Corporate Accounting: Computation of Recoverable Amount and Impairment Loss

This study provides descriptive evaluation for computation of recoverable amount, the value in use and fair value of asset by reducing cost of disposable by considering relevant subsections. Impairment loss for asset is recorded in situation where carrying book amount is higher in comparison to this recoverable value. The study further incorporates journal entries for recording impairment loss of cash generating unit by considering appropriate provisions of AASB 136.

Corporate accounting

TABLE OF CONTENTS
Introduction................................................................................................................................3
Part A.........................................................................................................................................3
Part B..........................................................................................................................................6
Conclusion..................................................................................................................................9
References................................................................................................................................10

Introduction
AASB 136 states the accounting provisions for the Impairment of Assets supported by
amendments incorporated by IAS 36 Impairment of Assets as provided by the IASB
(Kuzmina and Kozlovska, 2012). The present study provides descriptive evaluation for
computation of recoverable amount, the value in use and fair value of asset by rducing cost of
disposable by considering relevant subsections. The study further incorporates journal entries
for recording impairment loss of cash generating unit by considering appropriate provisions
of AASB 136.
Part A
AASB 136 provides specification relating to the impairment of assets. The main aim behind
specified standard is to stipulate the process that entities pertain to make sure that its assets
are conceded in comparison to their recoverable amount (Impairment of Asset. AASB 136,
2016). Impairment loss for asset is recorded in situation where carrying book amount is
higher in comparison to this recoverable value. If this condition is said to be satisfied, than
the concerned asset is illustrated to record loss due impairment and as per the provision of
cited standard decrease in value is shown as loss in books of accounts. It also indicates in
situation where organization is required to do accounting for reversal of loss shown as
impairment AASB 136 is applied for accounting all the assets except the following:
 Inventories (the same is dealt as AASB 102)
 Assets relating to construction contracts
 Deferred tax asset
 Financial assets which are covered under AASB 139.
 Non-current asset
 Investment property
 Assets covered under AASB 141and AASB 1023
Impairment of revaluing asset depends on the basis which is being applied for ascertaining
the fair value of the asset (HUANG, WANG and JI, 2017). In case the fair value of asset is its
market value than the variation between fair value deducted by the cost to sell and asset’s fair
value is believed as the direct incremental cost for selling of the asset. However, in case of
disposal cost is equal to negligible amount than the recoverable amount of revalued asset is

higher in comparison to the revalued amount. In case cost of selling the asset is not negligible
that in this case revalue asset will be impaired only in case the value is used is less than the
revalued amount.
Recoverable amount
In accordance with provision specified in AASB 136, the recoverable amount can be referred
as the amount greater of assets fair value adjusted by selling costs and value in its use. Under
paragraph 19-57 states the needs to be considered for calculation of recoverable amount.
Ascertainment of market value adjusted by selling costs, and fair value of the asset is not
always necessary to be calculated (Feige and Reichman, 2015). As in case any of these two
amounts exceeds the written down value than in such situation impairment loss is not
recorded, and due to the same reason, then computation of other amount is not necessary. In
case asset is not traded in the active market, then in such scenario fair value is ascertained
through making an appropriate estimate of the value by considering its selling price as per
arm’s length transaction within well-informed and interested individuals. In specified
situation, the recoverable amount is also considered to be fair value if active market for asset
does not exist.
Recoverable amount can be ascertained for a single asset in the situation where it does not
create inflows of cash that are mostly sovereign of the assets or group of assets. In such
situation, recoverable amounts are resolved for the cash producing unit to which the assets
belong till:
 Market Value of disposal must be more than its carrying value.
 Computation of value in use of asset is done by adjusting selling cost from the fair
value of asset or market value less cost of disposal.
In few cases, approximation, averages and evaluation shortcuts might offer an appropriate
estimation of the enlarged computations described under Standard for an influential fair value
of asset adjusted by selling costs or value in use.
Value in use
As per AASB 136, in order to ascertain value in use, there are some variants which shall be
considered are as follows:

