Reversal of Impairment of Goodwill and Journal Entries to Record Impairment Loss

This article discusses the reversal of impairment of goodwill and journal entries to record impairment loss. It covers the calculation of impairment loss, allocation of impairment loss to assets, and journal entries to record the same. The article also explains the need for annual impairment testing for goodwill and intangible assets with imprecise estimated useful life. It cites relevant standards and research studies to support the discussion.

Corporate accounting

TABLE OF CONTENTS
Part A: Reversal of an impairment of goodwill...............................................................................3
Part B: Journal entries to record impairment loss............................................................................5
References........................................................................................................................................8

Part A: Reversal of an impairment of goodwill
Goodwill refers to an asset that represents the economic benefits on the future basis from the
acquisition of other assets with a business amalgamation that is not determined individually
neither recognized separately (Tan, and Trotman, 2018). The need to begin a comparison of the
carrying amount of the business cash-generating unit (CGU) inclusive of goodwill along with the
recoverable amount, i.e., higher than the fair value minus disposal costs and used value.
Certain circumstances have been outlined by AASB 136, in which a company can do a reversal
of an impairment loss. According to the standard, asset’s impairment loss could be reversed other
than goodwill. Standards have covered certain assets, as these are generally such financial assets
dealing with other related standards, for example, assets addressed as per the with IAS 36.
Reversal of an impairment loss is done merely if there is a change in estimations with the
applicability to determine the recoverable assets amount at the period of prior impairment loss
realization (Filip, Jeanjean and Paugam, 2015). In this case, carrying the amount of the asset
should be enlarged to the recoverable amount. Furthermore, this increment will perform a
reversal of an impairment loss in accordance with the suitable accounting adjustments.
However, the increase in the carrying value of assets is done on the basis of the past depreciation
cost and will have been in a case the impairment had not. Reversal of impairment loss is
immediately realized in the income statement unless and until financial assets are conducted at
the revaluation amount. In this, the reversal will be said as the revaluation increase (Avallone
and Quagli, 2015). Further, an impairment loss has been recognized in earlier period for the
goodwill, and financial assets should be reversed, in a situation where there is change to
determine asset’s recoverable amount.
It is required by IAS 36 that assets can be carried at not over than their recoverable value. For
meeting the same objective, it is required by the standard, that business enterprise that is in the
scope for possible impairment while indicating the existence of impairment on an annual basis
for goodwill as well for intangible assets with imprecise estimated useful life (Glaum, Landsman
and Wyrwa, 2015).

The goodwill and intangible assets recoverable amount along with imprecise estimated useful
life and non-accessibility of intangible assets for the utilization on the date of reporting is
needed to consider on a yearly basis, regardless of if or if not there is the presence of any
impairment indicators.
At an earlier period of an asset other than goodwill, the recognization of the impairment loss is
done, and the same must be reversed in case a change has been noticed in the assumption used to
identify the recoverable amount of assets (Hong, Paik and SMITH, 2018). Both goodwill and
intangibles with vague useful life and those intangibles which are not yet accessible for the
application to are required to be impaired yearly.
This is completed by making a comparison of the assets carrying amount with the recoverable
amount, despite the fact that whether there is the presence of indications for the impairment.
Further, assets are needed to be impairment testing on frequent testing, if situations or changes in
events indicate that the assets may be impaired (Cao, Shaari and Donnelly, 2018). On the other
hand, once there is impairment then the IAS 36 Impairment of Assets enables the opportunity to
business enterprises to do the reversal of impairment losses realized in the earlier time if the
event has reverted and the rations of the same have improved or dropped.
Conversely, the alternative of reversal is not accessible for the recognized assets in the financial
statements. Thus, the IAS 36particullarly banns the impairment loss reversal in the earlier period
in regards to goodwill (Glaum, Landsman and Wyrwa, 2015). The rationale behind the
prohibition by IAS 36, is that if after the impairment losses of recognizing, with this the goodwill
will increase in following periods then this increase will be stated as the increment in internal
goods will rather than the increment of obtained or purchased goodwill.
The impairment loss on Goodwill’s account cannot be reversed in accordance with the IAS 36
standards. It is because, goodwill is considered as intangible assets, subsequent to IAS 36, it is
prohibited to make the recovery of loss on the Goodwill impairment. Goodwill created from the
purchase acquisition can be put in place for impairment testing (Sun, 2016). Furthermore,
goodwill created on an internal basis must be accounted as per incurred expenditure. Reversal of
impairment lost appears if there is regaining in impaired assets or bounces back in its actual

