Impairment Test under AASB 136

This solved assignment explores the application of AASB 136 (Impairment of Assets) in a practical scenario. It demonstrates how to conduct an impairment test for intangible assets with indefinite useful lives, goodwill, and other assets. The assignment provides step-by-step calculations for determining recoverable amount, identifying impairment losses, and allocating them to specific assets within a cash-generating unit. A detailed conclusion summarizes the findings and highlights the key principles of AASB 136.

Corporate Accounting
and Reporting

Table of Contents
INTRODUCTION...........................................................................................................................1
PART A...........................................................................................................................................1
PART B............................................................................................................................................3
CONCLUSION................................................................................................................................5
REFERENCES................................................................................................................................7
Index of Tables
Table 1 Calculation of impairment loss against all the assets in CGU...........................................4
Table 2 Allocation of extra impairment loss of patent on other assets in CGU..............................5
Table 3 Journal entry of Gali Ltd...................................................................................................5

INTRODUCTION
According to the Company Act of Australia, every firm is mandatory obliged to prepare
accounts and publish it after auditing. In the globalized world, firms need to comply with
international accounting and reporting standard to prepare their annual statements. IAS 36 lay
down rules and regulations on impairment of assets that entities follow to assure that assets are
not carry forwarded beyond its recoverable amount. The current research thoroughly explains the
circumstances when an impairment test must be carry out and make journal entries for the
impairment loss with supporting calculations.
PART A
IAS 36, impairment of assets sets out the mandatory standards that company need to
comply with for reporting their assets. It states that every firm need to reduce their assets
carrying value to its recoverable amount (Buschhüter and Striegel, 2011). Here, recoverable
amount is the amount that is higher of the following:
 Arm length price: Fair value less disposal cost/cost of sell
 Value in use: It is the potential cash inflows that an asset expects to generate, the amount
is discounted to reflect its present value at an appropriate discounting rate (Husmann and
Schmidt, 2008).
The key principle of the IAS 36 is that any asssets in the financial statement cannot be
carried forwarded more than its expected recoverable price though its sales or use. If in any
circumstance, the carrying amount of assets exceeds the recoverable money, then, such assets is
called impaired. Amount by which carrying value is reducing to its recoverable price is
recognizing as impairment loss. The standard also applies on the group of assets that do not
generate cash inflows separately or individually, called cash generating units (CGU). The
standard applies for many assets except those on which, other specific standard applies such as
inventory, financial assets under IFRS 9, investment property, biological assets, deferred tax
assets, assets from employee benefits, non-current assets available for sale.
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According to the standard, establishment needs to conduct an annual impairment test for
intangible assets and business goodwill as well. As per the standard, it is mandatory for the
company to carry out impairment assets every year for the following:
 Intangible assets that have indefinite useful lives
 All the intangible assets of the business entity that is not yet available for the use
 Goodwill that is the result of business combination
For all above-mentioned assets, there is no requirement of any evidence or indication of
impairment. However, other assets requires performing an impairment test when, there is an
evidence of impairment available. As per the standard, whenever an asset is being impaired, then
the amount is recognizing immediately as profit or loss in the statement of comprehensive
income (Impairment Accounting – The Basics of IAS 36 Impairment of Assets, 2008). In CGU, it
is necessary to reduce goodwill first and thereafter, other assets are reduced based on pro-rata
allotment. Assets that are subjected to depreciation is adjusted in future years so as to allocate its
revised carrying value over its remaining useful life. Notably, the impairment loss on the
goodwill cannot be reverse whereas other assets loss can be favorably resolved by reversing the
loss in the profit and loss account, on reversal, carrying value is increases.
Australian Accounting Standard Board (AASB) 136 states that the indication of
impairment can found from either of internal or external sources that are present here as under:
External sources:
 Decline in market value
 Adverse/unfavorable changes in the entity’s market
 Increase in the interest rate
 Net assets of the company above market capitalization
Internal sources:
 Physical change or Obsolescence
 Part of restructuring, idle assets or held for disposal
 If an assets perform worse than expectation
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 If investment in joint venture, associates and subsidiaries, carrying amount exceeds
investee’s assets or dividend goes beyond investee’s total comprehensive income
The standard recognizes impairment loss when recoverable amount fall below the
carrying value. The loss on impairment treats as an expense unless it is relate to such assets, that
impairment loss on revaluation treated as revaluation decrease.
