Reversal of Impairment Loss for Goodwill

This essay discusses the crucial aspects of reversal of an impairment loss for goodwill in corporate accounting. It explains the regulations and guidelines provided by AASB 136 for the accounting treatment of goodwill impairment. The essay also highlights the reasons behind the prohibition of reversal of impairment loss for goodwill.

Running head: CORPORATE ACCOUNTING
Corporate Accounting
Name of the Student
Name of the University
Author’s Note

1CORPORATE ACCOUNTING
Introduction
Impairment of assets is considered as an important concept in the process of
accounting and an asset is considered as impaired when its market prices is less
than its listed value in the company’s balance sheet (Christensen and Nikolaev
2013). Impairment loss is an important concept under asset impairment accounting
and it denotes the decrease in the net carrying value of an asset that surpasses the
future undisclosed cash flows that should be generated by the asset. In this case,
net carrying value refers to the acquisition cost of an asset less depreciation. The
occurrence of impairment can be seen at the time of selling or abandoning an asset
that cannot provide the company with benefits (Trottier 2013). It is needed for the
companies to undertake the testing of goodwill impairment in order to ascertain the
fact that whether the carrying value of goodwill surpasses the fair value of the same.
In this context, it is required to be mentioned that reversal of an impairment loss is a
crucial aspect in the process of accounting for goodwill impairment and the
companies are required to follow certain rules and regulations for the treatment of
reversal of impairment loss for goodwill (Lange, Fornaro and Buttermilch 2014). This
particular essay undertake the discussion on the crucial aspects of reversal of an
impairment loss for goodwill.
Discussion
According to the above discussion impairment loss and reversal of impairment
loss is considered as crucial aspect for the companies in the process of impairment
accounting. It is needed for the companies in Australian to comply with the standards
and principles of AASB 136 Impairment of Assets (AASB 136) for the necessary
accounting treatments related to the impairment of assets (aasb.gov.au 2019).

2CORPORATE ACCOUNTING
According to AASB 136, Paragraph 114, it is required for a company to reverse an
impairment loss recognized in previous periods for a particular asset other than
goodwill and this needs to be done when there is a change in estimates used for the
determination of the recoverable amount since the recognition of the last impairment
loss. In case of the occurrence of this situation, there will be increase in the carrying
value of the asset to its recoverable amount. This increase is considered as the
reversal of impairment loss. According to AASB 136, Paragraph 115, increase in the
estimated service potential of an asset is reflected from the impairment loss reversal.
These are crucial aspect (aasb.gov.au 2019).
It needs to be mentioned that the companies are needed to consider
complying with certain rules and regulations in case of the reversal of an impairment
loss for an individual asset. As per AASB 136, Paragraph 117, the increased
carrying amount of a particular asset except goodwill attributable to an impairment
reversal loss shall not surpass the carrying value that would be needed to determine
(aasb.gov.au 2019). At the same time, according to AASB 136, Paragraph 119, it is
required for the business organizations for the recognition of a reversal of an
impairment loss for an asset except goodwill on immediate basis in the profit or loss,
unless the company has carried the asset at revalued amount while complying with
another accounting standards. Paragraph 120 of the same standard states that it is
needed to credit the impairment loss reversal directly to equity under the revaluation
reserve heading (aasb.gov.au 2019). According to the AASB 136, Paragraph 121,
after the recognition of an impairment reversal loss, it is needed for the business
organizations to make the necessary adjustments with the depreciation or
amortization charged for the asset in the future period for the allocation of the
revised carrying amount of the asset after the deduction of its residual value and this

