Impairment Loss and Asset Revaluation

This assignment focuses on analyzing an impairment loss situation involving a machine asset within a company. It examines the assumptions made regarding the machine's replacement and the impact of its cash-generating unit (CGU) on the recoverable amount calculation. The analysis delves into the accounting treatment for impairment losses, considering the potential allocation of losses across assets within the CGU and the role of fair value less disposal costs in determining the impairment.

Running head: CORPORATE ACCOUNTING AND REPORTING
Corporate Accounting and Reporting
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CORPORATE ACCOUNTING AND REPORTING 1
Table of Contents
Part A:.............................................................................................................................. 2
Part B:.............................................................................................................................. 6
References.......................................................................................................................7

CORPORATE ACCOUNTING AND REPORTING 2
Part A:
The major impairment principle is that an asset may not be carried within balance
sheet statement other than its recoverable amount that is more than an asset fair value
substracted from value in use and cost of sell. An assets carrying amount is compared
with its recoverable amount along with hat an asset is impaired while the former is
higher than the later (Bond, Govendir and Wells 2016). Certain impairment is
associated with the asset at a time in which impairment loss is realized within loss or
profit.
Every asset is subject to the impairment review which is considered for
impairment test within which there is an indication that an asset can get impaired.
Conversely, there are several assets such as infinite goodwill and intangible assets that
is tested for annual impairment while there is lack of any impairment indicator. Certain
recoverable amount computation is conducted at a personal asset level. In addition, an
asset results in independent cash flows of other assets along with a large number of
assets those are tested for classes of assets impairment elucidated as a part of cash
generating unit (Linnenluecke et al. 2015).
As per “Paragraph 104 of AASB 136”, impairment loss recognition for a cash
generating unit might be conducted in case the unit’s recoverable amount is decreased
in contrast to the carrying amount associated with that unit. Allocation of the impairment
loss is conducted in order to decrease the assets carrying amount in consideration to
the units within two sequential orders. One among them is the carrying amount
associated with the goodwill associated with the cash generating unit that can be

CORPORATE ACCOUNTING AND REPORTING 3
decreased. Another one can be units of the other assets for pro-rata relied on every
assets carrying amount within the unit which can be decreased.
These minimizations within the carrying amounts requires to be considered as a
part of impairment loss for individual assets for they can be realized in accordance with
“Paragraph 60 of AASB 136” (AASB 2014). In addition, “Paragraph 105 of AASB 136”
indicated that for impairment loss allocation, a company will not require to decrease
carrying amount of assets below the high three likely alternatives. Such alternatives
encompass fair value lesser than costs, zero and value in use.
The amount associated with impairment loss that might be allocated in a different
way other than the asset is required to be allocated pro-rata with other unit assets.
“Paragraph 106 of AASB 136” indicated that it is not likely to estimate certain
recoverable amount related with every individual asset associated with the cash
generating unit. For this reason, such standard requires a rapid allocation of impairment
loss among the unit’s assets including the goodwill. This is due to the reason that cash
generating unit of an asset is concerned with working together (Kabir, Rahman and Su
2017).
In addition, “Paragraph 107 of AASB 136” signifies a conduction in which a
recoverable amount is associated asset which is not assured and can lead to two
different situations. In a situation, certain impairment loss associated with asset is
realized in a condition in which a carrying amount is higher in contrast to the fair value
substracted from the disposal cost as well as the allocation process results as
mentioned within the “Paragraphs 104 and 105 of AASB 136” (AASB 2015). More in a

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condition for an asset segmentation is carried out in a condition for an asset in a
condition in which the cash generating units which is not impaired. This is likely in which
the fair value of assets is decreased in comparison to disposal cost in contrast to
carrying amount of assets.
For example, physical damage is caused to a machine and it still remains in the
working condition even if the performance is not up-to-the-mark like before. The fair
value substracted from a machine’s disposal cost is lesser in comparison to the
associated carrying amount. Moreover, it does not acquire independent cash flows. The
smallest class of assets that is recognizable encompassing machine and attaining cash
inflows is independent from cash inflows from different assets. This is in accordance
with the production to which the machine is related to. The recoverable amount I
associated with the production line indicates that this line is not totally impaired.
In such situation, two distinct suppositions might be made. The first supposition is
that certain estimations or budgets which was approved by the management and
indicate lack of commitment level of the management in replacement of the machine.
Recoverable amount of the machine is not estimated as the value-in-se of the machine
might be different from the fair value substracted from the disposal costs and his might
be assured for the CGU to which the machine is associated with (Banker, Basu and
Byzalov 2016). For this reason, there is less impairment loss realization of the machine.
For this reason, it is vital for the company to re-evaluate the depreciation period of
depreciation or depreciation method associated with the machine. It is recommended to
the company in implementing shorter or faster depreciation period in indicating the

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remaining machine life or in manner in which economic advantages are anticipated to
be consumed.
The second assumption is that the budgets and forecasts approved by the
management indicate its commitment in replacing the machine through selling it within
the future years. The cash inflows from the regular machine usage till is disposal are
anticipated to be less. In such situation, the value-in-use of the machine might not be
estimated is close to fair value subtracted from disposal cost. For this reason, it is likely
to make sure of the recoverable amount related with the machine. Conversely, there is
a lack of certain consideration for the cash-generating unit to which the machine
belongs that is the production line. As the fir vale substracted from the disposal cost of
machine lesser in comparison to the carrying amount, an impairment loss that is
realized for the machine. Relied on the above discussion, it might be signified that in
case an impairment loss occurring within CGU including goodwill, the loss is associated
all through the assets within the CGU relied on pro-rata that is associated with the total
carrying amount related with CGU. Lastly, in this case losses associated with
accounting is conducted in an identical manner such as for individual assets.

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Part B:

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References
AASB, C.A.S., 2014. Business Combinations. Disclosure, 66, p.77.
AASB, C.A.S., 2015. Investments in Associates and Joint Ventures.
Banker, R.D., Basu, S. and Byzalov, D., 2016. Implications of Impairment Decisions and
Assets' Cash-Flow Horizons for Conservatism Research. The Accounting
Review, 92(2), pp.41-67.
Bond, D., Govendir, B. and Wells, P., 2016. An evaluation of asset impairments by
Australian firms and whether they were impacted by AASB 136. Accounting &
Finance, 56(1), pp.259-288.
Kabir, H., Rahman, A.R. and Su, L., 2017. The Association between Goodwill
Impairment Loss and Goodwill Impairment Test-Related Disclosures in Australia.
Laing, G.K. and Perrin, R.W., 2014. Deconstructing an accounting paradigm shift: AASB
116 non-current asset measurement models. International Journal of Critical
Accounting, 6(5-6), pp.509-519.
Linnenluecke, M.K., Birt, J., Lyon, J. and Sidhu, B.K., 2015. Planetary boundaries:
implications for asset impairment. Accounting & Finance, 55(4), pp.911-929.
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), pp.289-
294.