Corporate Accounting and Reporting

This article discusses the reversal of impairment loss for goodwill and its treatment in the profit and loss account of a firm. It also covers the mandatory requirements for impairment loss reversal under AASB 136 and the impact of goodwill acquisition on impairment testing of cash generating unit.

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:
Reversal of impairment loss for goodwill could be termed as a situation where a
firm could announce an asset to be inevitable that was recorded as impairment loss in
the past. An asset is deemed to have holding cost, which, if exceeds the fair market
price, results in asset impairment (Kabir and Rahman 2016). However, the inevitability
of the asset increases with the reversal of impairment loss. Hence, the treatment of the
asset is not a burden to profit. Generally, when an impairment reversal is recognised, it
is essential to match the carrying amount of the asset with its new recoverable value.
However, the value should not exceed the actual amount or depreciated carrying
amount. In opposition, it would lead to recognition of no impairment previously. The
reversal of impairment loss is treated as income in the profit and loss account of a firm.
If assets are carried at re-valued figures with no write-down against revaluation of
impairment loss in the past, it would be considered as impairment loss reversal (Cao,
Shaari and Donnelly 2018).
It is mandatory under “Paragraph 109 of AASB 136” that the considerations for
impairment loss reversal are to be recognised for any cash generating unit or asset in
previous periods. The reversal of impairment loss is possible for three classes of assets,
which take into account cash generating units, assets and goodwill. For this essay, the
impairment loss reversal for goodwill would be considered, which is mentioned in
“Paragraphs 124 and 125 of AASB 136”. It is noteworthy to mention that any
impairment loss recognised for goodwill is not to be reversed in the subsequent period,
in compliance with “Paragraph 124 of AASB 136” (Aasb.gov.au 2018). The reason

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behind this logic is the treatment of goodwill as intangible asset, as per the above-stated
standard. Under this standard, the past reversals of goodwill impairment are allowed
where an increase in value is attributable to the unexpected external event reversal
resulting in the recognition of actual impairment (Chang and Yen 2015).
On the other hand, “AASB 138 Intangible Assets” restricts the recognition of
internally generated goodwill in the financial statements, as highlighted in “Paragraph
125 of AASB 136”. The reason is that any increase in the recoverable value of goodwill
in the periods after impairment loss recognition is likely to result an increase in goodwill
generated within the organisation rather than reversing impairment loss for the goodwill
acquisition (Linnenluecke et al. 2015).
The actual values of the items need to be identified in the statement of financial
position while conducting the overall business operations. Therefore, impairment testing
is necessary, if the asset’s recoverable amount does not exceed its carrying value at the
reporting date. However, it is to be borne in mind that impairment test for goodwill is to
be conducted annually. In relation to impairment testing, the acquisition of business
goodwill would have impact on the impairment testing of cash generating unit. This unit
consists of various assets, which assists in cash flow generation for a business
organisation. The allocation of goodwill to the cash generating units is required for
obtaining benefits from the synergy of combination of two organisations. Under this
scenario, the yearly impairment test for cash generating unit to which the distribution of
goodwill is made is required to be conducted at the reporting time (Mazzi et al. 2017).

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In the impairment test procedure, cash generating units are to be tested for
impairment that does not consider goodwill in business operations. Once it is
completed, the test for individual assets would be conducted for identifying their actual
values. This test would assist in the evaluation process regarding whether the entity has
create value by goodwill acquisition in its business operations. In order to conduct this
type of impairment test, AASB 136 needs the entities to compare the values of their
previous cash inflows with the actual cash flows (Schatt et al. 2016).
In case, goodwill is inherent in the business operations of the entity, the
recoverable value of intangible assets in impairment test would be reliant on enterprise
value or equity value. When the recoverable value is determined by using enterprise
value, it is necessary to carry out comparison with the invested capital. In case of equity
value, it is to be prepared depending on shareholders’ equity. If the recoverable amount
based on enterprise value is not more than the invested sum of the entity, the test for
impairment would be imposed to reduce goodwill amount to a particular computed
amount. However, the assets’ carrying values should not be reduced to an amount,
which is lower than the higher of fair value minus value-in-use or zero or rate of return
(Sun and Zhang 2017).
For determining whether a reversal of impairment loss is needed, the
organisation should consider identical sources of information like for the actual loss
related to impairment. The impairment loss reversal could be conducted only when
there are changes in estimates to determine the recoverable asset values since the
previous impairment loss has been recognised. Under such circumstances, the
recoverable amount and the carrying amount of the asset are to be equal. The increase

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would be identified as impairment loss reversal. However, the reversal of impairment
loss might require modification to asset amortisation in future years.
For instance, a positive change is deemed to be observed in relation to the
recoverable amount of net assets of Ashton Limited since impairment loss is
recognised. The present recoverable amount is $800 million, while the carrying amount
is observed as $720 million. It has been assumed that the depreciation of assets is
conducted by using the diminishing balance method of 20%. In this situation, it is not
possible to reverse to impairment loss on goodwill, as per AASB 136. Moreover, it is not
possible to match the carrying amount and recoverable value of net assets of Ashton
Limited. Hence, it could be concluded that the reversal of impairment loss on goodwill
could not be conducted in compliance with AASB 136.
Answer to Part B:

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References:
Aasb.gov.au., 2018. [online] Available at:
https://www.aasb.gov.au/admin/file/content102/c3/AASB136_07-04_ERDRjun10_07-
09.pdf [Accessed 23 Sep. 2018].
Cao, T., Shaari, H. and Donnelly, R., 2018. Impairment reversals: unbiased reporting or
earnings management. International Journal of Accounting & Information
Management, 26(2), pp.245-271.
Chang, M.L. and Yen, T.Y., 2015. Does Reversal of Asset Impairment Loss Matter?
Evidence from China. International Research Journal of Applied Finance, 6(4), pp.197-
222.
Kabir, H. and Rahman, A., 2016. The role of corporate governance in accounting
discretion under IFRS: Goodwill impairment in Australia. Journal of Contemporary
Accounting & Economics, 12(3), pp.290-308.
Linnenluecke, M.K., Birt, J., Lyon, J. and Sidhu, B.K., 2015. Planetary boundaries:
implications for asset impairment. Accounting & Finance, 55(4), pp.911-929.
Mazzi, F., André, P., Dionysiou, D. and Tsalavoutas, I., 2017. Compliance with goodwill-
related mandatory disclosure requirements and the cost of equity capital. Accounting
and Business Research, 47(3), pp.268-312.

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Schatt, A., Doukakis, L., Bessieux-Ollier, C. and Walliser, E., 2016. Do goodwill
impairments by European firms provide useful information to investors?. Accounting in
Europe, 13(3), pp.307-327.
Sun, L. and Zhang, J.H., 2017. Goodwill impairment loss and bond credit
rating. International Journal of Accounting & Information Management, 25(1), pp.2-20.