 Approximate value of the cash flows for future years of the entity anticipates
obtaining from the asset.
 Anticipation regarding probable variant into the amount or timing of prospected cash
inflows.
 Time value of money, symbolize by the present market threat liberated interest rate
(Bond, Govendir and Wells, 2016).
 Price for demeanour the ambiguity inbuilt into an asset.
 Other factors like liquidity, market applicants would imitate in pricing the future cash
flows the entity anticipate constraining from the market.
For the computation of value in use there are few steps which are to be followed as per
Para31 of AASB 136, the same have been specified below:
 Calculating the future inflows and outflows of cash to be derived from enduring
utilizing of the assets and from its eventual disposal.
 Application of viable rate of discounting to adjust future cash flows to determine
present value of asset.
The factors that are recognized under provisions of (b), (d) and (e) of paragraph 30 can be
referred either as an adjustment the FCF or as an adjustment by using the discounting rate.
Whatever way is being implement to reflect prospect about probable alternatives in the
amount or time value of FCF the consequence should replicate present value of asset by
considering the weighted average of computed inflow that will be derived in future.
Fair value less cost in disposal
As per the views of Rennekamp, Rupar and Seybert, (2014) the most appropriate evidence
which can be applied for determination of fair value of non-current asset reduced by cost to
sale is the amount present in sale agreement in arm’s length transaction. The same is
adjusted by adding the amount which is being paid directly in order to dispose of the asset.
In case agreement abiding the sale is not available due to the absence of lively market of an
asset than fair value less cost to the asset is ascertained through reducing disposal cost from
the fair value. The current bid price is taken as the market price of the asset.
Cost of selling off other than which has been identified as liabilities are eliminated in
calculating fair value lesser than costs of disposal. This cost is inclusive of, stamp duty,
operation taxes, legal costs, expenses of elimination of the asset and direct incremental costs

to fetch an asset into circumstance for its sale. Though standstill gains which are described
under AASB 119 and costs related to dropping or restructuring business following the
disposal of an asset are no express additional costs to organize of the asset. Sometimes the
selling off of an asset would involve the purchaser to presume a liability and only a solitary
fair value cost of disposal is accessible for assets as well as liability. Paragraph 78 of AASB
113 specifies the manner of dealing such issues.
Part B
Impairment loss of cash generating unit can be defined as the amount which shows an excess
of the recoverable amount in comparison to the written down value of the asset. Accounting
of impairment loss is covered under Paragraphs 58-64 of AASB 136 for the purpose
ascertainment and evaluation of impairment losses (Deegan, 2012). However, these
provisions will not be applicable for goodwill. Further, in this aspect, Paragraphs 12-14
shows an indication that any impairment loss has been incurred or not and if any of those
indications exists then the company is required to make an estimation of the recoverable
amount (Bowen and Khan, 2014). However, there is an exception to this provisions in
paragraph 10 in which entity is not required to make a formal estimation of the recoverable
amount if there is no hint of impairment loss in present scenario.
According to the provision of paragraph 59, even in the recoverable amount of an asset is
comparatively lower than the carrying amount than in such situation carrying value of CGU
is reduced to its recoverable value (Olante, 2013). This reduction value is recorded as an
impairment loss. Further, paragraph 60 the standard states that impairment loss is recorded in
profit and loss account on immediate basis until the asset is carried at the revalued amount as
per another standard like AASB 116 which deals with revaluation model of the assets. This
paragraph also states that impairment loss associated with the revalued asset will be
considered as decreased in revalued amount. Further, paragraph 61 of the asset states that
impairment loss of the assets which have not been revalued will be recorded profit and loss
account (Weil, Schipper and Francis, 2013). On the contrary, impairment loss of revalued
assets will be shown in other comprehensive income statement. In this amount to be shown
will be restricted to the quantum of loss of impairment does not surpass the value of
revaluation surplus for that specific asset. In a situation where loss of impairment is higher
than carrying amount that entity is required to recognise liability only if it is required by any
other section.

