Essence and Requirements of Impairment of Assets

This article explains the essence and requirements of impairment of assets, including examples and accounting standards. Learn more about the importance of periodic revaluation and recognition of impairment loss.

Running head: ACCOUNTING AND FINANICAL REPORTING
Accounting and Financial Reporting
Name of the Student:
Name of the University:
Author’s Note:

1ACCOUNTING AND FINANCIAL REPORTING
Table of Contents
Answer to question 1:......................................................................................................................2
Sub part (a):.................................................................................................................................2
Sub part (b):.................................................................................................................................2
Sub part (c):.................................................................................................................................2
Sub part (d):.................................................................................................................................3
Answer to question 2:......................................................................................................................4
Answer to question 3:......................................................................................................................6
Sub part (a):.................................................................................................................................6
Sub part (b):.................................................................................................................................6
Answer to question 4:......................................................................................................................7
Answer to question 5:......................................................................................................................9
References and bibliography:........................................................................................................11

2ACCOUNTING AND FINANCIAL REPORTING
Answer to question 1:
Sub part (a):
Grace Limited takes services from a cloud service provider and there was a disruption in
the services for the last 14 days, which caused a major loss to the Grace Limited. Grace Limited
went for legal actions and claimed $300,000 for such damages. This cannot be considered as an
adjusting event. Until and unless the claim is realized, there would be no effect of such a claim
on profit or loss of the company. Hence, no adjusting entry is required for that, and it can only be
shown in the notes to the balance sheet.
Sub part (b):
The government announcement had an impact on the value of the said property. The
director of the company valued the asset after the government announcement at $800,000 less
than the current book value of the asset. The value assessed by the director can be considered as
the fair value and it needs to be restated in the financial books of accounts. Hence, this is and
adjusting event and needs a proper adjustment entry in accordance with the accounting standard
AASB 13.
Journal
Particulars Debit Credit
Revaluation Loss $ 800,000
Land $ 800,000

3ACCOUNTING AND FINANCIAL REPORTING
Sub part (c):
In this case, the car was purchased by the manager in his name using the company’s fund,
but the asset was shown in the books of the company. When the fraud activity is disclosed, the
manager agreed to refund the amount to the company. In this case, the company should
derecognize the value of asset in the books along with the respective accumulated depreciation.
Therefore, this is an adjusting event and following adjustment entry is needed for recording the
event.
Journal
Particulars Debit Credit
Bank $ 38,000
Accumulated Depreciation $ 1,000
Motor Car $ 38,000
Retained Earnings $ 1,000
Sub part (d):
Grace Limited is having some financial assets of a current market value of $500,000.
Subsequently, the market price of such financial assets slips down to $250,000. As per the
accounting standard AASB 13 such assets are subject to fair valuation and as the market value of
such financial assets decreases, the company needs to recognize that fall in market price in their
financial books of accounts. Hence, this is an adjusting event and following adjusting entry is
needed.
Journal
Particulars Debit Credit
Revaluation loss on financial assets $ 250,000
Investment in shares of Slipp Limited $ 250,000

4ACCOUNTING AND FINANCIAL REPORTING

5ACCOUNTING AND FINANCIAL REPORTING
Answer to question 2:
Sunshine Ltd
General Journal
Date Particulars Debit Credit
28-Feb Share Underwriters (1800000*1.5) $ 2,700,000
Share Application $ 2,700,000
(To record share application money
received for 1800000 shares @ $1.50
each)
28-Feb Share Application $ 2,700,000
Share Capital $ 2,700,000
(To record transfer of share
application money to the share
capital)
10-Mar Share Underwriters (1800000*1) $ 1,800,000
Share Capital $ 1,800,000
(To record allotment of 1800000
shares @ $1 each on allotment)
10-Mar Underwriting Commission $ 12,000
Share Underwriters $ 12,000
(To record share underwriting
expense due to the share
underwriters)
10-Mar Bank $ 4,488,000
Share Underwriters $ 4,488,000
(To record receipt of share
application and allotment money
from the share underwriters)
15-Apr Share issue expenses $ 5,000
Bank $ 5,000
(To record other share issue
expenses)
1-May
Share First and Final Call
(1800000*.50) $ 900,000

