LITHUANIAN BUSINESS ACCOUNTING STANDARD No 23 (IAS 36)

IMPAIRMENT OF ASSETS

The purpose of the standard is to determine the principals, how to evaluate, register in the books and present in the financial statements the impairment of fixed assets (loss because of the decrease of the value).

The standard is applied in order to determine indications (“symptoms”) of impairment and present assets in the financial statements at the value, which is not higher than the recoverable amount (net realization value or the net present value of the future cash flows from the assets).

If the book value of the assets is higher than the recoverable amount, the assets are impaired. If the difference is material, the book value of the assets has to be reduced up to the recoverable value.

Making the financial statements, the Company has to assess, if there are any indications of impairment, showing material devaluation, and, if any of the indications is present, the company has to estimate the recoverable value of the assets and compare it with the book value.

In assessing the impairment of the assets, the company has to consider internal and external indications:

External Indications:

1. During the period, the market value of the assets has declined significantly and the decline is not short-term;

2. Significant changes have taken place in the technological, market, economic or legal environment, and it will have a negative influence to the company’s assets, dedicated to that market;

3. Interest rates or other market rates of return on investment have increased, and it is likely, that the discount rate, used in calculating the net present value of the assets, has increased, making material effect on the recoverable value of the assets.

Internal Indications:

1. The Company has got assets, which is not depreciated yet, but is not used in the Company activities;

2. The Company has got assets under construction, which will not be finished or the finishing is disadvantageous to the company;

3. The assets are damaged by the natural calamities or other forces;

4. The rent income from the assets does not cover the depreciation and exploitation expenses;

5. The Company plans to discontinue or restructure its activities, and it will change the manner or the extent to which the asset is used;

6. The economic performance of the assets is or will be worse than expected.

The concept of materiality applies in identifying whether the recoverable amount of an asset needs to be estimated. If there are indications of impairment, but calculations show, that there is no loss because of devaluation, some other aspects need to be reviewed and adjusted accordingly (remaining useful life of assets, depreciation method or the residual value).

Estimating the recoverable amount of the assets, two methods are used:

• Fair value less costs to sell (sales price in the contract, price in the active market, information from experts, auctions, etc.);
• Value in use (net present value of the future cash flows discounted at the preferable discount rate).

If the recoverable amount is materially less than its book value, the book value has to be reduced up to the recoverable amount, and the loss from the impairment of assets is recognized as the expense in the Income statement.