Corporate Accounting and Reporting

This article discusses the primary impairment theories and asset impairment decisions in corporate accounting and reporting. It explains the concept of impairment and how it comes into effect when the carrying value of the asset rises higher than the recoverable value. The article also discusses the dispersal of the impairment loss and the exceptions to the rule. It concludes with a discussion on the accounting losses and how they are managed.

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:
One of the primary impairment theories state that an asset cannot be brought
ahead of its recoverable sum on the declaration of its financial status, which is higher
of the fair asset value minus selling cost and value-in-use. Impairment comes into
effect when the carrying value of the asset rises higher than the recoverable value,
when a comparison is made between the two factors (Birt 2016). The property is
allotted with the impairment during the time when impairment is placed in the income
statement.
Whenever there is any sign recognized for impairment, the associated properties
are revalued during the review process. However, even if there is no presence of
impairment in case of few of the assets an annual impairment is done which includes
goodwill and other property values having no physical presence (Bond, Govendir
and Wells 2016). The recoverable sum is estimated at the level of individual asset.
However, cash flows generated by few of the assets are independent in comparison
to other assets and maximum of the assets undergo impairment testing, which falls
under cash-generating units (Bragg 2017).
“Paragraph 104 of AASB 136” shows that the recoverable amount to be lesser
than the carrying amount so that impairment loss can be identified for the cash-
generating units. The dispersal of the impairment loss is made to minimize the
carrying value of the asset of a particular unit into two sequential orders. First of all,
the assigned value of goodwill would get minimized in cash-generating units and
second of all, the other units of the property on the basis of carrying amount in
proportion would get reduced.

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Due to the reduction in the carrying amounts, the presentation is to be made in
impairment loss on other assets and identification would be made on as per
“Paragraph 60 of AASB 136” (Aasb.gov.au 2018). Besides, “Paragraph 105 of
AASB 136” notifies that the minimisation of the carrying value must not be lesser
than that of the highest three alternate options available for dispersal of the
impairment loss. The alternate options are as follows fair value less disposal cost,
zero and value-in-use.
The sum sustained due to impairment loss could have been dispersed distinctly to
the asset that requires distribution in proportion on the basis of other units of the
property. In context to “Paragraph 106 of AASB 136”, the recoverable sum cannot
be always calculated for the individual asset in cash-generating unit. Therefore, this
standard demands dispersion of impairment loss between the assets of the unit, the
only anomaly is goodwill. This has been caused by the cooperation among all the
classes of assets in cash-generation units; the exception in this case is goodwill
(Chang and Yen 2015).
According to “Paragraph 107 of AASB 136”, if it is not possible to estimate the
value of recoverable amount of a separate asset, there could be development of two
specific situations. Firstly, the asset suffers from impairment loss, if the carrying
value is greater than the fair value less disposal cost and the results of the
distribution procedures mentioned under “Paragraphs 104 and 105 of AASB 136”
(Linnenluecke et al. 2015). Secondly, the asset suffers from impairment loss, if no
impairment is calculated for the related cash-generating unit. This can happen only
when the carrying value is greater than the fair value less disposal cost.

4CORPORATE ACCOUNTING AND REPORTING
An example of such a situation could be when a machine has suffered from some
damages; however, it is still good enough for production usage only, despite the fact
that the efficiency of the machine has been reduced at present. It has been
recognised that the carrying value of the machine is lower compared to its fair value
less cost of disposal related to the machine. Alongside that, the cash flow generated
by the machine is not good. The cash inflows derived by the machine along with the
least recognisable assets, which have no relation with the other assts group, is the
production capability of the machine. Impairment is not fully calculated in this case,
as identified by the recoverable values of the machine.
As shown in the example there might be two definitive assumptions. In the first
case, there is lack of commitment on the part of the management when it comes to
the obvious scenario of replacing the machine as per the budgets and estimations
approved by them. On the other hand, the recoverable value of the machine cannot
be estimated, because value-in-use of the machine might not be identical with the
fair value less cost of dispersal. This could be estimated by the cash-generating unit
of the machine (Wang, Butterfield and Campbell 2016). Hence, the impairment loss
of the machine cannot be identified and the organisation needs to determine the
specific depreciation technique of the machine. In this situation, the depreciation
needs to be calculated for a short period or the organisation can apply paid
depreciation method. In this way the economic benefits of the machine along with its
lifespan for the production unit can be estimated by the organisation.
In the second case scenario, it is assumed that the organisation is ready to
replace the defective machine and the budget and the estimation sanctioned by
them would allow them to buy the new machine just like the previous one. The cash
generated from the defective machine is estimated to be not of a greater value until it

5CORPORATE ACCOUNTING AND REPORTING
is disposed. This makes it even more difficult to calculate the recoverable value of
the machine. The cash-generating unit is not considered where the machine is being
utilised, that is, the production line. The fair value acquired after reduction of the
disposal cost of the machine is lesser than the compared carrying value, the
machine recognises impairment loss (Zhuang 2016).
From the above assessment, it is clearly shown that the impairment loss happens
in the cash-generating unit, the loss gets dispersed in all the assets depending on
the proportion that is feasible. However, this does not consider the value of the
goodwill of the asset or in this case the defective machine. The loss incurred is
related to the carrying value of the cash-generating unit. Lastly, the accounting
losses are managed in the same manner like those for the separate or distinct
assets.
Answer to Part B:

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References:
Aasb.gov.au., 2018. [online] Available
at: http://www.aasb.gov.au/admin/file/content105/c9/AASB136_07-
04_COMPjun09_01-10.pdf [Accessed 27 May 2018].
Birt, J., 2016. Asset impairment: accountants’ road to adaptation.
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.
Bragg, S.M., 2017. Fixed Asset Accounting. AccountingTools LLC
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.
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.
Wang, Y., Butterfield, S. and Campbell, M., 2016. Deferred tax items as earnings
management indicators. International Management Review, 12(2), p.37.
Zhuang, Z., 2016. Discussion of ‘An evaluation of asset impairments by Australian
firms and whether they were impacted by AASB 136’. Accounting & Finance, 56(1),
pp.289-294.