6ACCOUNTING AND FINANCIAL REPORTING
Share Capital $ 900,000
(To record share first and final call
money due on 1800000 shares @
$0.50 each)
31-May Bank (1780000*0.50) $ 890,000
Calls in arrear (20000*0.50) $ 10,000
Share First and Final Call
(1800000*0.50) $ 900,000
(To record receipts of share first and
final call money on 1780000 shares
and non receipt call money on 20000
shares)
10-Jun Share Capital (20000*3) $ 60,000
Calls in arrear (20000*0.50) $ 10,000
Share Forfeiture (20000*2.50) $ 50,000
(To record forfeiture of 20000 shares
for nonpayment of call money)
20-Jun Bank (20000*2.70) $ 54,000
Share Forfeiture (20000*0.30) $ 6,000
Share Capital (20000*3) $ 60,000
(To record reissue of 20000 forfeited
shares for a consideration of $2.70
per share)
20-Jun Share Issue Expense $ 4,000
Bank $ 4,000
(To record payment of share issue
expense)
25-Jun Share Forfeiture $ 44,000
Share Issue Expense $ 4,000
Bank $ 40,000
(To record refund of balance in share
forfeiture account after adjusting
share issue expenses)

7ACCOUNTING AND FINANCIAL REPORTING
Answer to question 3:
Sub part (a):
Computation of Current Tax Liability and Deferred tax Assets
Allowances for doubtful debt (Disallowed as per IT
Rules)
$12,00
0
Tax Liability as per Income Tax Rules $3,600
Depreciation as per accounting rules:
$55,00
0
Less: Depreciation as per Income Tax Rules
Equipment ((400000-120000)/5)
$56,00
0
Motor vehicle ((150000-30000)/8)
$15,00
0
Total Balance to be considered for deferred tax assets
$16,00
0
Tax Assets as per Income Tax Rules $4,800
Net Deferred Tax Assets (4800-3600) $1,200
Sub part (b):
Tulip Ltd
General Journal
Date Particulars Debit Credit
30-Jun Current Tax Expense $1,200
Deferred Tax Assets $3,600
Deferred tax liability $4,800
(To record current tax liability)

8ACCOUNTING AND FINANCIAL REPORTING
Answer to question 4:
MEMORANDUM
To: The Director, Star Freight Limited
From: [Name, Designation]
Date: 14 September 2019
Subject: Key aspects of revaluation of assets
This memorandum is prepared to analyze and explain key aspects of revaluation of assets
and its statutory requirements. Every financial and non-financial asset must be assessed at a
given frequency of time to find out the current market value of the assets and the carrying value
of the assets must be restated to the fair value accordingly. In the following parts of this
memorandum, key aspects of the revaluation of assets have been analyzed with a practical
example.
Revaluation of assets:
Revaluation of assets means reassessment of value of the assets. The varying value to
assets must be restated to its fair value in the books of accounts accordingly. As per the
accounting standards AASB 116, every assets and liabilities of the company must be assessed in
terms of arm’s length principle with market comparable transactions and the value of such
transactions should be considered as the value of assets. The difference between the carrying
value and the fair value of the assets is to be considered as the fair value gain or fair value loss.

9ACCOUNTING AND FINANCIAL REPORTING
In the following example, the fair value gain or loss can be considered as follows in
comparison with their fair value and market value.
Particulars Truck 1 Truck 2 Truck 3 Total
Fair value as at 1 July 2018 $ 140,000 $ 200,000
$
210,000 $ 550,000
Less: Estimated residual value $ 20,000 $ 30,000
$
30,000 $ 80,000
Depreciable Amount $ 120,000 $ 170,000
$
180,000 $ 470,000
Estimated life 8 10 12
Depreciation for the year $ 15,000 $ 17,000
$
15,000 $ 47,000
Carrying value as on 30 June
2019 $ 125,000 $ 183,000
$
195,000 $ 503,000
Fair value as on 30 June 2019 $ 110,000 $ 175,000
$
220,000 $ 505,000
Fair Value Gain/Loss $ (15,000) $ (8,000)
$
25,000 $ 2,000
From the above calculation, it can be observed that, there is a total fair valuation gain of
$2,000, which is arising from the revaluation of value of three Trucks to their fair value. Effect
of such revaluation must be given to the books of accounts with a proper journal entry as
follows.
Star Freight
General Journal
Date Particulars Debit Credit
30-
Jun Motor Vehicle-Truck 3 $ 25,000
Motor Vehicle-Truck 1 $ 15,000
Motor Vehicle-Truck 2 $ 8,000
Gain on Revaluation $ 2,000
(To record revaluation gain on
revaluation of Trucks)

