Discuss about the Impairment of Assets for International Accounting Standard.
The essay describes about impairment of asset, the standard describing impairment of asset is AASB 136, which is amended by IAS 36. This standard is required to be adopted by each and every organization. This is done to be ensured that whether the Longreach limited has carrying value over its fair value. The asset values are shown in the financial statements by deducting impairment loss. Impairment of assets is done because of the decrement in fair value of asset, or obsolescence. If there is any impairment loss arises, it need to be mentioned in the Longreach limited’s financial records. But if there is an impairment gain that is carrying value is lesser than fair value, it need not to be recorded in the financial statements, as there is nothing like impairment gain (Deloitte, 2017). However in the given assignment, impairment of asset has been discussed by taking a case of Longreach ltd, which has undertaken an impairment asset.
AASB 136 deals with impairment of assets. It is amended by international accounting standard (IAS). This standard applies to each and every entity which prepares its financial statements, by complying the rules and regulations of the corporations’ act. The objective of this standard is to impair those assets which are carried over its recoverable amount. An asset can be said to be as over recovered if the asset’s carrying value is more than its recoverable value which can be arose through its uses and sales. When an asset is impaired, the entity should recognize it in its financial statements. The scope of impairment of assets levies on inventories, assets held for sale, assets from contracts of construction, assets arising from employee benefits, deferred tax assets, apart from that it also applies on revalued assets such as plant and machinery, buildings, equipments. However investment assets, biological assets, and agricultural assets this standard is not applied (Australian government, 2009).
Here the carrying amount is the value which is arrived after subtracting any depreciation or amortization and impairment losses from the asset value. While value to be recovered is the difference between the fair value less costs and its value in use. The loss on impairment is a value in which amount carrying is greater than its value to be recovered (Choi & Meek, 2011).
Purpose of Impairment Test
The objective for assets impairment is to get ensured that the values of assets are recorded at their fair value. It can be done by conducting a match between carrying value and recoverable amount that is carrying value of the assets is either equal or less than the value to be recovered. If the carrying value of assets is more than its amount to be recovered by sales or uses of the assets, in this case impairment of assets is required (Dagwell, Wines & Lambert, 2011).
Goodwill Affecting Impairment Assets
Goodwill is the amount which arises in case of business combination. If the purchase price to be paid by the selling company is more than the value of its net assets, it is termed as goodwill. The valuation of goodwill is required to be done annually. It is to be done even when there is boom in the economic cycle or the valuation has not been changed. As goodwill is required to amortize its value over its useful life, hence sometimes accountants treat such amortized value or written down value as impairment. Hence applying this principle in the given case it is required to mention impairment in the Longreach limited’s income statement.
However in case of Longreach limited the impairment of goodwill will not required until and unless the fair value of goodwill exceeds its carrying value, but if the fair value is lesser than the assets carrying value, the impairment needs to be recorded in the financial statements to the amount goodwill’s book value is exceeding its fair value (Accounting standard 28).
The Basic Steps to be Followed in Applying the Impairment Test
The recoverable values of the assets are required to be calculated annually whether there is an indication of impairment or not. According to the IFRS it is required for all cash generating units to be tested for impairment including goodwill. Here the assets whose value are required to be calculated in case of an intangible assets, or who has an identifiable life, or not used yet or not in a useful condition yet, or goodwill in case of a business combination. In business combination, goodwill is required to be computed as it generates future benefits and will lead to generate cash for multiple units (Ernst & Young, 2011).
However there can be some indications indicating impairment of assets through external and internal sources. In external sources it can be identified if the asset’s market value is declining, like there are some negative changes in economy, technology, or laws and if there is any indication of increase in interest rates, or the net assets are greater than the market capitalization value. However internal sources can be said as if there is any physical damage to the assets or obsolescence, or any part of the whole asset is held for disposal, or the performance of the asset is worse in comparison to expectation. However there can be other indications also. Under GAAP, impairment test of goodwill can be done in two steps:
In Step 1, the goodwill’s fair value is calculated and it is matched with its carrying amount, in step 2nd if the goodwill’s fair value is lesser than the amount to be carried that is carrying value this step is required. For example if the carrying value of an asset is $800, and has a recoverable amount of $750 (Korosec, Jerman & Tominc, 2016). Then the impairment loss would be $50 that is recoverable value is deducted from the carrying value of the goodwill ($800-$750). If there is any impairment loss arises it needs to be recognized in financial statements (ACCA).
After discussing about the impairment asset, it can be concluded that impairment of asset is a compulsion for each and every entity. It gives a better presentation to the financial statements, as all the assets in the financial records would be recorded at their fair value.
ACCA. Impairment of goodwill. Retrieved by https://www.accaglobal.com/my/en/student/exam-support-resources/fundamentals-exams-study-resources/f7/technical-articles/impairment-goodwill.html
Accounting standard (AS) 28. Retreived at https://www.mca.gov.in/Ministry/notification/pdf/AS_28.pdf
Australian government. (2009) Australian accounting standards board. Commonwealth of Australia. Retrieved by https://www.aasb.gov.au/admin/file/content105/c9/AASB136_07-04_COMPjun09_01-10.pdf
Choi,F,D,S & Meek,G,K.(2011) International accounting. 7th edition. Pearson education inc. new jersey
Dagwell,R. Wines,G & Lambert,C. (2011) Corporate accounting in Australia, Pearson, Australia
Deloitte,(2017) IAS 36: Impairment of assets. Retrieved by https://www.iasplus.com/en/standards/ias/ias36
Ernst & Young.(2011) Impairment of long-lived assets, goodwill and intangible assets. Retrieved by https://www.ey.com/Publication/vwLUAssets/ME_ImpairmentGoodwillandIntangible/$FILE/ME_ImpairmentGoodwillandIntangible.pdf
Korosec,B. Jerman,M & Tominc,P.(2016) The impairment test of goodwill: an empirical analysis of incentives for earnings management in Italian publicly traded companies. Economic research. Routledge taylor and fracins group, UK. Retrieved by https://www.tandfonline.com/doi/pdf/10.1080/1331677X.2016.1164923