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Basic principle behind impairment

Question:

Discuss About The Statements Over Above Recoverable Amount?

The basic principle behind impairment is the fact that the asset would never be reported in the financial statements over and above the recoverable amount. This is the higher of the fair value of the asset less the costs to sell and its value which is in use. The carrying value of the asset would be compared in with the amount that would be recovered if the asset is sold in the market. An asset is stated to have been impaired when the amount that could be recovered is less than the value at which the cost has been reported in the books of accounts. Any difference between the former and the latter is then termed as an impairment loss and is carried on to the statement of profit and loss.

All of the assets that are reported in the books of accounts or in the financial statements are generally tested for review with regard to an impairment whenever there is an indication that an asset could have been impaired. There are some of the assets such as the goodwill and the intangible assets that have an indefinite life which are tested for an impairment each year even when there is an absence of the conditions that could indicate impairment. The amount that is capable of being recovered is calculated for each one of the individual assets. There is generally not even one asset that is able to generate revenues for the company all by itself. It needs the other assets for the purposes of generating the cash flows. This is termed as the cash generating units. It is mainly described as the smallest group of the assets which is able to generate in the cash flow which mainly depends on the other cash flows of the other assets or the groups of the assets.

Whenever there is a business communication, then the amount of the goodwill earned or recovered is able to be allocated to the cash generating units of the acquirer which is expected to benefit from the business combination. But the largest group of the cash generating unit which is permitted is for the impairment testing of the goodwill which generally operates at the lowest level of the operating segment

As per the rules of the IAS 36 which deals with the impairment of the assets, the testing of impairment of the assets is usually performed as the level which is much more bigger than the operating stement which has been defined out under the IFRS 8 which deals with an operating segment.

Testing for impairment

There are many of the issues that are created since the IFRS 8 allows the fact that a higher level of the operating segment which could be reported is created in case some of the conditions have been set The standard though is not very much clear as to the aggregation of the allocation of the goodwill for the cash generating units along with the testing of impairment. This would be no longer than the operating segment before and after the aggregation has taken place. In order to deal with this uncertainty (AASB, 2017). The IASB went on to amend the standard and state the fact that the operating segment in no case could be larger than the operating segment before the aggregation takes place. The entities would definitely ensure that the cash generating units would be aligned in with the operating segments.

The amount that is capable of being recovered is usually the same for each one of the individual asset. The carrying amount of the cash generating units comprises of the assets that are capable of being directly attributed to the reasonable and consistent basis for the cash generating units. These include the corporate assets and the goodwill (IFRS, 2017). In the case, wherein goodwill is allocated to an operating unit and then that operating units has been disposed of, then the amount of the goodwill which is allocated to the operating units would be included in the carrying amount of the operation when it would calculate the profit or the loss on disposal.

An entity would recognise the business and also change in the composition of the cash generating units to which the amount of the goodwill is calculated. In these cases, the amount of the goodwill which is attributable to these operations would be moved in between these cash generating units on the basis of the fair values of the operations and the remaining of the cash generating units from which the operations could be transferred. The amount of the liabilities that relates in with the financing of the cash generating units are not allocated to determine in the carrying amount of the cash generating units which is related with the amount of the cash flow which is apart from the calculations of an impairment (IAS plus, 2017). Whenever there is an impairment loss, then the amount of the change would be allocated towards the amount of the goodwill which is calculated to the cash generating units and then on to the other assets of the cash generating units on the pro rate basis as per the carrying amounts of each one of the assets that forms the part of the cash generating unit (Ernst and Young, 2017).

When calculating the loss of impairment to a cash generating unit, the carrying amount of each one of the asset would be reduced to below to the highest of the fair value less the costs to sell or value in use or 0. Any amount of the impairment loss which has not been allocated would be allocated to the cash generating units or on to the other assets subject to some of the limits. This would result in the process which continues till the time an impairment loss is capable of allocated fully or till the time each one of the assets contained in the cash generating units has been reduced to the highest of the fair value of the each asset less the costs to sell, value or 0 (ACCA global, 2017)

 (Amounts in $)

 Particulars

 Carrying amount

 Value in use

 Impairment loss

 Patent

              5,21,000.00

         5,01,381.00

                 19,619.00

 Equipment

              1,20,000.00

            98,950.00

                 21,050.00

 Fittings

                 76,000.00

            62,669.00

                 13,331.00

 Inventory

                 33,000.00

            33,000.00

                              -  

 Goodwill

                 27,000.00

                         -  

                 27,000.00

 Total CA

              7,77,000.00

         6,96,000.00

                 81,000.00

 Equipment

              1,20,000.00

                     0.61

                              -  

 Fittings

                 76,000.00

                     0.39

                              -  

              1,96,000.00

                              -  

Journal entry:

 Impairment loss

                 81,000.00

            Patent

            19,619.00

            Equipment

            21,050.00

            Fittings

            13,331.00

            Goodwill

            27,000.00

References:

https://www.accaglobal.com, A. (2017). Impairment of goodwill and CGUs | ACCA Global. [online] Accaglobal.com. Available at: https://www.accaglobal.com/in/en/member/discover/cpd-articles/corporate-reporting/goodwill-cgus.html [Accessed 12 Sep. 2017].

Iasplus.com. (2017). Goodwill and other intangible assets — Key differences between U.S. GAAP and IFRSs. [online] Available at: https://www.iasplus.com/en-us/standards/ifrs-usgaap/goodwill [Accessed 12 Sep. 2017].

Ifrs.com. (2017). International Financial Reporting Standards - Questions and Answers. [online] Available at: https://www.ifrs.com/updates/aicpa/ifrs_faq.html [Accessed 11 Sep. 2017].

www.aasb.gov.au. (2017). ED 30. [online] Available at: https://www.aasb.gov.au/admin/file/content105/c9/IPSASB_ED30.pdf [Accessed 15 Sep. 2017].

www.asb.co.za. (2017). Executive summary – Impairment of Cash-generating Assets. [online] Available at: https://www.asb.co.za/asb_dev/Portals/0/Documents/GRAP/standards/approved_effective/GRAP26/GRAP_26_FAQS.pdf [Accessed 15 Sep. 2017].

www.ey.com. (2017). Impairment accounting – the basics of IAS 36 Impairment of Assets. [online] Available at: https://www.ey.com/Publication/vwLUAssets/Impairment_accounting_the_basics_of_IAS_36_Impairment_of_Assets/$FILE/Impairment_accounting_IAS_36.pdf [Accessed 15 Sep. 2017].

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