CGU is defined as the smallest group of identifiable assets that are obtaining cash flow
from its continual use and which is independent of cash inflows from the other assets of the
enterprise (Wittsiepe, 2008). With reference to CGU, AASB 136 allows establishment to use a
segment as CGU where the segment is equal to the smallest assets group that are deriving
independent cash flows. Within the CGU< if there is no goodwill amount and company
recognize an impairment loss then such loss is assigned across all of the assets that are the part of
CGU on pro-rate basis using carrying value of each separate assets in relation to the total
carrying amount of CGU. Its impairment losses treat similarly to that of individual business
assets. However, on the other side, when a CGU includes goodwill also, than in line with the
AASB 136 goodwill’s carrying amount is reduced to the possible extent means zero and other
assets on pro-rata basis (IAS 36 Impairment of Assets, 2017).
AASB 136 presents key disclosure requirements for impairment loss in the annual
account of the business unit, that are presented here as under:
 The amount recognized as impairment loss must disclose in the profit or loss account.
 Any reversal of the loss should recognize in profit or loss account.
 Impairment loss on the assets that revalued earlier must recognize directly in the business
equity during the period.
 Any reversal of impairment loss on revalued assets needs to be report directly in equity in
relevant period.
PART B
According to the scenario, Gali Ltd had determined its Fine China division as Cash
Generating Unit (CGU) contains number of assets including building, patent, fittings, inventory
and goodwill. As per AASB 136, impairment test needs to be perform to determine the amount
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of impairment loss is the amount by which carrying amount of an assets goes beyond its
recoverable price that is higher of the arm’s length price or value in use. With reference to the
mentioned scenario, value in use of the assets is 792,000 that is its recoverable price.
Impairment loss: Carrying amount – Recoverable amount
Total carrying amount of the assets = Patent + Building + Fittings + Inventory + Goodwill
= 594,000 + 137,000 + 86,000 + 37,000 + 31,000
= 885,000
Recoverable amount = Value in use = 792,000
= 885,000 – 792,000
= 93,000
According to AASB, impairment loss allocation to CGU, it must be allocated first to
goodwill to nil value and then it must be charge against other assets using pro-rata allotment
basis as follows:
Table 1 Calculation of impairment loss against all the assets in CGU
Item
Carrying
amount
Proportion
(Pro-rata)
Allocation of
impairment loss
Net carrying
amount
Goodwill 31000 - 31000 0
Patent 594000
(594/854) =
0.70 43124 550876
Building 137000
(137/854) =
0.16 9946 127054
Fittings 86000 (86/854) = 0.10 6244 79756
Inventory 37000 (37/854) = 0.04 2686 34314
Total current
assets except
goodwill 854000 1.000 93000 761000
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Here, on patent, fair value after deducting cost of disposal is 571,462 means impairment
loss on such assets (CA-RV) = (594,000 – 571,462) = 22,538. However, as per the above table,
62,420 impairment loss is charged, hence, loss worth (43,124 - 22,538) = 20,586 needs to be
allocated to other assets using pro-rata basis of their adjusted CA as follow:
Table 2 Allocation of extra impairment loss of patent on other assets in CGU
Item Adjusted CA
Proportion
(Pro-rata)
Allocation of
impairment loss
Total impairment
loss allocated
Goodwill - 31000 31000
Patent - 22538 22538
Building 127054 0.53 10847 20793
Fittings 79756 0.33 6809 13053
Inventory 34314 0.14 2930 5616
Total current assets
except goodwill
and patent 241124 1.00 20586.00 93000
Table 3 Journal entry of Gali Ltd
Particulars L.F. Debit Credit
Impairment loss a/c Dr. 93,000
To Accumulated depreciation and impairment loss – building 20,793
To Accumulated depreciation and impairment loss – fittings 13,053
To Accumulated impairment loss - inventory 5,616
To Accumulated impairment loss - goodwill 31,000
To Accumulated impairment loss - patent 22,538
(Impairment loss allocation to all the assets in cash generating
unit)
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CONCLUSION
From the findings of the study, it is clear that AASB 136 and IAS 36 necessitates for the
enterprises to conduct impairment test per year for the intangible assets with indefinite useful
lives, not available for use and goodwill in business combination. In order to find out impairment
loss, recoverable amount (higher of FV-cost of sale or value in use) is compare with carrying
amount and to the extent to which, CA> RV is recognized as loss in profit or loss account.
Although assets are allocate on pro-rata basis, however, if CGU comprises any amount for
goodwill, then, its value must be charge first for impairment loss and thereafter, remainder assets
carrying amount is used. According to the result, total impairment loss of 93,000 is charged
against building by 20,793, fittings by 13,053, inventory by 5,616, goodwill by 31,000 and
patent by 22,538 respectively.
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REFERENCES
Books and Journals
Buschhüter, M. and Striegel, A., 2011. IAS 36–Impairment of Assets. In Kommentar
Internationale Rechnungslegung IFRS. Gabler. 15(4). pp. 888-954.
Husmann, S. and Schmidt, M., 2008. The discount rate: A note on IAS 36. Accounting in
Europe. 5(1). pp.49-62.
Wittsiepe, R., 2008. IAS 36—Impairment of Assets. IFRS for Small and Medium-Sized
Enterprises: Structuring the Transition Process. 14(3). pp.140-155.
Online
IAS 36 Impairment of Assets. 2017. [Online]. Available through: <
https://www.iasplus.com/en/standards/ias/ias36>.
Impairment Accounting – The Basics of IAS 36 Impairment of Assets. 2008. [PDF]. Available
through: <
http://www.ey.com/Publication/vwLUAssets/Impairment_accounting_the_basics_of_IAS_
36_Impairment_of_Assets/$FILE/Impairment_accounting_IAS_36.pdf>.
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