be allocated first to goodwill, then to intangible assets and finally to tangible assets.

Impairment write-downs can be reversed, say if previous forecasts underestimated the value of a tangible fixed asset.

Impairment losses must be recognised in the profit and loss account, with the exception of previously revalued fixed assets or changes in the price of the asset, which are recorded in the STRGL (statement of total recognised gains and losses).

Affects accounts for years ending on or after 28 December.

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