Accounting Standard (AS) 28, Impairment of Assets, issued by the Council of the Institute of Chartered Accountants of India, comes into effect in respect of accounting periods commencing on or after 1-4-2004. The Standard is mandatory in nature from different dates for different levels of enterprises as below:

• To Level I enterprises- from accounting periods commencing on or after 1.4.2004.
• To Level II enterprises- from accounting periods commencing on or after 1.4.2006.
• To Level III enterprises- from accounting periods commencing on or after 1.4.2008.
• The criteria for different levels are given in Annexure I.

Considering the feedback received from various interest-groups and the concerns expressed at various forums, it is felt that relaxation should be given to Level II and Level III enterprises (referred to as ‘Small and Medium Sized Enterprises’ (SMEs)), from the measurement principles contained in AS 28, Impairment of Assets.

AS 28 defines, the following terms:

1. An impairment loss is the amount by which the carrying amount of an asset exceeds its recoverable amount.
2. Recoverable amount is the higher of an asset’s net selling price and its value in use.
3. Net selling price is the amount obtainable from the sale of an asset in an arm’s length transaction between knowledgeable, willing parties, less the costs of disposal.
4. Value in use is the present value of estimated future cash flows expected to arise from the continuing use of an asset and from its disposal at the end of its useful life.

The relaxations for SMEs in respect of AS 28 have been decided as below:

(i) Considering that detailed cash flow projections of SMEs are often not readily available, SMEs are allowed to measure the ‘value in use’ on the basis of reasonable estimate thereof instead of computing the value in use by present value technique. Therefore, the definition of the term ‘value in use’ in the context of the SMEs would read as follows:

“Value in use is the present value of estimated future cash flows expected to arise from the continuing use of an asset and from its disposal at the end of its useful life, or a reasonable estimate thereof”.

(ii) The above change in the definition of ‘value in use’ implies that instead of using the present value technique, a reasonable estimate of the ‘value in use’ can be made. Consequently, if an SME chooses to measure the ‘value in use’ by not using the present value technique, the relevant provisions of AS 28, such as discount rate etc., would not be applicable to such an SME. Further, such an SME need not disclose the information required by paragraph 121(g) of the Standard. Subject to this, the other provisions of AS 28 would be applicable to SMEs.

An enterprise, which, pursuant to the above provisions, does not use the present value technique for measuring value in use, should disclose, the fact that it has measured its ‘value in use’ on the basis of the reasonable estimate thereof and the manner in which the estimate has been arrived at including assumptions that govern the estimate.

Where an enterprise has been covered in Level I and subsequently, ceases to be so covered, the enterprise will not qualify for relaxation/exemption from the applicability of this Standard, until the enterprise ceases to be covered in Level I for two consecutive years.

Where an enterprise has previously qualified for the above relaxations but no longer qualifies for relaxation in the current accounting period, this Standard becomes applicable from the current period without the above relaxations. However, the corresponding previous period figures in respect of the relevant disclosures need not be provided.