Impairment Loss Allocation and Journal Entry

This assignment focuses on understanding and applying the concept of impairment loss in accounting. It presents a scenario where a company has incurred an impairment loss and outlines the process of allocating that loss to individual assets like Goodwill, Patent, Building, and Fitting. A journal entry is also provided to demonstrate how this impairment loss is recorded in the company's books.

RUNNING HEAD: Computation of impairment loss under impairment test
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Name of the student
Topic- Computation of impairment loss and disclosure of same under impairment test
University

Computation of impairment loss and disclosure of same under impairment test
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Part A: Essay on impairment loss and disclosure of same under impairment test
Introduction
With the ramified economic changes and complex business functioning, all the listed
companies are implementing impairment test to identify the true and fair value of their assets in
determined approach. Impairment test is implemented with a view to identify the true and fair
value of the assets after a certain period of time. This essay has focused on how impairment loss
is charged on the assets of company to showcase their true and fair value to its stakeholders.
After that concept disclosure of impairment loss have been justified. An impairment loss for
goodwill is never reversed as there are several assets which are taken by company under the
impairment test. If circumstances are favorable then these impairment loss occurred on assets are
reversed in its profit and loss account. This impairment loss is charged on the profit and loss of
company. The accounting frameworks followed in Australia prescribes the accounting standards
136 (AASB-136) to handle with the provision of accounting treatment (AASB, 136, 2007). The
impairment loss is referred as loss which has been computed by reducing the recoverable amount
form the carrying value.
Nature of Impairment Loss
It is considered that impairment loss is recognized to showcase the true and fair value of
the assets in the books of accounts. It is evaluated that due to internal and external factors of
business, value of assets decrease. Therefore, accountant book this impairment loss in the profit
and loss account of company and reduce the value of the assets with the same impairment loss.
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Computation of impairment loss and disclosure of same under impairment test
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As per the international accounting standards, assets and liabilities of company should be
disclosed at their true and fair value (Huikku, Mouritsen, & Silvola, (2017).
Provision enunciated in AS 136, it is evaluated that impairment loss is computed on all assets of
company except inventories, deferred tax, investment and other few categories. However,
computation of impairment loss is highly based on the carrying amount or recoverable amount of
assets. The carrying amount is the value of assets which is shown in the books of account. If
carrying amount is less than its recoverable amount then that shortage of amount would be
booked as impairment loss. Nonetheless, recoverable amount is also computed with the
references to fair value and CGU.
Impairment loss= Carrying amount - Recoverable amount
Recoverable amount= or net selling price which every is higher)
Carrying amount= (Historical cost- Accumulated depreciation
However, due to the internal and external factors, it could be inferred that impairment
loss recognized for an assets other than goodwill might no longer exist. These factors reflect the
significant favourable changes which increase the value of the business or its assets. Therefore,
this impairment loss could be reversed on the basis of market situation and favourable factors of
business. In order to reverse the impairment loss on its assets, company needs to increase its
profit with the same impairment loss and also the same impairment loss will be added back in the
books of account of company on which impairment test was performed. It is evaluated that if
carrying amount of the assets is less than its recoverable value then there would be impairment
loss and same would be charged from the profit and loss account. After that impairment loss will
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Computation of impairment loss and disclosure of same under impairment test
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reduce the value of those particular assets with the same amount. Nonetheless, it will also put
impact on its other cash generating units to reduce the value in determined approach. All the
impairment loss would be covered from the cash generating units on the proportionate basis.
However, impairment loss would be written off from the goodwill and then rest loss would be
covered from cash generating units (Brigham, E.F. and Ehrhardt, M.C., 2013).
Disclosure requirement for the impairment loss of company
It is considered that as per the IAS-136 company needs to make disclosure of complete
details about the impairment test and amount of loss implemented in the business of
organization. It should be disclosed in the books of account of company either annually or after
each impairment test (ICAA, 2012). There should be proper details about the charging of
impairment loss from the particular cash generating units’ assets and in case of disclosure of
impairment loss, all the impairment loss should be supported by the proper reasons and
justification in the annual report of company (AASB 136, 2007). Additionally, all the
impairment loss on the cash generating units is to be allocated on individual assets based on their
carrying amount. At the time of disclosure of impairment loss same amount would be adjusted
from this cash generating units. The important point to remember is related to its entry in the
books of account i.e. impairment loss arise in the books of account should be properly recorded
as per the IAS 136 (Bepari & Mollik, 2015).
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Computation of impairment loss and disclosure of same under impairment test
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Conclusion
After evaluating all the details and impairment test rules and regulations, it could be
inferred that, recognition of impairment loss, disclosure of same is the matter of financial
prudence and thus, all the corporate bodies should comply with the all the rules and regulation
given under IAS-136. It helps company to disclose true and fair view of assets. It increases the
transparency and credibility of the financial statement disclosed by the company to its
stakeholders. Eventually, this provision helps entities to comply with the international
accounting frameworks (Dagwell, Wines, and Lambert, 2011).
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Computation of impairment loss and disclosure of same under impairment test
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Part B: Journal entries for Impairment loss
Computation of Impairment loss
Amount ($)
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Carrying value of the Assets (Excluding
Inventory) 284704
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Recoverable Amount of Cash Generating
Unit 262000.00
3 Impairment Loss (A-B) 22704
Note: (Impairment test= Not included inventories)
The impairment loss is specifically allocated to individual assets. Firstly, Goodwill would
be used first to cover impairment loss. After that, remaining loss would be deducted from the
individual cash generating units.
Allocation of the impairment loss has been given as below.
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Computation of impairment loss and disclosure of same under impairment test
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Allocation of the Impairment Loss to Individual Assets
Assets
Carrying
Amount
Impairment
Loss
Goodwill 10000 10000
Patent189704/262704)*12704
189704 9173.815
Building
45000/262704)*12704
45000
2176.142
Fitting
28000/262704)*12704
28000
19,178.08
Total
262704
22704
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Computation of impairment loss and disclosure of same under impairment test
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Journal Entry for Impairment Loss
Description Debit ($) Credit ($)
Impairment Loss 22704
Goodwill 10000.00
Accumulation impairment
loss- patent 9173.815
Accumulation impairment
loss- Building
2176.142
Accumulation impairment
loss- Fitting 1354.04
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Computation of impairment loss and disclosure of same under impairment test
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References
AASB 136. (2007). Impairment of Assets. [Online]. Available at:
http://www.aasb.gov.au/admin/file/content105/c9/AASB136_07-04_COMPapr07_07-07.pdf
[Accessed on: 20 January 2018].
Bepari, M. K., & Mollik, A. T. (2015). Effect of audit quality and accounting and finance
backgrounds of audit committee members on firms’ compliance with IFRS for goodwill
impairment testing. Journal of Applied Accounting Research, 16(2), 196-220.
Brigham, E.F. and Ehrhardt, M.C., 2013. Financial management: Theory & practice. Engage
Learning.
Dagwell, R., Wines, G., and Lambert, C. 2011. Corporate accounting in Australia. Pearson
Higher Education AU.
Huikku, J., Mouritsen, J., & Silvola, H. (2017). Relative reliability and the recognizable firm:
Calculating goodwill impairment value. Accounting, Organizations and Society, 56, 68-83.
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