Can Cash and Cash Equivalents Be Equivalent Subjects to Impairment as per IAS 36?

IAS 36, also known as Impairment of Assets, provides a framework for entities to recognize and measure impairment losses on assets within their financial statements. This international financial reporting standard (IFRS) is crucial for ensuring accurate and transparent reporting. One common question that arises in this context is whether cash and cash equivalents, which are monetary assets, need to undergo impairment testing under IAS 36. In this article, we will explore the implications of IAS 36 on cash and cash equivalents.

Mandate of IAS 36

According to IAS 36, impairment is defined as the difference between the carrying amount of an asset and its recoverable amount. The carrying amount is what an entity records as the current value of an asset on its balance sheet, while the recoverable amount is determined as the higher of an asset's fair value less costs to sell or its value in use. Impairment losses are recorded if the carrying amount exceeds the recoverable amount.

Cash: An Unusual Case of Monetary Assets

The nature of cash and cash equivalents significantly deviates from typical assets that are subject to impairment testing. According to IAS 36, cash is characterized as a highly liquid asset. The carrying amount of cash, which is indeed its current value, is equal to its recoverable amount. This inherent liquidity implies that cash does not typically accumulate losses over time or become impaired as other assets might do. As a result, cash is generally not subjected to the impairment testing process required by IAS 36.

Cash Equivalents: Highly Liquid Assets

IAS 36 defines cash equivalents as short-term, highly liquid investments that are easily convertible to known amounts of cash and which mature in three months or less from the date of acquisition. Due to their liquidity, the carrying amount of cash equivalents is expected to approximate their recoverable amount. This characteristic resists the possibility of impairment losses unless there are extraordinary circumstances indicating potential declines in value.

Monetary Assets and Indirect Applications of IAS 36

IAS 36 primarily addresses the impairment of non-monetary assets such as intangible assets (e.g., patents) and fixed assets (e.g., property, plant, and equipment). Monetary assets are generally not within the scope of IAS 36 but are covered under other standards. For instance, investments in securities are valued at fair value according to IAS 32, Financial Instruments: Presentation. Similar to cash, these investments do not usually require impairment testing unless they fall under specific conditions outlined in the relevant standards.

IAS 109, Financial Instruments: Recognition and Measurement, deals with the application of IFRS 9, Financial Instruments, which addresses the recognition and measurement of financial assets. This standard dictates how financial assets, including monetary assets, should be measured and how impairment losses on such assets should be recognized. Hence, while cash and cash equivalents are considered monetary assets, they are governed by IAS 109 rather than IAS 36.

Conclusion and Implications

In conclusion, cash and cash equivalents, while considered monetary assets, do not require impairment testing under IAS 36. The inherent liquidity of these assets ensures that their carrying amount is equal to their recoverable amount, making impairment losses unlikely. Entities should focus on the proper application of IAS 109 for managing and reporting on monetary assets. Understanding these nuances is critical for accurate financial reporting and compliance with current international accounting standards.

References

1. International Accounting Standards Board (IASB). IAS 36 Impairment of Assets. 2. International Accounting Standards Board (IASB). IAS 109 Financial Instruments: Recognition and Measurement.