ACC204 Corporate Accounting And Financial Reporting

Answer:

Computation of recoverable amount, fair value less cost of disposal and value in use

Impairment loss amount is the value by which carrying amount of the asset or the carrying amount of the cash generating unit (CGU) exceeds the recoverable amount. While computing the amount of impairment loss various amounts of the asset like recoverable amount, value in use and fair value reduced by cost of disposal are taken into consideration. Recoverable amount of CGU or any particular asset is the higher value among the fair value reduced by cost of disposal and its value in use (Bond, Govendir and Wells 2016). Value in use is present value of future cash inflows likely to be generated from the CGU or any particular asset. Fair value reduced by cost of disposal is obtainable amount from sale of the CGU or asset at arm’s length transaction price among willing and knowledgeable parties reduced by the disposal cost.

AASB 136 on Impairment of assets defined the recoverable amount as higher among the value in use and fair value reduced by cost of disposal. Para 19-57 set out the out requirement to measure the recoverable amount. The requirement applies the term ‘an asset’. However, practically it is applied to individual asset or CGU both equally. This is not necessary always to determine the fair value reduced by cost of disposal and the value in use. If any of these 2 amounts exceeds the carrying amount of the asset, the asset will not be impaired rather it will then be necessary to compute the other estimated amount. Sometimes even if the particular asset is not dealt in active market, determination of the fair value reduced by cost of disposal (Guthrie and Pang 2013). However, in some instances it will not be possible as no basis can be established to make a reliable estimate for projecting the obtainable amount from selling of the asset. This situation generally arises when the asset is held for the purpose of disposal. The reason behind this is the value in use for the asset held for the purpose of disposal consists of the net proceeds from disposal as future cash flows from asset’s continuous use till disposal is of negligible value. For the individual asset the recoverable amount is established except where the asset dies not create any cash inflows that is highly dependent on other asset or other group of asset (Legislation.gov.au 2018). In this case, the recoverable amount is established for CGU under which the asset falls. Exception to this situation is (i) when the fair value reduced by cost of disposal of the asset is higher as compared to carrying amount or (ii) when the value in use of the asset can be established to be close to the fair value reduced by cost of disposal and the fair value reduced by cost of disposal is determinable (Rennekamp, Rupar and Seybert 2014). In some of the instances, the average, estimates and the computational short cuts provides with reasonable approximations of detailed computation to determine the value in use or fair value reduced by cost of disposal.

While measuring the fair value reduced by cost of sell, best evidence for the amount is the price mentioned in the binding sale agreement as per the arm’s length price. The amount is arrived at after adjusting for the incremental cost that will be directly attributable for disposing the asset (Kang and Gray 2013). However, if no binding agreement for sale is there however, the asset is dealt in the active market; fair value reduced by cost of disposal will be the market price of the asset less the disposal cost. Here, the bid price is considered as the market price. However, if the bid price also is not available price of the most recent transaction will be considered for estimating the fair value reduced by cost of disposal. However, this amount can be considered if there is no significant change taken place in the economic circumstances recently. However, the active market as well as binding agreement both are not found in that case fair value reduced by cost of disposal is estimated on the basis of best available information that can be obtained by the company on the date of reporting. In determination of this amount the entity takes into consideration the outcome of the similar asset’s recent transaction under same industry. Fair value reduced by cost of sale does not mean the forced sale unless the management is required to sell immediately (Christensen and Nikolaev 2013). Disposal or selling cost includes the stamp duty, legal cost, transaction taxes, cost involved in removing the asset and direct incremental cost required for bringing the asset in the status of its sale.

While measuring the amount of value in use the elements those are considered are – (i) estimation of future cash flows expected by the company to be obtained from the asset (ii) time value of the money that is represented by risk free interest rate prevailing in the market at present (iii) expected variation in market regarding the timing or amount of future cash flows (iv) price contributed to bearing of the inherent uncertainties of asset and (v) other factors like liquidity that will be reflected by the market participants for pricing the future cash inflows estimated to be generated from the asset (Ji 2013). While estimating value in use, steps followed are – (i) estimating future cash outflows and inflows to be generated from the asset’s continuous use and eventual disposal and (ii) application of appropriate rate of discount to the future cash flows (Bond, Govendir and Wells 2016). For estimating the value in use, basis used for estimating the future cash flows is the projections of base cash flows on supportable and reasonable assumption that will represent the best estimate of the management.

Part B

Impairment loss computation   

Journal entries in the book of Gali Ltd as on 30^th June 2015 

Note – while computing the allocation of impairment loss, inventory is excluded as it is valued at lower among the market price and cost.   

References

Bond, D., Govendir, B. and Wells, P., 2016. An evaluation of asset impairments by Australian firms and whether they were impacted by AASB 136. Accounting & Finance, 56(1), pp.259-288.

Bond, D., Govendir, B. and Wells, P., 2016. An evaluation of asset impairment decisions by Australian firms and whether this was impacted by AASB 136.

Christensen, H.B. and Nikolaev, V.V., 2013. Does fair value accounting for non-financial assets pass the market test?. Review of Accounting Studies, 18(3), pp.734-775.

Guthrie, J. and Pang, T.T., 2013. Disclosure of Goodwill Impairment under AASB 136 from 2005–2010. Australian Accounting Review, 23(3), pp.216-231.

Ji, K., 2013. Better late than never, the timing of goodwill impairment testing in Australia. Australian Accounting Review, 23(4), pp.369-379.

Kang, H. and Gray, S.J., 2013. Segment reporting practices in Australia: Has IFRS 8 made a difference?. Australian Accounting Review, 23(3), pp.232-243.

Legislation.gov.au., 2018. AASB 136 - Impairment of Assets - August 2015 . [online] Available at: https://www.legislation.gov.au/Details/F2017C00297/Download [Accessed 21 Sep. 2018].

Rennekamp, K., Rupar, K.K. and Seybert, N., 2014. Impaired judgment: The effects of asset impairment reversibility and cognitive dissonance on future investment. The Accounting Review, 90(2), pp.739-759.