3CORPORATE ACCOUNTING
needs to be done on a systematic basis over the outstanding useful life (aasb.gov.au
2019).
According to AASB 136, Paragraph 122, it is needed to allocate an
impairment loss reversal for a cash-generating unit to the assets of the unit except
goodwill on the pro rata basis with the assets’ carrying value. It is needed to treat
these increases in the carrying amount of these assets as the reversal of impairment
loss for individual assets and these need to be recognized in accordance with the
Paragraph 119 of AASB 136 (aasb.gov.au 2019). Two particular aspects need to be
taken into consideration at the time to allocate the impairment loss reversal for a
cash-generating unit as per the above-discussed manner. As per AASB 136,
Paragraph 123, it is not required to increase the carrying amount of an asset above
the lower of a) the recoverable amount of the asset, and b) the carrying amount of
the asset that would be required to determine. The same section states that it is
needed to allocate the amount of the reversal of the impairment loss on pro rata
basis to the other assets of the unit expect the goodwill of the firm (aasb.gov.au
2019).
It can be seen from the above discussion that goodwill is excluded from each
of the cases related to the accounting treatment of the impairment loss reversal for
the business organizations and the presence of certain reasons can be seen behind
this. AASB 136 has provided the necessary guidelines related to the reversing an
impairment loss for goodwill. According to AASB 136, Paragraph 124, there is not
any requirement to reverse an impairment loss recognized for goodwill in a
subsequent period. In this context, it needs to be mentioned that AASB 138
Intangible Assets puts ban on the recognition of the goodwill that are generated in
internal basis (aasb.gov.au 2019). Any increase in the goodwill’s recoverable value

4CORPORATE ACCOUNTING
in a specific period after the recognition of the loss of impairment related to that
goodwill is going to increase in the value of the internally generated goodwill instead
of the recognized impairment loss for that particular internally acquired goodwill.
Thus, it can be seen from the above that the AASB has prohibited the companies
from the recognition of the reversal of impairment loss in goodwill. There are certain
reasons for which the AASB has put restriction on the reversal of loss of impairment
on goodwill (Komissarov, Kastantin and Rick 2014).
In order to discuss the reasons, it needs to be mentioned that goodwill is
considered as an intangible asset and the business organizations need to recognize
them in the appropriate financial statements, but the companies have the authority to
recognize such goodwill in the financial statements that they have acquired in the
business combination. For this reason, the companies cannot recognize the internal
goodwill or the in-house goodwill as their assets in their financial statements
(Linnenluecke et al. 2015). These are crucial aspects that need to be considered at
the time of the accounting of impairment of goodwill. In this context, it is noteworthy
to mention the fact that a recognised loss of impairment for goodwill cannot be
reversed. Another crucial aspect that has major association with this particular
situation is the fact that it is now restricted to apply amortization on the goodwill
which implies that goodwill cannot be amortized anymore (Guthrie and Pang 2013).
Under the previous accounting standards, it was a major obligation on the business
organisations to ensure the amortization of the goodwill over a period that do not
exceed forty years. However, due to the introduction of the new accounting standard
of IFRS 3 or AASB 3 for the purpose of the accounting treatments of business
combination, the system to amortize goodwill has been eliminated (aasb.gov.au
2019). Under this new accounting standard, it is only needed for the business

5CORPORATE ACCOUNTING
organizations to test the goodwill for impairment loss on annual basis. The current
accounting standard does now allow any systematic decrease or amortization of
company goodwill.
However, it needs to be mentioned that after the impairment of a particular
asset, business organizations get the opportunity from the standards of AASB 136 to
make the reversal of the impairment losses recognized in the prior period and the
major reasons for this impairment have been improved (Storå 2013). However, it
needs to be mentioned that there is not any availability of such reversal option for the
recognized goodwill in the financial statements of the companies. AASB 136/IAS 36
specifically puts the restriction on the companies to carry out any accounting
transaction related to the reversal of any loss of impair my recognized in goodwill for
the previous period (aasb.gov.au 2019). It is crucial to mention the fact that the
previous accounting standards allowed the business entities for reversing the
impairment loss of goodwill under certain special situations such as the company
has recognized impairment losses because of the presence of certain specific
external events that are exceptional in nature and there is not any possibility of the
recurrence, but these external events occurred later which reserves the effects of the
previous events and then, the companies were allowed for the reversal of loss from
goodwill impairment. However, the absence this kind of regulation can be seen in the
current situation (Kabir and Rahman 2016).
The main reason that worked for AASB 136 for not allowing the reversal of the
impairment loss from goodwill is that in case after the recognition of the impairment
losses from goodwill, there is an increase in this value in the subsequent period, then
the companies are needed to consider this increase in this amount as increase in the
internal goodwill of the companies and this will not lead to the increase in the

