Accounting of Impairment loss

Accounting of Impairment loss
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Contents
Part A: How to Calculate Recoverable amount, value in use and fair value less cost of
disposal.......................................................................................................................................3
Introduction................................................................................................................................3
Calculation of Recoverable Amount, Value in use and Fair Value less cost of disposal..........3
Conclusion..................................................................................................................................5
Part B: Accounting of Impairment Loss....................................................................................6
Journal Entries............................................................................................................................6
References..................................................................................................................................8
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Part A: How to Calculate Recoverable amount, value in use and fair value less cost of
disposal
Introduction
The presence of economic uncertainty in the market has caused business entities to
introduce new models and technique for carrying out assets impairment. The asset is said to
be impaired when it has less market price as compared to its value in the balance sheet. The
business entities need to identify and report the asset impairment for identifying the losses
that is estimated to occur with the decline in asset value. The IASB has developed the
accounting standard of IAS 36 for measuring and recognizing the asset impairment and
provided the standard definition of associated related terms (Alexander and Archer, 2008).
Recoverable Amount, Value in Use (VIU) and Fear value less Cost to sell Measurement
in Asset Impairment Testing
The process of carrying out the impairment testing of an asset starts calculating its
amount to be recovered, VIU and fair value less cost to sell. The process of identifying asset
impairment begins at the close of the financial reporting period as compared to the carrying
amount of assets with its recoverable amount. The IAS 36 standard requires business entities
to carry out asset impairment testing if its carrying value is greater than the amount that is
likely to be revived after its sell. The business entities are implementing the use of IAS 36
accounting standard for ensuring that the net amount to be carried by the assets is not more
than the amount to be recovered from them, i.e. recoverable amount (Saracino, 2007).
The amount to be recovered from an asset refers to which ever value is larger in
comparison to the fair value less cost to sell or it’s VIU. The amount recovered from an asset
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