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1. The purpose of the impairment test?
2.How the existence of goodwill will affect the impairment test?
3.The basic steps to be followed in applying the impairment test?
4.Prepare the journal entry(ies) for any impairment loss occurring at 30 June 2015?


1. Impairment test:

Impairment test is a measurement tool to measure the worth and correctness of stated amount in balance sheet. According to impairment test the total amount of balance sheet must be reduced or increased, in case the test is showing a lower or higher value respectively. This test could be applied for tax accounts and commercial accounts. Longreach ltd has also considered to undertake an impairment test (Guthrie & Pang, 2013). This step is taken by Longreach ltd to understand and manage the worth of its assets properly. Longreach group limited is a private organization that is engaged in investment services.

Purpose of Impairment tax:   

The main purpose of AASB 136 is to ensure that the organization’s assets have carried at its recoverable amount in the financial statements. An impairment asset is that asset whose value is not recoverable either by using it or selling it. Such as an entity

The purpose of testing the impairment of assets is that an organization’s asset’s carrying amount might not affect the recoverable amount because:

  • The amount stated at financial statements of an asset is the result of judgments and estimates made by the accountant.
  • Depreciation on the asset only depicts the allocation of asset’s cost. It doesn’t consider the recoverability of the assets (Finch, 2006).

2. Impact of existence of Goodwill on impairment test:

Impairment of goodwill is related with the charge that the recorded value of goodwill on the financial documents exceeds the real worth. The company is suggested to run and maintain the impairment test on goodwill on daily basis. Goodwill is the asset whose value could be change at any time due to many circumstances and situations so that company has advised to monitor the value of its goodwill on regular basis. Though, in case of acquiring another business or company than it leads to a result of lower down cash generating units. So in this case, Longreach ltd must decrease the value of goodwill which has already been paid at the time of target company acquisition.


Goodwill testing for Impairment:

Goodwill testing is related with cash generating unit’s allocation. In case of cash generating units has already been get the amount of goodwill and Longreach ltd run an operation for associating the value of that cash generating unit than carrying amount should also be included in that operation while deciding the profit or loss.

Goodwill of a business directly affects the cash generating unit’s impairment test according to the allocation of goodwill. Normally, the goodwill is allocated to only those cash generating units which are expected to get benefits by the synergy of 2 different units. In this situation, if the recoverable value of asset is more than the carrying value of asset than it regarded as non impaired unit whereas if the situation is just opposite, than the unit is regarded as impairment loss. This test on goodwill must be done on regular basis.

For running the impairment test, acquired goodwill would affect the test on CGU. In this case, annually test must be performed on those CGU on which goodwill has been allocated. Further, an individual test has also done to determine the real worth of the assets of the company.

At Longreach ltd, the result of goodwill’s impairment test depends upon the recoverable amount of equity value or organization’s value. The computation of recoverable amount has done according to the entity value than the resulted data of impairment test must be compared with the invested capital. Instead of it, the recoverable value of equity would be laid upon the shareholder’s equity. After doing a study and analyzing the facts, it has been computed that in case of recoverable amount laid upon entity value is lesser than the amount which have been invested by Longreach ltd would provide a result in reduction of goodwill amount. But the carrying amount would never be decreased from the real value.

3. Steps for applying the impairment test:

An impairment test is always concerned with the calculation of carried worth, identification of CGU, recoverable amount and many more in specified time. A proper procedure has been described in the IAS 136. Longreach ltd must have to identify and determine the fair value, recoverable value and carried value of all the given assets in the financial documents for identifying that whether asset is impaired or not. If the total recoverable value of the cash generating units would be lesser than the carried value then assets impairment would take place.

For an effective test of impairment on assets, Longreach group ltd would run a recoverable test to identify the fair values of assets. This test makes a comparison of all the undisclosed cash inflows which would take place in future with the carrying amount. In case of carrying amount value becomes greater than the computed value, than assets would be considered as not recoverable (Carlin, Finch & Ford, 2007). Following steps must be followed by the Longreach ltd to apply the impairment test:

  • Identify the recoverable amount of assets
  • Determine the present and future cash flows of the business while acquiring the goodwill.
  • Check all the applications related to accounting standards in accordance with AASB  136 for running the impairment test.
  • Determine the difference value of carried amount and recoverable amount.
  • Take action accordingly.

This steps describes that how a company can reach on a perfect result regarding impairment the asset or not easily. This test shows a result which help an organization in taking the decision regarding either impair the asset or not.


In this report, the case study of Longreach group ltd has been taken into consideration. This report helped in understanding the value of impairment test in an organization. It has been learnt through this study that how impairment test shows real worth of an asset. Further, it has also been observed that this test is very important for an organization to determine the value of all the tangible and intangible assets. It could be said that impairment test should always be undertake after a clear understanding of AASB 136.

4. Computation of Impairment loss for Crosbow Ltd

A. Carrying amount of cash generating unit including goodwill



Amount ($)








Brand 'Crossbow Shoes'



Shoe Factory



Machinery for manufacturing shoes



Goodwill on acquisition of competing






B. Recoverable amount



C. Impairment Loss (A-B)




S. No.

Account Titles




Impairment Loss












Inventory Product




Brand ‘Crossbow Shoes’




Shoe Factory








(Being impairment loss recognized)




Profit and Loss




Impairment Loss




(Being impairment loss charged to profit and loss account)





Carlin, T. (2008). Advance Australia Fair: The quality of AASB 136 fair value disclosures down under (Doctoral dissertation, Macquarie Graduate School of Management).

Carlin, T. M., & Finch, N. (2011). Goodwill impairment testing under IFRS: a false impossible shore?. Pacific Accounting Review, 23(3), 368-392.

Carlin, T. M., Finch, N., & Ford, G. (2007). Goodwill impairment-an assessment of disclosure quality and compliance levels by large listed Australian firms.

Finch, N. (2006). Intangible assets and creative impairment-an analysis of current disclosure practices by top Australian firms.

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

Wiese, A. (2005). Accounting for goodwill: The transition from amortisation to impairment–an impact assessment. Meditari Accountancy Research, 13(1), 105-120.


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