6CORPORATE ACCOUNTING
goodwill that the company has acquired from business combination (Vogt et al.
2016). Since, there is not any regulation for the recognition of goodwill as an asset,
therefore, there is not any revaluation increase or decrease which can be accounted
for in relation to such goodwill (Storå 2013). This indicates towards the fact that since
goodwill is an intangible asset, there is the prohibition on these assets for the
recovery of loss upon impairment of goodwill. Thus, it can be seen from the above
discussion that the business organizations have the right to make reversal of the
impairment loss related to the assets, but they do not have the authority to make the
reversal of the impairment losses made on the goodwill of the companies (Sun
2016). This is a crucial aspect that the companies are needed to take into
consideration at the time of the accounting treatment of goodwill. However, it needs
to be mentioned that the managements of the companies must ensure the testing of
impairment of the goodwill on yearly basis since AASB 136 puts the obligation on the
firms to undertake the accounting treatments of goodwill, but they have the
restriction to reverse the loss of impairment on goodwill (Schatt et al. 2016).
Conclusion
It can be seen from the above discussion that impairment is an important
aspect for the accounting treatments of the companies of Australian and the
companies are needed to comply with the needed regulations and standards for the
accounting treatment of impairment of goodwill. The above discussion also shows
that the companies are needed to comply with the principles and standards of AASB
136 Impairment of Assets for conducting all the accounting treatments related to
asset impairment that includes goodwill. The above discussion indicates towards a
crucial fact that the companies are not needed to reverse the impairment loss from
goodwill due to the fact that goodwill is intangible asset in nature which put restriction

7CORPORATE ACCOUNTING
on the companies to consider the impairment loss for the purpose of reversal. The
above discussion also indicates towards the crucial aspect that the old accounting
standard for asset impairment provided the companies with the opportunity to
conduct reversal of the impairment loss related to goodwill and this was applicable in
certain circumstance. However, the AASB/IFRS has eliminated this accounting
transaction for the purpose of bringing transparency in the whole accounting
operation related to the impairment of goodwill. The main aim of this change was
that the reversal of impairment loss related to goodwill would lead to the increase in
the internal goodwill of the companies rather than the acquired goodwill from
business combination.

8CORPORATE ACCOUNTING
References
Aasb.gov.au. 2019. Impairment of Assets. [online] Available at:
https://www.aasb.gov.au/admin/file/content105/c9/AASB136_07-
04_COMPapr07_07-07.pdf [Accessed 10 Jun. 2019].
Boennen, S. and Glaum, M., 2014. Goodwill accounting: A review of the
literature. Available at SSRN 2462516.
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.
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.
Izzo, M.F., Valerio, L. and Elisa, S., 2013. Impairment of Goodwill: Level of
Compliance and Quality of Disclosure during the Crisis-An Analysis of Italian Listed
Companies.
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.
Komissarov, S., Kastantin, J.T. and Rick, K., 2014. Impairment of Long-Lived Assets:
A Comparison under the ASC and IFRS. The CPA Journal, 84(5), p.28.
Lange, C., Fornaro, J. and Buttermilch, R., 2014. Qualitative assessment of
impairment for goodwill and other indefinite-lived intangibles. The CPA
Journal, 2014, pp.22-29.

9CORPORATE ACCOUNTING
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.
Nwogugu, M.I., 2015. Goodwill/Intangibles Accounting Rules, Earnings
Management, and Competition. Eur. JL Reform, 17, p.117.
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.
Storå, J., 2013. Earnings management through IFRS goodwill impairment
accounting: In the context of incentives created by earnings targets.
Sun, L., 2016. Managerial ability and goodwill impairment. Advances in
accounting, 32, pp.42-51.
Trottier, K., 2013. The effect of reversibility on a manager's decision to record asset
impairments. Accounting Perspectives, 12(1), pp.1-22.
Vogt, M., Pletsch, C.S., Morás, V.R. and Klann, R.C., 2016. Determinants of goodwill
impairment loss recognition. Revista Contabilidade & Finanças, 27(72), pp.349-362.