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Part A:

                                
Recognision and measurment of an impairment loss for an individual asset                                    
                                    
Part B:                                    
"Gali Ltd has determined that its fine china division is a CGU. The carrying amounts of the assets at 30 June 2015 are as follows:
"                                    
Account    Carrying Amount                                
Land    274000                                
Equipment    63000                                
Building    40000                                
Inventory    17000                                
Goodwill    14000                                
Total CA    408000                                
                                    
Gali Ltd calculated the value in use of the division to be:                366000                    
If the fair value less costs of disposal of the            Land is:    263825                    
Required                                    
Prepare the journal entry(ies) for any impairment loss occurring at 30 June 2015 including supporting calculations.

Definition of Impairment

The decline in net carrying amount of the asset is above the generation of future unrevealed cash flows. The net carrying value could be obtained by deducting depreciation from the cost of asset acquisition. Impairment occurs when a firm sells or abandons its asset due to fall in its ability to fetch benefits. Thus, it is not needed to realise the impairment loss as loss in the profit and loss account of the firm. For calculating the impairment loss, the influential dynamics resulting in asset impairment are to be identified. Such influential dynamics include variations in the market conditions, new regulations, staff turnover or the obsolescence of the asset. Based on this, the fair market price of the asset is to be anticipated and it is the value to be obtained after it is sold in the market. This could be realised as asset’s recoverable value or the expected generation of future cash flows, if the operation is continued.

The fair market price is to be contrasted with the asset’s carrying value listed on the financial reports of the firm after allocating the former. If the fair market value falls below the holding cost of the asset, it indicates the asset impairment. Even though tax benefit could be obtained with the help of impairment, the outcome might not be effective from an organisational perspective. The reason is that the requirement for investment increases.

In order to measure and recognise impairment loss, three requirements need to be followed. Firstly, the carrying amount is to be reduced to the recoverable amount, if the recoverable amount is lower in contrast to the carrying value.  Secondly, impairment loss is arrived at by obtaining the difference between the reduction from the last carrying value to the recoverable value. Finally, the realisation of impairment loss is made in the income statement unless the revaluation decrease treatment is prescribed in another accounting standard. This would occur, if there is upward revaluation of the asset, as per “IAS 16- Property, Plant and Equipment” in the past and in order to allocate the right impairment, revaluation surplus is used.

In accordance with “Paragraphs 59-64 of AASB 136”, it is possible to identify the requirements in order to gauge and realise impairment loss for a distinct asset. “Paragraphs 59-64 of AASB 136” cites that the carrying amount is to be reduced to the recoverable amount, if the recoverable amount is lower in contrast to the carrying value. This reduction is treated as impairment loss. According to “Paragraph 60 of AASB 136”, the recognition of impairment loss would be made in profit or loss, unless the asset’s carrying value is made at re-valued amount with conformance to another standard such as the model of revaluation, as laid out in AASB 116. Any loss of impairment related to re-valued asset would be considered as fall in revaluation in conformance to another standard.

Factors Leading to Impairment

Paragraph 61 of AASB 136” cites that impairment loss pertaining to assets that are not re-valued are realised in the income statement. However, the recognition of this impairment loss is carried out at the extent that this loss does not exceed the amount of revaluation surplus for the same asset. Thus, the revaluation surplus is minimised due to the loss of impairment on re-valued asset. According to “Paragraph 61(1) of AASB 136”, impairment loss of re-valued asset is recognised in the income statement for non-profit companies. However, the recognition of this impairment loss is carried out at the extent that this loss does not exceed the amount of revaluation surplus for the class of asset. Thus, the revaluation surplus is minimised due to the loss of impairment on the class of asset.

Paragraph 62 of AASB 136”, cites that when the estimated amount of impairment loss is greater in contrast to the asset’s carrying value to which it belongs, a liability would be realised, if another standard fulfils the same. According to “Paragraph 63 of AASB 136”, adjustment is to be made in relation to the depreciation or amortisation expense for the asset in order to assign the revised carrying amount less residual amount after the impairment loss is realised. This is to be conducted in a systematic way over the remaining useful life. Finally, in compliance with “Paragraph 64 of AASB 136”, if impairment loss is realised, ascertaining the deferred tax assets or liabilities is required to comply with AASB 112 by comparing the revised carrying amount of the asset with the tax base.   

For example, XYZ Limited has a machine having carrying amount of $160,000 at the beginning of the financial period. The asset was re-valued previously and the revaluation surplus account has a balance of $10,000. During that year, one staff has caused damage to the machine because of which the asset is to be impaired. The estimated recoverable value of the machine is $120,000 and the overall depreciation amount to be incurred for this asset is $16,000.

$10,000 could be made as offset in contrast to the revaluation surplus of the asset and it is reported as negative figure in the statement of other comprehensive income for this year, out of this loss of impairment. The leftover amount of $30,000 is to be written off as expenditure in the year and the carrying value of the asset would match with the recoverable value, which is $120,000. In the next year, the depreciation expense would depend on the new asset’s carrying value, which is $120,000 minus estimated residual amount. Hence, the depreciation expense related to the impaired asset would be adjusted in the future years.

References:

André, Paul, Dionysia Dionysiou and Ioannis Tsalavoutas, "Mandated Disclosures Under IAS 36 Impairment Of Assets And IAS 38 Intangible Assets: Value Relevance And Impact On Analysts’ Forecasts" (2017) 50(7) Applied Economics

Avallone, Francesco and Alberto Quagli, "Insight Into The Variables Used To Manage The Goodwill Impairment Test Under IAS 36" (2015) 31(1) Advances in Accounting

Gros, Marius and Sebastian Koch, "Goodwill Impairment Test Disclosures Under IAS 36: Disclosure Quality And Its Determinants In Europe" [2015] SSRN Electronic Journal

Guthrie, James and Tsz Ting Pang, "Disclosure Of Goodwill Impairment Under AASB 136 From 2005-2010" (2013) 23(3) Australian Accounting Review

Kieso, Donald E, Jerry J Weygandt and Terry D Warfield, Intermediate Accounting (John Wiley & Sons, Incorporated, 2014)

Loftus, Janice et al, FINANCIAL REPORTING 1E (Wiley, 2015)

Mazzi, Francesco, Giovanni Liberatore and Ioannis Tsalavoutas, "Insights On Cfos’ Perceptions About Impairment Testing Under IAS 36" (2016) 13(3) Accounting in Europe

Oghoghomeh, Tennyson, and Fynface N. Akani, "Assets Impairment Testing: An Analysis Of IAS 36" (2016) 10(1) African Research Review.

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