ACC 204 Managerial Accounting

This standard ‘IAS 36’ deals with reporting and accounting of impairment of tangible assets and intangible assets. This standard also specifies when the non-financial assets are considered as impaired, the time for conducting impairment test, the methods to be used for conducting impairment tests for assets. This standard also speaks about the recognition procedures in financial statements and their performance indicators. In addition to above, it also specifies the situations for reversal of impairment loss and their related disclosures in financial reports (Ernst & Young, 2017). Therefore, IAS 36is a very wide concept.

IAS 36 confirms that organizations do not carried assets more than its recoverable amount. Hence for meeting this objective, firstly organization needs to do impaired tests for the assets covered under this scope which is identified on the basis of indicators (IFRS, 2009).

Identification of impaired assets:

An organization has to conduct the impairment test of assets on the basis of indicators (explained below) at the end of every reporting period. After conducting impairment test, organization will estimate the recoverable amount. But for intangible asset impairment test will be performed annually. Further goodwill will be tested annually for impairment in accordance with paragraphs 80-99.

Performance indicators are as follows:

1. Internal sources:
2. Asset is kept for disposal
3. Adverse obsolescence to the assets
4. Inferior economic performance of assets more than the estimated.
5. External sources
6. Critical changes with adverse effect in economic, technical and market environment.
7. Carrying amount of an asset are more than market capitalization rate.
8. Favorable interest rates in the market.
9. Assets value has declined substantially because of its normal use.
10. Market rate of interest is improved during the reporting period.

IAS 36 applies to following assets:

Tangible assets: land, plant and machineries, equipment’s, buildings, fittingsetc.

Intangible assets: Goodwill, patents, copyright etc.

IAS 36 not applies to following assets:

Deferred tax assets, inventories, assets derived from insurance contracts, construction contracts assets, assets held for disposal, financial assets etc.

Impairment loss – meaning

According to IAS 36, impairment loss is the amount which is calculated by subtracting the recoverable amount of assets or CGU’s from its carrying amount.

In other words,

Impairment loss = carrying amount minus recoverable amount

Where,

The carrying amount of the assets or the cash generating units is reported in the balance sheet and it means the amount which is calculated after subtracting accumulated losses and accumulated depreciation.

The recoverable amount of an assets or cash generating units is the higher of the following two:

1. Value in use.
2. Fair value of the assets or the cash generating units less the cost of disposal.

Further, value in use means the present value of future cash flows resulting from asset or Cash generating units.

Fair value of an asset defined as the price that receives when the asset is sold or the price that is paid when liability is transferred between willing parties.

Measuring and recognizing the amount of impairment loss

Impairment loss is measured only if recoverable amount is less than its carrying amount.

Paragraph 59-64 outlines the recognition and measurement of impairment loss for assets other than goodwill whereasfor recognition and measurement of impairment loss for goodwill and cash generating units are dealt in paragraph 65-108 of IAS 36.

Impairment loss is reported immediately in the debit side of statement of profit and loss as expenditure except the asset is carried at revalued amount as per other accounting standard i.e. IAS 16. Thus as per that situation, impairment loss will be treated as revaluation decrease in accordance with respective standard.  After the identification of an impairment loss, the depreciation amount shall be adjusted for future years so as to calculate the revised carrying amount of assets.

Impairment of Goodwill

Company’s net worth is represented by goodwill. Inflating the goodwill in the balance sheet will misinform the investors and amortization of goodwill will also create the incorrect values and that is why Goodwill will be tested for impairment on an annual basis.

The impairment loss of goodwill will then be allocated to the cash generating units (paragraph 80).

Reversal of an impairment loss of goodwill

IAS 36 prohibits reversal of the impairment loss of goodwill in succeeding period (IFRS box, 2017).

Internally generated goodwill shall not be recorded as per IAS 38. If the recoverable amount is increased after the impairment loss was recognized then internally generated goodwill will get increased instead of reversal of an impairment loss of goodwill.

Reasons for non-reversal of an impairment loss of goodwill

After recognition of impairment losses amount of goodwill will increase in following periods and it will be considered as increase in internally generated goodwill rather than increase in purchase goodwill. Having said that, internally generated goodwill shall not allow to be recorded and thus no increase or decrease is accounted for such goodwill (IAS 36, 2014).

Disclosure requirements

1. Amount of goodwill in Cash generating units.
2. Recognition of impairment losses in Profit and loss statement.
3. Reversalof impairment losses recognized in profit and loss statement.
4. Conditions resulting in impairment loss
5. Other disclosures.

Gali Limited

30 June 2015

Calculation of Impairment Loss:

= Carrying amount of cash generating unit – recoverable amount of cash generating unit (Deloitte, 2017).

where,

• Total Carrying amount of cash generating unit:

• Recoverable amount of cash generating unit:

It is higher of the two:

1. Value in use
2. Fair value of asset minus cost of sale

So,

Value in Use of cash generating unit = 511000

Fair value of asset minus cost of sale = not given in question. hence, taken as zero.

Thus, recoverable amount = 511000

Therefore,

Impairment loss = 547000 – 511000 = 36000

Impairment loss to Cash generating unit = 36000

The impairment loss of CGU is distributed to the assets in the following manner:

Impairment loss is firstly distributed to the goodwill and then remaining amount of impairment loss shall be allocated to other assets of the cash generated unit.

Allocation of impairment loss in the following manner:

Total loss of impairment (calculated above) = 36000

Less: Allocation to goodwill (to the extent of goodwill amount) = 20000

Remaining amount of impairment loss = 16000

Therefore,

Revised carrying amount = total carrying amount of cash generating unit – goodwill amount

Revised carrying amount = 547000 – 20000 = 527000

Now, remaining amount of impairment loss shall be allocated to remaining assets of CGU.

Plant = 384000   × 16000 = 11658.44

527000

Equipment = 88000    × 16000 = 2671.73

         527000

Fittings = 55000   × 16000 = 1669.83

    527000

Journal entry for impairment loss:

Statement of profit and loss A/c Dr. 36000

To Impairment loss (Goodwill) 20000

To Impairment loss (plant) 11658.44

To Impairment loss (equipment) 2671.73

To Impairment loss (fittings) 1669.83

(Being impairment loss recognized)

Impairment Loss A/c Dr. 36000

To goodwill A/c 20000

To Plant A/c 11658.44

To Equipment A/c 2671.73

To Fittings A/c 1669.83

Calculation of revised carrying amount after recognition of impairment loss:

 Working note:

IAS 36 does not apply to inventories.

References

Deloitte 2017,IAS 36 – impairment of assets,viewed on 17 May 2017 from <https://www.iasplus.com/en/standards/ias/ias36>.

Ernst & Young 2017,impairment accounting – the basics of IAS 36 impairment of assets,viewed on 17 May 2017 from <https://www.ey.com/Publication/vwLUAssets/Impairment_accounting_the_basics_of_IAS_36_Impairment_of_Assets/$FILE/Impairment_accounting_IAS_36.pdf>.

IAS 36 2014,IAS 36 impairment of assets,viewed on 17 May 2017 from <https://www.ifrs.org/IFRSs/Documents/Technical-summaries-2014/IAS%2036.pdf>.

IFRS box 2017,lecture#2: how to calculate impairment loss,viewed on 17 May 2017 from <https://www.ifrsbox.com/ifrs-in-1-day/sample-chapter-222/>.

IFRS 2009,Module 27 – impairment of assets,London: IFRS foundation.

International Accounting standard 36 2010,Impairment of assets,viewed on 17 May 2017 from <https://ec.europa.eu/internal_market/accounting/docs/consolidated/ias36_en.pdf>.