Impairment of Assets Accounting

This assignment provides a practical example of how to calculate an asset impairment loss according to AASB 136. The example walks through the process, starting with identifying the need for an impairment test and then calculating the recoverable amount. The assignment also demonstrates the apportionment of the impairment loss across different assets within the entity.

Running head: CORPORATE ACCOUNTING AND REPORTING
Corporate Accounting
Name of the Student:
Name of the University:
Author’s Note:
Course ID:

1CORPORATE ACCOUNTING AND REPORTING
Answer to Part A:
One of the key accounting principles asserts the fact that there is no such
requirement of assets, which have excessive valuations in the financial position
statement. This in turn needs the requiring of several concepts of values with respect to
which the amount, which is carried by the asset, can be contrasted in order to see if
there is surplus. The “Paragraph 1 of AASB 136” asserts that the impairment in the
assets discusses about the methods, which are adopted by every enterprise in order to
ensure that the assets are being carried out at right amounts, which do not exceed the
level of the amounts, which are recoverable. The paragraph also asserts that in case
the assets are carried over that of the amount, which is recoverable, the amount
recoverable through selling of the assets is lower than that of the amount carried by the
asset. The asset, in such scenarios, can be considered to be impaired and the standard
requires the enterprise to realize the losses from impairment including the time of the
impairment loss and that of the disclosures which are essential (Legislation.gov.au
2017).
If for an asset the carrying value exceeds that of the recoverable value then the
impairment loss occurs. This in turn is higher of asset’s fair value minus the selling costs
and the value, which is in use. Taking reference of the “Paragraph 59 of AASB 136”, if
the recoverable value of an asset is less than the carrying value of the same, then the
latter needs to be minimized to that of its former. This kind of minimization is considered
as impairment loss. The technique of measuring the impairment loss may differ based
on the fact whether the asset is recorded at the cost level or pursues the revaluation

2CORPORATE ACCOUNTING AND REPORTING
model (Tricker and Tricker 2015). According to the same paragraph, the impairment
losses need to be immediately realized, except when the carrying of an asset is being
made at the amount, which is re-valued, and comply to some other standard. These
standards help in denoting the revaluation model as it is in AASB 116. Therefore, the
impairment loss, which is related to that of an asset which is re-valued, required to be
considered as a decrease in the revaluation according to other standard (Amiraslani,
Iatridis and Pope 2013).
The two methods with the help of which impairment of assets can take place are
the revaluation model and the cost model. According to the “Paragraph 61 of AASB
136”, in case of the cost model, when an impaired asset is recorded in terms of cost, the
loss needs to be recognized immediately in profit or loss terms. This in turn implies that
the loss is required to be recognized as expense in the statement of income for the
concerned organization (Cotter 2012).
In accordance to that of the “Paragraph 60 of AASB 136”, when the revaluation
model is taken into consideration, then while an impairment is carried out, like that of
plant, property and that of equipment, at the re-valued amount, then the impairment loss
needs to be treated similar to that of a decrease in the revaluation. For the purpose of
reiteration, the impairment loss on the re-valued assets is needed to be realized in the
statement of income in the first stage in order to ensure that it does not exceed the
surplus amount for the similar asset. The target can be achieved with the help of
debiting of the leftover surplus account, which in turn is applicable to assets including
that of the tax liability, which is deferred, before any kind of loss balance is considered
as expenses in the statement of income (Guthrie and Pang 2013).

3CORPORATE ACCOUNTING AND REPORTING
It might happen in some cases that the past written recoverable value of the
amount of an asset exceeds the same asset’s carrying value. As stated by the
“Paragraph 110 of AASB 136”, it is the need of an enterprise to look for the signs of
whether an impairment loss in the past for any asset, except that of goodwill, has
decreased or became non-existent. As can be derived from the “Paragraph 111 of
AASB 136”, there are needs of several external as well as internal signs for impairment
loss reversal. The signs are inclusive of substantial increase in the asset’s market value,
fall in the overall rate of interest in the market, dynamics with favorable implications for
that of the organization, positive changes with regards to utilization of assets and signs
showing better performance of the same in economic terms, in the contrary of the
speculations (Kuzmina, and Kozlovska 2012).
Two models, including the cost model as well as the revaluation model, can do
the impairment loss reversal. When the cost model is taken into account, the reversal
cannot be seen to increase the carrying value of the asset over the depreciated value of
the same. In this context, it is to be taken into account that the concerned asset is
subjected to the policy of the actual depreciation. In this case, the impairment loss for
the asset can be realized in the form of an income item in the statement of income of
the concerned enterprise as is stated in the “Paragraph 119 of AASB 136” (Guthrie and
Pang 2013).
For example, an impairment loss for machinery of amount $13,000 is recorded at
June 30, 2014. The carrying value of the asset at June 30, 2016, is assumed to be
$11,333. This is inclusive of $50,000 cost minus the accumulated depreciation of
$25,667 and the accumulated impairment loss of $13,000. The value recoverable is