As per para 63, the depreciation (amortisation) after the accounting of impairment loss is to
be charged for the concerned asset, or CGU shall be adjusted in future years to be allocated
for revised carrying amount of asset after making an adjustment of residual value on a
systematic basis (Cotter, 2012).
Recognising and measurement of an impairment loss
In a situation where the recoverable amount of asset is not higher in comparison to the
carrying amount then an impairment loss is recorded in the books of account. It is because;
carrying value is required to be reduced to the extent of the recoverable amount (Deegan,
2012). Therefore, the variation between the amount of carrying value and recoverable loss is
known as impairment loss (Impairment of Asset. AASB 136, 2016). This loss is recognized as
deficit in the income statement. In a situation where there is a reduction in value of specific
asset than impairment loss is recorded by considering the provision of a specific standard.
Further, in case of cash generating unit (CGU) impairment loss is recorded and apportioned
in the following manner:
 Initially, there is a requirement to make a reduction in carrying the amount of
goodwill allocating to the CGU (AASB 136 - Impairment of Assets - August 2015,
2015).
 Further, the remaining loss is apportioned to the remaining assets in the CGU as per
pro rata basis by considering carrying amount of each asset.
In such computation, it is required to be considered that carrying value of individual assets
within a cash-generating unit cannot be reduced below than maximum of fair value after
making adjustment of costs of disposal (if it can be determined ), value in use (if it can be
determined) or zero (Bond, Govendir and Wells, 2015).
Table 1: Statement showing the calculation of impairment loss for Alex Ltd
Particulars Amount
Asset Carried Value in books of account $266,200
Less: Value in use of assets $239,200
Impairment loss $27,000

Table 2: Statement showing apportioned impairment losses to the assets in cash generating
unit
Particulars Amount
Impairment loss $27,000.00
Less: Goodwill $9,000.00
Less: Impairment loss allocated to Land $6,551.00
$11,449.00
Table 3: Statement showing the apportionment of Impairment loss to the assets in cash
generating unit
Asset Value in
Use
Calculation
of Allocable
Impairment
loss
New Amount to be carried
in Balance Sheet
Franchise $41,000.00
11449*(4100
0/78000) 6018.064 $ 34,981.94
Furniture $ 26,000.00
11449*(2600
0/78000) 3816.333 $ 22,183.67
Inventory $ 11,000.00
11449*(1100
0/78000) 1614.603 $ 9,385.40
$78,000.00 $ 66,551.00
Table 4: Journal entries to record impairment loss
Date Particulars Dr. Amount Cr. Amount
30.06.201
5
Impairment loss Dr. $27,000.00
To Goodwill $9,000.00
To Accumulated Losses for
amortisation and Impairment
(Franchise)
$6018.06
To Accumulated Losses for
amortisation and Impairment
(Furniture)
$3816.33

To Accumulated Losses for
amortisation and Impairment
(Inventory)
$1614.60
To Accumulated amortisation
Losses for and Impairment
(Land)
$6551.00
30.06.201
5
Profit and Loss Account A/c Dr. $27,000.00
To Impairment loss $27,000.00
Conclusion
In accordance with the present study conclusion, can be drawn that accounting of impairment
loss requires various computations such as a value in use, recoverable amount and fair value
reduced by cost of disposal. Therefore, corporate entities are required to consider appropriate
subsection and provisions for disclosure of carrying a value of assets and it is required to be
supported by proper standards. Further, proper disclosure should be made for an accounting
of impairment loss.

References
AASB 136 - Impairment of Assets - August 2015, 2015. [Online]. Available through <
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May 2018]
Bowen, R.M. and Khan, U., 2014. Market reactions to policy deliberations on fair value
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[Accessed on 28th May 2018]
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Weil, R.L., Schipper, K. and Francis, J., 2013. Financial accounting: an introduction to
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