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Reversal Of Impairment Loss

Discuss about the Reversal Of Impairment Loss For Cash Generating Units.

AASB 136 and IAS 36 deals with the procedures which are being applied to make sure that assets are not shown at higher value in comparison to its recoverable value. The specified standard specifically provides procedure relating to impairment on all intangible and tangible assets other than those which are covered under other IFRS. Present essay revolves around the analysis of ‘Reversal of accounted impairment loss for CGU’ and accounting for same.  An impairment loss can be define as written down value of an asset or a CGU because shown value is higher than its recoverable amount (Johansson, Hjelström and Hellman, 2016.). As according to the provisions of the standard no asset should be carried at a value which is higher than its recoverable amount or fair value. Further, for accomplishing the same objective, it has been provided with the scope of potential indicators for assessing whether impairment loss exists or not.

Above description shows that CGU is impaired in case the carried value is higher in comparison to recoverable amount then computation of recoverable amount is done by making comparison of ‘fair value less cost relating to selling’ and ‘value in use’, in this higher value is considered for accounting. The loss which has been recognised as expenses is transferred to profit and loss account (Henderson and et.al. 2015). Further, the standard also specifies the provisions when entities are required to make a reversal of impairment loss and the manner of recognising the same in books of accounts. IAS 36 provides that reversal of impairment in the case of CGU is to be reversed by appropriately proportioning the amount in no. of assets which have been covered by making use of pro rata basis and applying it on carrying amounts of concerned assets.

 However, goodwill is not be included while reversal of impairment loss of Cash Generating Unit. The reversal amount is allocated to the written down value of asset available in the balance sheet (Edwards, 2013). It should not be increased higher in comparison to the lower of its carrying amount and recoverable amount. The specified amount must be provided after reducing depreciation or amortisation which might have been recognised in the case where there has no recognition of impairment loss in prior periods. It is also provided in the standard that it is necessary for the entire organisation to apply the test in order to assess the same and it should be assessed at each reporting date. For verifying the same, it is necessary to consider internal as well as external components which are considered necessary by the management (Johansson, Hjelströ, and Hellman, 2016.).

Provisions for Disclosure of Reversal of Impairment Loss

Provisions relating to disclosure of reversal of impairment loss have been made available in paragraph 130 of AASB 136. As per the provision specified in Australian accounting standards reversal of impairment loss in case of a CGU is recorded in books of accounts on an instant basis in profit or loss statement. Thus the provisioning of same is not required in case when the book value of the asset is revalued in accordance with the provision of IAS 36.  As per the views of Detzen,  Stork and Zülch (2016),  in the case when the value of the asset is increased at the year end than the  reversal is required to be considered as a revaluation increase and accounted as per provision of IAS 36. Further after revising the written down value of asset, depreciation or amortisation is charged for future periods in accordance with the allocation revised carrying amount from which residual value is deducted on a reasonable base for the remaining life of the asset.


A CGU is the least distinguishable group of assets which is capable for generation of cas inflows that are specifically dependent on assets or group of assets (Bond, Govendir and Wells, 2016.). AASB 136 states recoverable amount as higher of recongnised value of cash-generating and unit’s fair value. It is not compulsory to determine both value in use and fair value less cost relating to selling. In case the either amount of both is higher than assets carrying amount that it is clear that the impairment of asset is not required. Further, it is necessary to ascertain fair value less cost of sale even in case the asset is not actively traded in the market. In a situation when no basis is available to evaluate the value of the asset on a reasonable basis from the sale of an asset by considering its arm length price in market then it is more appropriate to consider the recoverable value of the asset.  As per the views of Amiraslani, Iatridis and Pope, (2013), in a situation when there is no reason to have confidence in fact that asset’s value in use is substantially higher in comparison to fair value less cost relating to selling than the same might be used as the recoverable amount. It is usually considered in the case when assets are being disposed of because at that time asset will mainly consist net proceeds from disposal as future cash flows that will be derived from continuing use of asset until the amount is same as negligible value.