10ACCOUNTING AND FINANCIAL REPORTING
From the above discussion and analysis, it can be concluded that there is an importance
of revaluation of assets and liabilities for correctly showing the actual financial position of the
company and it must be done properly in accordance with the AASB .

11ACCOUNTING AND FINANCIAL REPORTING
Answer to question 5:
To,
The Director
Fresh Limited,
[Address]
Subject: Essence and requirement impairment of assets
Sir,
This letter is drafted to explain and analyze the essence and requirements of impairment
of assets. Impairment of assets refers to the periodic reassessment of value of assets, with respect
the current value of assets. Impairment of assets is a periodic testing and revaluation of assets
and liabilities at a given frequency of time. For better understanding of the process of impairment
loss computation following example can be cited.
Particulars Fresh Juice
Bar Fresh Salads
Book value 84,000 165,000
Less: Net recoverable amount:
Value in use 58,000 180,000
Fair value less cost to sales 50,000 140,000
Net recoverable amount (Higher of above two) 58,000 180,000
Impairment Loss/Gain 26,000 15,000
Book value of motor vehicles 12,000 18,000
Fair value less cost to sales 11,000 14,000
Impairment loss attributable to motor vehicle 1,000 4,000
Impairment loss/gain attributable to other assets 27,000 19,000
If the market value of assets is less than the carrying value of assets then the difference is
considered as the impairment loss. Such impairment loss must be recognized and recorded in the

12ACCOUNTING AND FINANCIAL REPORTING
books of accounts with a proper adjusting entry in accordance with the accounting standard
AASB 136. For computation of impairment loss, the cash-generating unit of the business needs
to be identified. The difference between the carrying value and the net recoverable amount is
recognized as the impairment loss.
With Regards:
[Name, Designation]
Date: 14 September 2019

13ACCOUNTING AND FINANCIAL REPORTING
References and bibliography:
AASB, C. A. S. (2015). Investment property.
Bond, D., Govendir, B., & Wells, P. (2016). An evaluation of asset impairments by Australian
firms and whether they were impacted by AASB 136. Accounting & Finance, 56(1), 259-
288.
Bond, D., Govendir, B., & Wells, P. (2016). An evaluation of asset impairment decisions by
Australian firms and whether this was impacted by AASB 136.
Joubert, M., Garvie, L., & Parle, G. (2017). Implications of the New Accounting Standard for
Leases AASB 16 (IFRS 16) with the Inclusion of Operating Leases in the Balance
Sheet. The Journal of New Business Ideas & Trends, 15(2), 1-11.
Kabir, H., Rahman, A., & Su, L. (2017). The Association between Goodwill Impairment Loss
and Goodwill Impairment Test-Related Disclosures in Australia. In 8th Conference on
Financial Markets and Corporate Governance (FMCG).
Parle, G., Joubert, M., & Laing, G. K. (2017). Measuring economic performance of Real Estate
Developers in Australia:(A Longitudinal Study). Journal of New Business Ideas &
Trends, 15(1).
Tan‐Kantor, A., Abbott, M., & Jubb, C. (2017). Accounting Choice and Theory in Crisis: The
Case of the Victorian Desalination Plant. Australian Accounting Review, 27(3), 273-284.
Zhuang, Z. (2016). Discussion of ‘An evaluation of asset impairments by Australian firms and
whether they were impacted by AASB 136’. Accounting & Finance, 56(1), 289-294.

14ACCOUNTING AND FINANCIAL REPORTING