Asset Impairment and AASB 112

This assignment delves into the concept of asset impairment under Australian Accounting Standard Board (AASB) 112. It emphasizes the importance of comparing an asset's carrying amount with its tax base to ensure compliance. The text uses a practical example of ABC Limited, showcasing how an impairment loss is recognized and accounted for, considering factors like revaluation surplus and depreciation charges. It highlights the adjustments made to the carrying amount and subsequent depreciation calculations in light of the impairment.

Running head: CORPORATE ACCOUNTING AND REPORTING
Corporate Accounting and Reporting
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1CORPORATE ACCOUNTING AND REPORTING
Table of Contents
Answer to Part A:........................................................................................................2
Answer to Part B:........................................................................................................5
References:.................................................................................................................7

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Answer to Part A:
The fall in the net carrying value of the asset, which is beyond the future
undisclosed cash flows to be generated. The cost of acquiring the asset less
depreciation could be adjudged as the net carrying value (He, Kelly and Manela
2016). Impairment takes place at the time an organisation abandons or sells its
asset, which is not beneficial anymore. The impaired assets need to be recognised
in the form of loss in the income statement of an organisation. In order to compute
the impairment loss, the factors need to be identified firstly leading to the impairment
of assets. These might constitute of changes in the market conditions, workforce
turnover, new legislation or the asset has become outdated or old. After that, the fair
market value of the asset is to be estimated, which is the price to be provided after
selling the same in the market. It could be termed as the recoverable amount of the
asset or the future cash flow to be generated; in case, it continues to operate.
After assigning the fair market value, it needs to be compared with the
carrying value of the asset listed on the financial statement of the organisation. In
case, the fair market value is lower in contrast to the cost of holding the asset, the
asset could be considered as impaired. Despite the fact that impairment results in
tax benefit, it is not good for an organisation. This is because it implies increased
need for investment (Avallone and Quagli 2015).
There are three requirements for measuring and recognising an impairment
loss. Firstly, when the carrying amount of an asset is greater in contrast to the
carrying amount of the asset, the former amount needs to be minimised to the latter
amount. Secondly, the difference between the minimisation from the previous
carrying value to the recoverable amount is called impairment loss. Finally, the

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impairment loss needs to be recognised in the income statement instantly unless the
treatment of revaluation decrease is prescribed in another standard of accounting.
This might take place if the asset was re-valued upwards in compliance with IAS 16-
Plant, Property and Equipment in the past and there is a revaluation surplus for
assigning the current impairment (Tennyson and Akani 2016).
“Paragraphs 59-64 of AASB 136” state the requirements for measuring and
recognising impairment loss for an individual asset except goodwill. According to
“Paragraph 59 of AASB 136”, if the asset’s carrying value is greater compared to its
recoverable value, the asset’s carrying amount would be minimised to the
recoverable amount. Such minimisation is categorised as loss of impairment
(Banker, Basu and Byzalov 2016). In compliance with “Paragraph 60 of AASB 136”,
it could be stated that impairment loss would be realised in profit or loss, unless the
carrying of asset is made at re-valued with adherence to another standard like the
revaluation model in AASB 116. Any impairment loss of such re-valued asset should
be treated as a revaluation decrease in compliance with the other standard.
According to “Paragraph 61 of AASB 136”, any loss of impairment related to
non-revalued asset is realised in the statement of income. However, the realisation
of such loss of impairment is made to the degree that such loss does not go beyond
the revaluation surplus amount for that identical asset. This loss of impairment on re-
valued asset minimises the surplus of revaluation for that asset (Banker, Basu and
Byzalow 2014). Moreover, “Paragraph 61(1) of AASB 136” cites that for non-profit
organisations, an impairment loss associated with re-valued asset is realised in the
statement of income. However, the realisation of such loss of impairment is made to
the degree that such loss does not go beyond the revaluation surplus amount for that

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class of asset. This loss of impairment on re-valued asset minimises the surplus of
revaluation for that class of asset.
With adherence to “Paragraph 62 of AASB 136”, it could be cited that at the
time the anticipated amount in relation to impairment loss is higher compared to the
carrying value of the asset to which it is associated, an organisation needs to realise
a liability, if another standard needs it. “Paragraph 63 of AASB 136” states that after
the realisation of loss of impairment, the amortisation or depreciation expense for the
asset needs to be adjusted in future years for allocating the revised carrying amount
of the asset minus its residual value. This is to be carried out systematically over its
leftover useful life (Bond, Govendir and Wells 2016). Finally, according to
“Paragraph 64 of AASB 136”, if the recognition of impairment loss is made, any
associated deferred tax assets or liabilities are ascertained in compliance with AASB
112 by contrasting the revised asset’s carrying amount with its tax base.
For instance, ABC Limited has a machine with carrying value of $160,000 at
the start of the fiscal year. There was previous revaluation of the asset and
revaluation surplus of $10,000 was there in the account of revaluation surplus. In
that year, one careless staff has damaged the machine, due to which it has to be
impaired (Detzen, Wersborg and Zülch 2015). The anticipated recoverable amount
of the machine is $120,000 and the amount of depreciation to be charged for the
machine is $16,000.
Out of this impairment loss, an offset of $10,000 could be made against the
revaluation surplus of the asset and it is reported in the form of a negative figure in
the other comprehensive income for the year. The remaining $30,000 would be
written off in the form of expenditure in the year and the carrying amount of the asset

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would be its recoverable amount, which is $120,000. In the upcoming year, the
depreciation charge would be based on the new carrying value of the asset, which is
$120,000 less any anticipated residual value. Thus, the charges of depreciation in
relation to the impaired asset would be adjusted in the upcoming years (Rennekamp,
Rupar and Seybert 2014).
Answer to Part B:

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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.
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.
Banker, R.D., Basu, S. and Byzalow, D., 2014. The role of multiple impairment
indicators in conditional conservatism (No. 2400812). SSRN Working Paper.
Bond, D., Govendir, B. and Wells, P., 2016. An evaluation of asset impairment
decisions by Australian firms and whether this was impacted by AASB 136.
Detzen, D., Wersborg, T.S.G. and Zülch, H., 2015. Bleak Weather for Sun-Shine AG:
A Case Study of Impairment of Assets. Issues in Accounting Education, 30(2),
pp.18-39.
He, Z., Kelly, B. and Manela, A., 2016. Intermediary asset pricing: New evidence
from many asset classes (No. w21920). National Bureau of Economic Research.
Rennekamp, K., Rupar, K.K. and Seybert, N., 2014. Impaired judgment: The effects
of asset impairment reversibility and cognitive dissonance on future investment. The
Accounting Review, 90(2), pp.739-759.
Tennyson, O. and Akani, F.N., 2016. Assets Impairment Testing: An Analysis of IAS
36. African Research Review, 10(1), pp.178-192.

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