Calculation of Impairment Loss

Usually, impairment of assets is done on the individual basis in accordance with the provisions of IAS 36 (Bartov, Goldberg and Kim, 2013). However, in case the recoverable amount of assets cannot be ascertained for each individual asset than in such situation an organisation opts to value the carrying value of the cash-generating unit to which the asset belongs. As it considered that computation of the recoverable amount of each individual asset is not appropriate and hence, ascertainment of the recoverable amount of the CGU to which that particular asset belong. Further, the following aspects are to be considered while impairment testing of CGU by every organisation:

  • Consideration of cash flows in detail and reassessing the same;
  • Evaluation of impairment indicators.
  • Ascertainment of the discount rates;
  • Benchmarking the assumptions with the market.

Journal entry for recording impairment loss:

In case of cost, model is applied

Particular

Amount

Accumulated depreciation & impairment losses         Dr.

XXX

Income - impairment loss reversal       Cr.

XXX

In case revaluation model is applied

Asset                                                   Dr.

XXX

Deferred tax liability                           Cr.      

XXX

Asset revaluation surplus                    Cr.

XXX


Calculation of Impairment Loss:

Carried Value of Balance Sheet                                                         677000

Value in Use of assets                                                                         608000

Impairment loss                                                                                   69000

Allocable Impairment loss to assets:

Total impairment loss - Amount of Goodwill – Impairment loss allocable to patent

= 69000-23000- (455000-438283)

= 29283

Allocation of impairment loss to assets in proportionate to their book value:

Asset

Value in Use

Calculation

Allocable Impairment loss

Amount to be carried in Balance Sheet

Equipment

105000

29283*105000/199000

15451

89549

Fitting

66000

29283*66000/199000

9712

56288

Inventory

28000

29283*28000/199000

4120

18880

Patent

455000

 

16717

438283

Journal Entry in the books of Gali Ltd:

30.06.2015      Impairment loss Dr.                                                                    69000

Goodwill Cr.                                                                                                     23000

Patent Cr.                                                                                                        16717

Accumulated amortisation and Impairment Losses (Equipment) Cr.                       15451

Accumulated amortisation and Impairment Losses (Fittings) Cr.                            9712

Accumulated amortisation and Impairment Losses (Inventory) Cr.                         4120

[Being impairment loss attributed to assets on pro-rata basis except patent and goodwill.]

Impairment Account

Date

Particular

Amount

Date

Particular

Amount

30.06.2015

Accumulated Impairment Loss A/c

69000

30.06.2015

Profit and Loss Account A/c

69000


Provision of IAS 36 will be applicable in the present case for the allocation of impairment loss to the available assets. In accordance with the study of Abuaddous, Hanefah and Laili (2014),  the provisions impairment loss is initially adjusted with the amount available in Goodwill account and further to the extent to which loss has been provided to a specific asset. Finally, the remaining amount of impairment loss is being proportionate to the book value of remaining assets. Another thing that is to be considered is that no impairment loss is adjusted in cash account. As in present scenario; firstly the impairment loss will be set off with the amount of goodwill i.e. 23000 then the remaining amount will be allocated proportionately to remaining assets except cash. Further, as the fair value of a patent is available in the question, hence the impairment loss of patent will be the difference between book value and fair value.

References

Books and Journal

Abuaddous, M., Hanefah, M.M. and Laili, N.H., 2014. Accounting standards, goodwill impairment and earnings management in Malaysia. International Journal of Economics and Finance. 6(12). P.201.

Amiraslani, H., Iatridis, G.E. and Pope, P.F., 2013. Accounting for asset impairment: a test for IFRS compliance across Europe. Centre for Financial Analysis and Reporting Research (CeFARR).

Bartov, E., Goldberg, S.R. and Kim, M., 2013. Comparative value relevance among German, US, and international accounting standards: A German stock market perspective. Journal of Accounting, Auditing & Finance. 20(2),Pp.95-119.

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.

Detzen and et.al. 2016. Impairment of Goodwill and Deferred Taxes Under IFRS. Australian Accounting Review, 26(3),Pp.301-311.

Edwards, J.R., 2013. A History of Financial Accounting (RLE Accounting) (Vol. 29). Routledge.

Henderson, S., Peirson, G., Herbohn, K. and Howieson, B., 2015. Issues in financial accounting. Pearson Higher Education AU.

Johansson, S.E., Hjelström, T. and Hellman, N., 2016. Accounting for goodwill under IFRS: A critical analysis. Journal of International Accounting, Auditing and Taxation, 27, Pp.13-25.

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[Accessed 16 July 2024].

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