Impairment Loss for Cash Generating Unitsâ€Myassignmenrthelp.Com

Question: Discuss About The Corporate Accounting And Reporting? Answer: Introducation Impairment of assets as per Australian accounting principles is governed by the provision of AASB 136 and IAS36. This standard aims to describe the provision to be applied by corporate entities to ensure that assets are carried at fair value which is not higher in comparison to recoverable amount. An asset is considered to be impaired if it is recorded at an amount higher than its recoverable amount i.e. value receivable through sale or disposal at present point of time. On such assets, an impairment loss is required to be recorded. In addition to this, provisions of the Standard stipulated cases where business entities are required to make a reversal of impairment loss and prescribes disclosures associated with the same.The present essay is focused on the evaluation of Reversal of impairment loss for cash generating units by considering relevant accounting standards. The standard specifies the testing of all tangible and intangible assets excluding assets which are comprised under other IFRS. As per the standard, it is necessary that the carried value of the asset should not be higher than recoverable amount. For accomplishing its objectives, the standard specifies that the entities should test all the assets in order to ascertain that whether they are within the scope for potential indicators of impairment exist or not. The same is to assess at each reporting date to ascertain whether the indicators exist or not and for ascertaining it internal and external information is to be considered by the management. IAS 36 had stipulated the circumstances in which a corporate entity is required to record reverse of an impairment loss for cash generating unit (CGU). In accordance with this standard, CGU is a slightest recognisable group of assets which generates inflows of cash that are mainly liberated of the cash inflows from other groups of assets or cash. In CGU, reversal of an impairment loss is acknowledged an immediate basis in the income statement. However, this aspect is not applicable in the case where carried value of the asset is revalued amount; in this case, the reversal of impairment loss is treated as an increase in revalued amount. In accordance with the provisions of IAS 36, assessment of impairment should be done on the basis of individual assets. In the case where the recoverable amount is not determinable for the individual asset, then in such case entity decides the carrying value of the cash-generating unit to which the asset belongs. Study of Bartov, Goldberg and Kim, (2012) shows that it is not feasible to make the computation of the recoverable amount of an individual asset and further compute there coverable amount of the CGU to which that particular asset belong. Impairment testing of CGU by the companies is time intensive and inclusive of following aspects: The identification of impairment indicators; Assessment and reassessment of cash flows; Determination of the discount rates; Analysis of the sensibleness of the assumptions Benchmarking the assumptions with the market. In accordance with the study of Barth, Landsman and Lang (2013), the company should make an analysis of impairment by considering its key triggers. For example, if the value if market capitalisation is lower than net asset value then it is an impairment trigger, and computations of recoverable amount are to be done. IAS 36 stipulated that reversal of impairment loss for a CGU, the amount to be reversed is allocated or apportioned to the no. of assets covered in the unit on a pro rata basis with the carrying amounts of those assets (Edwards, 2013). However, this does not include goodwill. For the allocation of the reversal amount, the carrying amount of an asset cannot be increased higher in comparison to the lower of its carrying amount and recoverable amount. This amount must be net from respective depreciation or amortisation which have been acknowledging in a situation where there has no recognition of impairment loss inprior periods. Corporate entities are required to make an assessment of impairment at the end of each reporting year to identify whether there is any indication regarding impairment loss or reversal of recognised loss in prior periods for an asset except goodwill (Johansson, Hjelstrm and Hellman, 2016). In the case of the existence of such indication, then the entity is required to make an estimation of therecoverable amount of cash generating unit. In the case where there is an indication of the existence of impairment reversal, the assessment of recoverable asset is made. Provision of Australian