Corporate Accounting and Financial Reporting: Impairment Analysis

This report provides a comprehensive analysis of corporate accounting and financial reporting, with a specific focus on the treatment of impairment losses, particularly concerning goodwill. It delves into the relevant accounting standard, AASB 136, outlining its requirements for identifying and measuring impairment, including the determination of recoverable amounts and the use of cash-generating units. The report explains the process of impairment loss reversal, detailing the conditions under which it is permitted, the accounting entries involved, and the limitations, such as the prohibition of goodwill impairment reversal. It also provides a clear explanation of how to calculate impairment loss, supported by journal entries. The report references several academic sources to support its analysis, offering a robust understanding of the topic.

Running head: CORPORATE ACCOUNTING AND FINANCIAL REPORTING
Corporate Accounting and reporting
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1CORPORATE ACCOUNTING AND FINANCIAL REPORTING
Part A
Reversal of the impairment loss on goodwill
AASB 136 - impairment of assets ensures that Assets of the company are not
recorded at the value which is exceeding its recoverable amount. The companies are
required to carry on impairment test if there is any indication that the asset may be
impaired. Further if the asset does not generate any independent cash flows then the
cash generating unit under which the asset is included is tested for impairment. The
excess of carrying amount as compared to recoverable amount of the Assets or the
cash generating unit is known as the impairment loss. Further, the amount for which
the asset is identified in the balance sheet after reducing the accumulated
impairment loss and accumulated depreciation, if any, is known as the carrying value
of asset (Bond, Govendir and Wells 2016). On the other hand the higher amount
among the fair value of the asset reduced by the cost of disposal and the value in
use is known as the recoverable amount of the Asset. In this case the price that can
be received from selling of the asset in the open market is known as the fair value of
the Asset. On the contrary the value in use of the asset is the PV (present value) of
all the future cash flows that can be expected to receive from the Asset.
Various external as well as the internal indications are there with regard to the
impairment of asset. The internal indications are (i) physical damage or
obsolescence of the asset (ii) asset is not in use or part of the asset is being held for
restructuring or disposal (iii) lower economic performance as compared to the
expectation. The external indications are (i) reduction in the asset’s market value (ii)
negative impact on the technology, economy, laws or market condition (iii)
enhancement in the rate of interest in the market and (iv) value of the net asset of

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the company is higher as compared to the market capitalisation (Bugeja,
Czernkowski and Moran 2015).
Goodwill is annually tested for the purpose of impairment. For testing the
impairment of the goodwill that is acquired under the business combination shall be
assigned to each of the cash generating unit of the Acquirer. The goodwill shall be
assigned to all the cash generating units of the company that are likely to be
benefited from the combination of synergies. Further, the CGU under which goodwill
is assigned must not be more than the operating segment and shall represent lowest
level of the company under which the goodwill is scrutinized for internal management
(Kang and Gray 2013). However, initial goodwill allocation that is acquired under the
business combination is not possible to complete before the closing of accounting
period during which business combination has been impacted. Further, the initial
distribution must be completed before closing the 1st accounting period after the
acquisition date.
Para 110 – 116 of AASB 136 stated the requirement criteria for impairment
loss reversal that can be identified for the CGU or the individual asset. Even if it used
the term ‘an asset’ it is applicable to CGU as well as individual asset both. Reversing
of impairment loss shall be evaluated at each of the closing period to find out
whether any indication exists for impairment (Christensen and Nikolaev 2013).
Further, it shall be analysed whether there is any reduction or non-existence of the
impairment loss that has been recognised in the previous period. If indication for
impairment exists the asset’s recoverable amount of the asset shall be determined.
The impairment loss identified in the previous period except the goodwill shall be
reversed if indications exist there that the estimated used to determine the asset’s
recoverable amount has been altered since last time when the impairment loss was

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recognized. Indication for changes in the estimates are – (i) changes are there for
the basis used to estimate the recoverable amount (ii) alterations in the timing or
amount for the discount rate or projected future cash flows if the recoverable amount
was calculated based on the value in use (iii) change is there on the basis of
estimation of fair values where the recoverable amount of the asset is based on the
fair value reduced by the disposal cost (He, Evans and He 2016).
The impairment loss reversal is recognized in the profit or loss account
immediately except where the asset is recorded at the revalued amount where the
reversal is treated as the increase in the revaluation balance (Farías and Rodríguez
2015). After making the reversal, the adjustment for amortisation or depreciation is
made in the future period for assigning the revised carrying amount of the asset
reduced by the residual value on systematic approach over the asset’s useful life
that is remained. However, the revised carrying amount of the asset cannot be more
than the amount that would have been if there had been no impairment.
While impairment loss is reversed the amount of reversal is assigned to CGU
except for the goodwill on pro rata basis in proportion of the assets carrying amount.
As per Para 122 of AASB 136, at the time of allocation the asset’s carrying amount is
not increased beyond the carrying amount and recoverable amount, whichever is
lower if the impairment would not have been taken place (Ji 2013).
As per Para 124 of AASB 136 the impairment loss that is recognised for the
goodwill is not allowed to be revered in the subsequent period. As per AASB 138 on
Intangible asset the recognition of the internally created goodwill is prohibited
(Guthrie and Pang 2013). Increase in the goodwill’s recoverable amount that is
impaired is treated as increase in the value of internally generated goodwill.

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Therefore, instead of reversing the impairment loss recognised with regard to the
goodwill acquired shall be recorded as the value increase. Therefore, impairment
loss reversal for the goodwill is not allowed.

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Part 2
Calculation of impairment loss
Journal entries –

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Note – while allocating the impairment loss inventory is not considered owing to the
fact that the inventories are value at market value or cost, whichever is lower.

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Reference
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.
Bugeja, M., Czernkowski, R. and Moran, D., 2015. The impact of the management
approach on segment reporting. Journal of Business Finance & Accounting, 42(3-4),
pp.310-366.
Christensen, H.B. and Nikolaev, V.V., 2013. Does fair value accounting for non-
financial assets pass the market test?. Review of Accounting Studies, 18(3), pp.734-
775.
Farías, P. and Rodríguez, R., 2015. Segment disclosures under IFRS 8’s
management approach: has segment reporting improved?. Spanish Journal of
Finance and Accounting/Revista Espanola de Financiacion y Contabilidad, 44(2),
pp.117-133.
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.
He, L., Evans, E. and He, R., 2016. The Impact of AASB 8 Operating Segments on
Analysts’ Earnings Forecasts: Australian Evidence. Australian Accounting
Review, 26(4), pp.330-340.
Ji, K., 2013. Better late than never, the timing of goodwill impairment testing in
Australia. Australian Accounting Review, 23(4), pp.369-379.
Kang, H. and Gray, S.J., 2013. Segment reporting practices in Australia: Has IFRS 8
made a difference?. Australian Accounting Review, 23(3), pp.232-243.

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