Impairment Accounting and Journal Entries

This assignment focuses on the accounting treatment of impairments in assets. It provides a scenario where an entity needs to recognize an impairment loss on various assets such as goodwill, plant, equipment, and fittings. The student is required to calculate the recoverable amount, determine the impairment loss, and prepare journal entries to reflect the impairment in the financial statements.

RUNNIGN HEAD: Disclosure of Impairment test 1
Disclosure of Impairment test

Disclosure of Impairment test 2
Part-A
Introduction
With the increasing ramification of economic changes and complex reporting
frameworks, all the listed companies implement impairment test on its assets to identify the true
and fair view of their assets. It is evaluated that IAS-136 is the international accounting standard
which is followed by organization to implement impairment test on its business functioning.
International financial reporting authority has implemented IAS-136 to strengthen the
transparency of its assets value by following effective level of disclosure of impairment loss. It is
determined that the disclosure of impairment loss is more extensive when the impairment loss is
deducted from the goodwill. The main disclosure requirement is related to deducing the
impairment loss from the goodwill and implementing proper level of impairment test. With the
help of this impairment test implemented by companies may showcase the true and fair view of
assets (Dagwell, Wines, and Lambert, 2011). This impairment test should be implemented by
following all the rules and regulations of IAS-136 to identify the true value of assets. However,
the main problem in impairment test arise when organization find difficulty finding the market
value of assets. The accounting principles permit revaluation of assets of company on periodic
basis to determine the value of assets in books. However, disclosure of impairment loss become
cumbersome when these computed impairment loss is deducted from the goodwill and other cash
generating units of organization.
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Impairment Test disclosure Purpose and Objectives
The main objective of implementing impairment test is to identify and evaluate whether the
assets shown in the books of accounts are reflecting true and fair view of assets. There are
several organizations who had been cheating with their stakeholders by falsifying the wrong
value of assets in their balance sheet (AASB 136, 2009). Therefore, disclosure of impairment test
may strengthen the faire view of assets and reporting frameworks as per the international
financial reporting standards. Ideally, impairment loss disclosure should be done on periodic
basis and it could also be done by company whenever these companies feel to impair their assets.
(Dagwell, Wines, and Lambert, 2011). This disclosure of impairment test may increase the fair
value of its assets (Dagwell, Wines, and Lambert, 2011).
It is evaluated that while implementing impairment test, company needs to find out the
market value of its assets and amount of assets shown in the books of accounts. This level of
differences between market value and books of accounts of assets of company is undertaken
through the impairment test. If company could implement proper level of IAS-136 then it will
increase the overall reporting frameworks in determined approach (Ernst & Young LLP, 2015).
If carrying amount of organization is low as compared to books value of assets shown in the
books of accounts then it will result to impairment loss and should be disclosed in the books of
accounts of company on periodic basis (AASB 136, 2009).
The disclosure requirements for the implemented impairment test are given as below
As per the provisions of AASB 136, all the assets should be tested for impairment
individual basis. Extensive disclosure is required to be made by organization whenever
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impairment loss is recognized in books of accounts of company (AASB 136, 2009). In addition
to this, when these impairment test is related to charging impairment loss from goodwill and case
of cash generating units, this process become cumbersome. It is evaluated that in case of
identifying, disclosing and measurement of impairment loss for individual assets, the net
realizable value of the assets on individual basis should be charged from profit and loss and
reporting of same should be done in the notes to accounts of company (AASB 136, 2009).
IN case of recognize and measurement of impairment loss for individual assets,
impairment loss is occurred when the market value of assets is less than the market value of
assets shown in the books of accounts of company. In this case, it is observed that if company
could easily identify the true and fair view of assets and found any impairment loss then that loss
firstly be deducted from the goodwill and then from other cash generating units (AASB 136,
2009).
Disclosure requirement of impairment loss
The AASB 136 has stated that there is extensive disclosure requirement in respect of
impairment test and recognized impairment loss (AASB 136, 2009). It has shown that amount of
impairments recognized and reversed and circumstances are the main cause for disclosing the
impairment loss. The disclosure of impairment test must be done for the valuation method which
company has used, sensitivity analysis implemented key assumptions taken by organization.
This sensitivity analysis is used by organization to determine the key value of assets and possible
changing factors which are considered by organization for identifying the impairment loss. In
addition to this, all the impairment loss arise should be shown in the notes to accounts and
appendix attached for the same while reporting financial statement (AASB 136, 2009).
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Key assumption disclosure while implementing impairment test
It is observed that at the time of impairment test company’s needs to showcase all the
details and assumptions taken by company while impairing all of the assets of organization.
However, key assumptions such as discounted rate, present value factors, and valuation methods
used by company and following rules and IFRS standards must be disclosed in the notes to
accounts of company (AASB 136, 2009).
Conclusion
It is observed that impairment test should be implemented to recognize and measurement
of Impairment loss assets. If company could make complete level of disclosure in its books of
accounts then it will help in strengthen the transparency of impairment test on determined
approach, Now in the end, it could be inferred that disclosure of impairment test and all the
details and assumptions taken by company while impairing all of the assets of organization is
imperative for the transparency of its reporting frameworks.
.
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Part-B
Computation of impairment loss for individual assets of Gali Ltd
A. Carrying amount of cash generating
unit including goodwill
Amount ($)
Plant 974000
Equipment 224000
Fittings 141000
Inventory 61000
Goodwill 51000
Total 1451000
B. Recoverable amount 1298000
C. Impairment Loss (A-
B) 153000
S. No. Account Titles Debit Credit
1 Impairment Loss
153000
Goodwill 51,000.00
Plant (note below)
37098
Equipment (102000/ 1339000)*224000
39830.27
Fittings ((102000/ 1339000)*141000
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25072
Inventory Nil
(Being impairment loss recognized)
2 Profit and Loss
102000
Impairment Loss
102000
(Being impairment loss charged to profit and loss
account)
Impairment on plant individually
(
974000
-
936902
)
37098
Impairment loss on plant cannot be allocated more than $18196
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References
AASB 136. 2009. Impairment of Assets. [Online]. Available at:
http://www.aasb.gov.au/admin/file/content102/c3/AASB136_07-04_ERDRjun10_07-09.pdf
[Accessed on: 21st September 2017].
Dagwell, R. Wines, G., and Lambert, C. 2011. Corporate Accounting in Australia. Pearson
Higher Education AU.
Ernst & Young LLP. 2015. International GAAP 2016: Generally Accepted Accounting
Principles under International Financial Reporting Standards. John Wiley & Sons.
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