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$18,000. There is 10% actual rate of depreciation annually for 6 years. The carrying
value in this scenario is supposed to be $20,000. The recoverable value not surpassing
the carrying value, the impairment loss realized previously of $6,667 can get reversed in
order to restate the carrying value at $18,000. This in turn will raise the initial carrying
value. The accumulated loss from impairment, in this scenario, will be debited and the
reversal will be credited with $6,667.
In the revaluation model, if the impairment loss is taken to be an expense and it
is recorded in the statement of income, the reversal will be done by credit of income
amount. For example, equipment has $90,000 carrying amount, with $100,000 in
account and as depreciation an amount of $10,000. $30,000 of revaluation decrements
can be seen to have been realized while previous impairment loss recording. The
losses in their turn have minimized the balance of the revaluation surplus and deferred
liability of tax account.
The recoverable amount of the same is $1110,000 and so for reversal recording
of $20,000, the loss of impairment previously, the accumulated depreciation and
equipment accounts needs to be debited and has $10,000 balances each. Accounts of
revaluation surplus and deferred liability of tax will also be credited and will have
$14,000 and $6,000 respectively. Therefore, in the coming periods, there is need of
adjustments of the depreciations for the apportionment of the carrying amount (revised)
less the residual values in a systematic manner for the remaining useful life (Laing and
Perrin 2014).

5CORPORATE ACCOUNTING AND REPORTING
Answer to Part B:
Particulars Amount (in $)
Assets' carrying amount (A)
136,0
00
Value in use of the division (B)
121,0
00
Fair value of the assets ( C)
87,3
60
Actual or real asset values (D)
[Greater of (B) and (C)]
121,0
00
Loss from Impairment (E) (A) - (D)]
15,0
00
Goodwill on acquisition of competing
organisations (F) -
Impairment loss from subtraction of
goodwill (E) - (F)
15,0
00
Apportionment of Impairment Loss
Particulars Amount (in $) Percentage Impairment (in $)
Patent 91,000 67% 10,037
Equipment 21,000 15% 2,316

6CORPORATE ACCOUNTING AND REPORTING
Fittings 13,000 10% 1,434
Inventory 6,000 4% 662
Goodwill 5,000 4% 551
Total Amount of Assets 136,000 100% 15,000
Debit Credit
Date Particulars Amount (in $) Amount (in $)
30-Jun-15 Impairment Loss Account……….Dr 15,000
To Goodwill Account 551
To Patent Account 10,037
To Equipment Account 2,316
To Fittings Account 1,434
To Inventory Account 662
(Net assets, liabilities and goodwill impaired
depending on the amount of recovery)
30-Jun-15 Income Statement Account………………..Dr 15,000
To Impairment Loss Account 15,000
( Value of impairment loss reallocated to the
income statement)
In the books of Gali Limited
Journal Entry as on 30 June 2015

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References
AASB, C.A.S., 2014. Business Combinations. Disclosure, 66, p.77.
Amiraslani, H., Iatridis, G.E. and Pope, P.F., 2013. Accounting for asset impairment: a
test for IFRS compliance across Europe. Centre for Financial Analysis and Reporting
Research (CeFARR).
Cotter, D., 2012. Advanced financial reporting: A complete guide to IFRS. Financial
Times/Prentice Hall.
Guthrie, J. and Pang, T.T., 2013. Disclosure of Goodwill Impairment under AASB 136
from 2005–2010. Australian Accounting Review, 23(3), pp.216-231.
Kuzmina, I. and Kozlovska, I., 2012. ACCOUNTING MEASUREMENT OF LONG-
LIVED ASSETS: A CASE OF IMPAIRMENT PRACTICE. Journal of Business
Management, (5).
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.
Legislation.gov.au. (2017). AASB 136 - Impairment of Assets - August 2015. [online]
Available at: https://www.legislation.gov.au/Details/F2017C00297/Download [Accessed
13 May 2017].
Tricker, R.B. and Tricker, R.I., 2015. Corporate governance: Principles, policies, and
practices. Oxford University Press, USA.