accounting standards states that reversal of an impairment loss of cash generation unit is recognised on the immediate basis for profit or loss statement. This provision is not applicable in a situation where carried value of the asset is revalued amount in accordance with IAS 16 (Lhaopadchan, 2012). In this case, the reversal is required to be considered as a revaluation increase and accounted as per provision of IAS 16. After an accounting of reversal, the charge of depreciation or amortisation is made in future periods to for the allocation revised carrying amount less it's residual value (if any)on a regular and logical manner over its remaining useful life of the asset (Henderson, Peirson and Howieson, 2015). According to AASB 136, paragraph 130 disclosure of reversal of impairment loss is made in the income statement. Study of Weil, Schipper and Francis (2013) shows that the amount is to be reversed in the section of other comprehensive income. In notes to accounts company is required to describe the event or circumstances that had led to the reversal of impairment loss. Further description of cash generation is given by mentioning the amount to be reversed by class of assets or particular segment. In the case where recognised reversal of impairment loss is material in aggregation to the financial statements in such as the company is required to disclose the main class of assets affected by this reversal. Journal entry to recordimpairment loss: Cost model Accumulated depreciation impairment losses Dr. xxx Income - impairment loss reversal Cr. xxx Revaluation model Asset Dr. xxx Deferred tax liability Cr. xxx Asset revaluation surplus Cr. xxx Journal Entry Journal Entries relating to impairment loss in the books of Gali Ltd. as on 30th June 2015 Sr. No. Date Particular Dr. Amount Cr. Amount 1 30.06.2015 Impairment loss Dr. 69000 Goodwill 23000 Patent 16717 Accumulated amortisation and Impairment Losses (Equipment') 15451 Accumulated amortisation and Impairment Losses (Fittings) 9712 Accumulated amortisation and Impairment Losses (Inventory) 4120 [Being impairment loss attributed to assets on pro-rata basis except for patent and goodwill.] Calculation of Impairment Loss Carrying amount of assets 677000 Value in Use of assets 608000 Impairment loss 69000 As per the view of Weil, Schipper and Francis (2013), in accordance with the provision of IAS 36, the impairment loss will be initially set off with the amount of goodwill i.e. 23000 then the remaining amount will b allocated proportionately to remaining assets except cash. In the present scenario as the fair value of a patent is provided in the question than the impairment loss which will be allocated to the remaining assets will be calculated as follows: Total impairment loss- Amount of Goodwill Impairment loss allocable to patent* Loss allocable to patent = Carrying amount Value in use 455000-438283 $ 16717 Calculation of remaining impairment loss: = 69000-23000-16717 = 29283 (Amount in $) Particular Value in Use Proportion Allocation of loss Balance Amount to be carried Patent 455000 16717 438283 Equipment 105000 29283*105000/199000 15451 89549 Fitting 66000 29283*66000/199000 9712 56288 Inventory 28000 29283*28000/199000 4120 18880 II Impairment Account Date Particular Amount Date Particular Amount 30.06.2015 Accumulated Impairment Loss 69000 30.06.2015 Profit and Loss Account 69000 References Books and Journal Andersson, S. and Wenzel, F., 2014. Application of IAS 36Impairment of fixed assets-A qualitative study about the main challenges for companies regarding impairments. Barth, M.E., Landsman, W.R. and Lang, M.H., 2013. International accounting standards and accounting quality. Journal of accounting research, 46(3). pp.467-498. Bartov, E., Goldberg, S.R. and Kim, M., 2013. Comparative value relevance among German, US, and international accounting standards: A German stock market perspective. Journal of Accounting, Auditing Finance. 20(2),Pp.95-119. Edwards, J.R., 2013. A History of Financial Accounting (RLE Accounting) (Vol. 29). Routledge. Henderson, S., Peirson, G., Herbohn, K. and Howieson, B., 2015. Issues in financial accounting. Pearson Higher Education AU. Johansson, S.E., Hjelstrm, T. and Hellman, N., 2016. Accounting for goodwill under IFRS: A critical analysis. Journal of International Accounting, Auditing and Taxation, 27, Pp.13-25. Lhaopadchan, S., 2010. Fair value accounting and intangible assets: Goodwill impairment and managerial choice. Journal of Financial Regulation and Compliance. 18(2), Pp.120-130. Weil, R.L., Schipper, K. and Francis, J., 2013. Financial accounting: an introduction to concepts, methods and uses. Cengage Learning. Journal entry to recordimpairment loss: