Goodwill Impairment Accounting Example

This assignment provides a practical example of how to record goodwill impairment in the accounting records. It includes journal entries to reflect the impairment loss and its allocation to different assets, such as goodwill, land, equipment, and buildings. The calculation of the impairment loss is based on a specific scenario with provided figures. This example can be helpful for students studying accounting principles related to asset impairment under IFRS.

Running head: ACCOUNTING
Accounting
Name of the Student:
Name of the University:
Authors Note:

1ACCOUNTING
Table of Contents
Part A:........................................................................................................................................2
Impairment of Assets.................................................................................................................2
Recoverable sum:.......................................................................................................................2
Value in utilization:....................................................................................................................4
Fair worth of the Asset:..............................................................................................................5
Cost of disposal:.........................................................................................................................6
Part B..........................................................................................................................................6
Reference....................................................................................................................................9

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Part A:
Impairment of Assets
The deprecation of the non-Current Assets are conducted over the useful life of the
assets. The non-current assets are valued in the financial statement at revalued amount or at
cost. At the period of executing of the sum of non-current assets are not equivalent to sum
that is recoverable (Chen et al. 2014). As per the IAS 36, destruction of assets must not be
concede at worth superior then sum that is recoverable. As per IAS 36, destruction of the
possessions that is recoverable total is referred as superior than the fair value and worth in
utilization. Anywhere fair cost is computed by reducing the expenses of the disposal of IAS
36 the inury of the possessions was amended on 2004.
As per the assertion, we may examine about the sum that is recoverable, fair cost in detail,
worth in utilization.
Recoverable sum:
Meaning:
As per the IAS 36, tenure of the amount of recoverable refers to as greater of the worth in the
market of an asset or the worth in utilization. This is a model of recoverable quantity in
utilization for shaping the mutilation of the assets (Rennekamp et al. 2014).
Computation:
The sum that is recoverable of a possession is greater than the two computations given
beneath:

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RECOVERABLE AMOUNT= FACE VALUE – COST OF DISPOSAL
Recoverable sum is equivalent to worth of utilization.
Where:
 Cost of Disposal: the extra cost in a straight line credited to the trade of asset that is
being sold.
 Fair Value: the sum for the trading of an possessions in the marketplace that are been
sold.
Explanation:
According to standards of accounting a business enterprise are necessary to spot their
balance sheet undertakings where executing a sum of a possession is higher than sum that is
recoverable. As per IAS 36, perception is comparable to the theory of MV or cost whichever
is inferior for the stocks (Kabir and Rahman 2016).
The business organization is vital to approximate the assets that are fixed in nature is
recoverable sum if this credence that the possessions worth has been injured:
 The Recoverable quantity= I to its worth in utilization if the assets fair worth a less
the expense of the disposal not probable to be computed.
 The recoverable sum of the firms fixed assets= to its Face Value less the expense of
the disposal if the firm desires to sell its possessions.
If executing the sum is more than the face value of an possession less the expense of the
disposal or the asset’s worth in utilization then this is not essential to compute the amount
that is recoverable for the reason that possessions is not destructed (Banker et al. 2016).

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Value in utilization:
Meaning:
The word value-in-use is equivalent to the Present Value of the potential flow of cash
obtained from the possessions. The business organization will conclude a possession’s value-
in-use in bid to ascertain the recoverable sum to compute the destructed loss.
Computation:
Value-In-Use= PV of the asset’s expected flow of cash by putting it to deploy
Explanation:
If a business organization trust the scale of asset’s worth will be destructed, this is essential to
execute an approximation of its sum that is recoverable. As per the IAS 36, also facilitates the
regulations to compute the worth in utilization.
Cash Flow: Compute the prospective flow of cash obtained from the utilization of the
possessions. The analyst of accounts must also take probable elements during the
computation of the anticipated flow of cash (Penner et al. 2016).
 Discount Rate: The computation of value-in-use must think about the time worth of
fund that is portrayed by the firm’s weighted average expense of capital. This pace is
then utilization as discounted pace.
 Other: All the other components are the capacity or liquidity to selling of a
possession.
There must be tolerable assumptions for the flow of cash anticipations such as the present
anticipations, forecast budgets. The business organizations usually estimate budgets for only
5 years, but in other hand, the business organization must construct long period anticipations.

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The discount pace utilized when decisive the PV of the gains from the asset must be one
among the declared below:
 Firm’s weighted average expense of capital before tax
 Augmented charge to have a loan
 Other markets rate of borrowing
Note: Value-in-use is usually anticipated by means of a method conservation therefore, the
worth in utilization will be lesser than its fair market worth.
Fair worth of the Asset:
Fair market worth is the rate at which the asset will be sold in the marketplace. Where
together the seller and buyer are fascinated in the dealing and there is no stress on any of
them. There is an simple method to ascertain the rate of selling of the assets. One may do that
by judges the charge of similar pieces sold in the marketplace (Xiao et al. 2014).
 Evaluate and study the merchandise having a few of special features. The examination
of the past of the assets and evaluating that’s age.
 Locate at least three or five of the similar or almost indistinguishable pieces. These
pieces should be as indistinguishable as possible to the pieces is to be evaluated in
past, age and physical situations.
 To check twice the fair market worth of the pieces. Take the model piece to the
professional in the assessment of this specific form of piece to authenticate the fair
market worth.

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 By captivating out the average price of selling of the indistinguishable pieces are sold.
This will be computed by splitting the total price of selling by the number of pieces
sold (Sandell et al. 2017).
Cost of disposal:
The Disposal refers to as the extra cost that the business organization has spent that is
proportionately credited to the asset selling. Cost of disposal is a future liability that is
debited as an outflow to statement of revenue when this is spent.
Explanation:
As per IAS 36, the destruction of the possessions involves the business organization to
compute the expense of the disposal when the business organization concludes the worth of
an asset has been injured. If the firm may not conclude the value of fair market in this case
the business organization can put off the keeping this burden in anticipation of the
expenditure can be settled (Klimczak et al. 2016).
Part B
Account Carrying amount
Land 605000.00
Equipment 139000.00
Building 88000.00
Inventory 38000.00

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Goodwill 32000.00
Total carrying amount 902000.00
Value in use 806000.00
Impairment loss 96000.00
Account Carrying
amount (CA)
Pro-
rata
Allocation
of
impairment
loss
Adjusted
carrying
amount
Goodwill 32,000 32,000 -
Land 605,000 605/832 46,538 558,462
Equipment 139,000 139/832 10,692 128,308
Building 88,000 88/832 6,769 81,231
832,000 96,000
Impairment loss on Land
Fair value less cost of disposal 581,731
Adjusted carrying amount of land 558,462
Amount to be reallocated 23,269
Allocation of the impairment loss in the CGU

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Account Adjusted CA Pro-rata
Allocation
of
impairment
loss
Total loss
allocation
Goodwill 32,000
Land 23,269
Equipment 128,308
128308/20953
8 14,248 24,941
Building 81,231 81231/209538 9,021 15,791
23,269 96,001
Journal Entries for recording the impairment loss
Particulars Debit Credit
Impairment loss account 96,000
To Goodwill 32,000
To land 23,269
To Equipment 24,941
To Building 15,790
[Being impairment loss of CGU is allocated to goodwill, plant, equipment and fittings]

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Reference
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.
Chen, W., Shroff, P.K. and Zhang, I., 2014. Fair Value Accounting: Consequences of
Booking Market-driven Goodwill Impairment.
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.
Klimczak, K.M., Dynel, M. and Pikos, A., 2016. Goodwill impairment test disclosures under
uncertainty. Journal of Accounting and Management Information Systems, 15(4), pp.639-660.
Penner, J.W., Kreuze, J.G. and Langsam, S.A., 2016. INSTRUCTORS'NOTES:
IMPAIRMENT ANALYSIS: COMPARISON OF IMPAIRMENT OF LONG-LIVED
ASSETS BETWEEN US GAAP AND IFRS. Academy of Educational Leadership
Journal, 22(2), p.90.
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.
Sandell, N., Sandell, N., Svensson, P. and Svensson, P., 2017. Writing write-downs: The
rhetoric of goodwill impairment. Qualitative Research in Accounting & Management, 14(1),
pp.81-102.

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Xiao, S., Wang, Q.Y., Cao, J.J., Huang, R.J., Chen, W.D., Han, Y.M., Xu, H.M., Liu, S.X.,
Zhou, Y.Q., Wang, P. and Zhang, J.Q., 2014. Long-term trends in visibility and impacts of
aerosol composition on visibility impairment in Baoji, China. Atmospheric research, 149,
pp.88-95.