AASB 13 Fair Value Measurement and Impairment Loss

This article discusses AASB 13 'Fair Value Measurement' and its objectives, framework, and appropriate disclosures. It also explains how to calculate impairment loss and its distribution. The article is relevant for students studying corporate accounting and reporting. Course code and college/university are not mentioned.

CORPORATE ACCOUNTING AND REPORTING

Part A:
The Australian Accounting Standard Board (AASB) aims at formulating such Australian
Accounting Standards that includes interpretations and are required to be applied by :
 Organizations required to present and prepare financial reports according to
Corporations Act 2001 ;
 Governments who are required to prepare financial reports for the entire General
Government Sector (GGS) ;
 Reporting entities whether they are profit making or nonprofit making companies or
whether they are preparing general purpose financial statements.
Our scope of study is about AASB 13 'Fair Value Measurement' and is issued by IASB
(International Accounting Standards Board). Organizations complying with AASB 13 are
automatically complying with IFRS 13 (Atkinson, 2012).
AASB 13 Standard defines fair value and sets out the framework to be used for measurement
of fair value and also requires accurate disclosures about such measurements of fair value.
Fair value is a measurement based on the market situations and is not estimated based on
entity's considerations or perspective. For certain assets and liabilities, market prices or
market conditions are available while in certain instruments, they might not be available.
However, the concept of fair value measurement remains the same in both the cases, that is,
estimation is made about the price at which the sell or transfer of an asset or liability
respectively will take place under market conditions between market participants on the date
of measurement. However in case of non availability of proper market conditions, an
organization uses other valuation techniques that make use of available inputs to estimate a
fair value for the instrument (Berry, 2009). Fair valuation uses assumptions about risk,
perception of market participants, trend analysis etc. Thus, as a result, the intention of an
entity that whether it wants to hold an asset or it wants to settle a liability is irrelevant for
measurement of fair value (Datar, 2015).
Let us discuss the objectives of AASB 13 in brief:
 Defining fair value: The standard defines the fair value as the price in the market that
would be received in case of sale of an asset or paying off a liability between the
participants of market on the date of measurement. The fair value measurements take

into concern the characteristics of an asset or a liability such as location, conditions,
uses of assets and restrictions on such assets or liabilities (Edwards, 2014).
 Framework for measurement of fair value: This framework states about the market
conditions relevant for an instrument, the perception of market participants, risks
associated etc (Girard, 2014). For example, It considers non performance risk when
measuring a liability which is a broader concept than the credit risk owned by an
entity. Market participants are those persons who are independent, knowledgeable and
capable enough to transact without any force whereas orderly transactions refer to
those transactions that take place normally in the market, that is, it excludes the sales
value made under liquidation, sales due to fire, non-arms length sales, etc. It considers
the restrictions that might prevent the transfer of a liability or sale of an asset or
transfer of its financial instruments. The framework states valuation techniques that
would be appropriate enough to measure an instrument's fair value and also that
increases the relevance of the inputs that are observable and reduces the use of inputs
that are non observable (Seal, 2012).
 Appropriate Disclosures: The objective of the standard is to disclose about the
valuation technique adopted, the basis whether recurring or non recurring after initial
recognition, using of important inputs whether observable or unobservable, the effects
of such valuation on profit or loss or other comprehensive income for the financial
year. The company shall make detailed disclosures if it is of material nature. It shall
state the emphasis to be placed on various requirements of the standard, additional
information that might deliver transparency at a greater level to the intended users
(Siciliano, 2015).
Usually the instruments referred above can be assets whether tangible or non tangible,
liabilities and equity instruments. For measuring fair value, the instrument is to be
recognized, that is, its characteristics and behaviour, the premise is determined for
appropriate valuation, the relevant market for such an instrument is determined and then,
accordingly the valuation technique is adopted.
For centuries, the books were made on historical cost basis that were based on conditions
existing while transacting to buy or sell such an instrument and not the current conditions
where such an instrument is existing (Taillard, 2013). The adoption of fair value
measurement is important to vanish the traditional concepts as valuation of an instrument is a
part of valuation of an enterprise and an enterprise value in the market is important for the

users who are responsible for making decisions of investments, supplies, management
decisions, etc.
The financial crisis globally had put a pressure on having common fair value measurements
across the world and accurate disclosure requirements. This is because fair value
measurement instils a better relevance in the books. For example, an equity instrument is
purchased today for $15 and just after some time, a government regulation regarding increase
in taxation is circulated. In such a case, the price of the entity might fall due to unfavourable
economic condition. Therefore, the valuation of such an instrument is to be made on the basis
of such condition and not on $15 so as to let intended users know about the current price of
the instrument in the market. The correct valuation would help in correct valuation of market
capitalization rate of an enterprise which is important for comparison purposes in terms of
performance between different enterprises in the industry.
It is important for enterprises to make an extensive use of AASB 13 when valuing their assets
and liabilities. AASB 13 delivers consistency and uniformity across the global corporate
world. This standard is more based on delivering real value of an instrument and not the cost
at which it was previously transacted. The high demand of transparency means the most
appropriate and accurate valuations in the financial statements. Thus, we see the increasing
relevance of AASB 13 in the books and how well the enterprises are complying with it to
satisfy the objectives of this standard.

Part B:
The amount by which total carrying cost exceeds recoverable amount is known as
impairment loss. In the given case, the total carrying amount of the assets amount to
$1221700 and the total recoverable amount amounts to $1095700. Therefore, the total
impairment loss amounts to $126000 (1221700-1095700).
Impairment loss against goodwill is $42000 and against equipment is $30539 (820700-
790161). The remaining impairment loss of $ 53461 (126000-42000-30539) is written off
against the rest of the assets in the ratio of their carrying amount. The distribution of the
impairment loss for the rest of the assets is shown in the below table:
Particulars Carrying Amount Ratio Impairment Loss
Copyright 189000 0.53 28,145 (53461*0.53)
Machinery 119000 0.33 17,721 (53461*0.33)
Inventory 51000 0.14 7,595 (53461*0.14)
3,59,000 53,461
The journal entries are as follows:
Particulars Dr Amt Cr Amt
Accumulated Impairment Loss ...
…..Dr 1,26,000.00
To Equipment 30,539.00
To Copyright 28,145.21
To Machinery 17,721.06
To Inventory 7,594.74
To Goodwill 42,000.00
(Being impairment on assets realised)
Impairment loss……Dr 1,26,000.00
To accumulated impairment loss 1,26,000.00

Bibliography
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Taillard, M. (2013). Corporate finance for dummies. Hoboken, N.J.: Wiley.