value, further gain on that particular amount would be reported within the income statement
which shall not exceed the actual impairment amount.
Under IAS 36 Impairment of Assets, a business entity is required to realize the reversal of the
impairment loss, exclusive of goodwill for which an impairment loss will not be reversed at any
condition. Thus, IFRS standards are a little bit severe regarding goodwill, for instance, entities
are required to conduct impairment testing for goodwill on each year (Skousen and Sun, 2016).
After the identification of CGU and the goodwill allocation, then the entity can conduct the
impairment test. The entity must make a comparison of the CGU and allocated goodwill carrying
amount and the CGU recoverable amount.
Present study depicts that the increased carrying amount of assets exclusive of goodwill could be
assessed for reversal for impairment loss. On the other hand, the reversal value in current context
shall not surpass than amortization or depreciation carrying amount. In addition to this, AASB
136 has also affirmed that in a situation of reversal of impairment loss, adjustment of
depreciation would be made from new carrying value from which residual value would be
deducted. Further, accounting for this particular transaction will be conducted in other related
income thereby increasing the revaluation of respective asset.
Part B: Journal entries to record impairment loss
Calculation of Impairment Loss:
Carried Value of Balance Sheet $1,432,200
Value in Use of assets $1,282,200
Impairment loss $150,000
Allocable Impairment loss to assets:
Total impairment loss - Amount of Goodwill – Impairment loss allocable to Land
= $150,000-$50000- ($962,200-$925,814)
= $63,614

Allocation of impairment loss to assets in proportionate to their book value:
Asset Value in
Use
Calculation Allocable
Impairment loss
Amount to be
carried in Balance
Sheet
Franchis
e
$221,000 29283*105000/19900
0
$33473.084 $187,527
Furnitur
e
$139,000 29283*66000/199000 $21053.20 $117,947
Inventor
y
$60,000 29283*28000/199000 $9087.714 $50,912
$420,000 $356,386
Journal Entry in the books of Gali Ltd:
30.06.2015 Impairment loss Dr. 150,000
Goodwill Cr. $50,000
Accumulated amortisation and Impairment Losses (Franchise) Cr. $33,473
Accumulated amortisation and Impairment Losses (Furniture) Cr. $21,053
Accumulated amortisation and Impairment Losses (Inventory) Cr. $9,087
Accumulated amortisation and Impairment Losses (Land) Cr. $36,386
[Being impairment loss attributed to assets on pro-rata basis except for land and goodwill.]
II Impairment Account
Date Particular Amount Date Particular Amount
30
June
2015
Accumulated Impairment
Loss A/c
$150,000 30
June
2015
Profit and Loss
Account A/c
$150,000

In a situation where the carrying amount is higher than the recoverable amount, further, the
entity needs to realize the impairment loss. Nevertheless, as the impairment loss is in relation to
many assets in the CGU, then the entity needs to do allocation as per the given criteria (Hamberg
and Beisland, 2014). Initially, the entity must make a reduction in goodwill to nil, and in case
there is a certain loss of impairment remained, then the allocation will be done to the individual
assets on the cash generating unit on the basis of pro-data. The entity must be careful not to
decrease the assets carrying amount under its recoverable value to nil. It is important to be noted
that, the entity must never do a reversal of any of the impairment loss in regards to goodwill.

References
Avallone, F. and Quagli, A., 2015. Insight into the variables used to manage the goodwill
impairment test under IAS 36. Advances in Accounting, 31(1), pp.107-114.
Cao, T., Shaari, H. and Donnelly, R., 2018. Impairment reversals: unbiased reporting or earnings
management. International Journal of Accounting & Information Management, (just-accepted),
pp.00-00.
Filip, A., Jeanjean, T. and Paugam, L., 2015. Using real activities to avoid goodwill impairment
losses: Evidence and effect on future performance. Journal of Business Finance &
Accounting, 42(3-4), pp.515-554.
Glaum, M., Landsman, W.R. and Wyrwa, S., 2015. Determinants of Goodwill Impairment:
International Evidence.
Glaum, M., Landsman, W.R. and Wyrwa, S., 2015. Determinants of Goodwill Impairment under
IFRS: International Evidence. Working Paper.
Hamberg, M. and Beisland, L.A., 2014. Changes in the value relevance of goodwill accounting
following the adoption of IFRS 3. Journal of International Accounting, Auditing and
Taxation, 23(2), pp.59-73.
Hong, P.K., Paik, D.G. and SMITH, J.V.D.L., 2018. A STUDY OF LONG-LIVED ASSET
IMPAIRMENT UNDER US GAAP AND IFRS WITHIN THE US INSTITUTIONAL
ENVIRONMENT. Journal of International Accounting, Auditing and Taxation.
Skousen, C.J. and Sun, L., 2016. ASC 820 level 3 net assets and goodwill impairment
losses. International Journal of Economics and Accounting, 7(3), pp.250-264.
Sun, L., 2016. Managerial ability and goodwill impairment. Advances in Accounting, 32, pp.42-
51.
Tan, H.C. and Trotman, K.T., 2018. Information Processing Biases in Impairment Decisions:
Effect of Reversibility of Impairment Losses and Disclosure Transparency. Behavioral Research
in Accounting.