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Impairment Loss Calculation Example

   

Added on  2020-03-04

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Impairment of Assets1
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Part A: Recognition and measurement of an impairment loss for an individual assetIntroduction The word impairment in accounting means a permanent decline in the value of certainasset of a company or a business organization. The decline in the price of an asset is a quitenormal feature but is a matter of distress for the management of the organization. The valuationof asset is done on periodical basis and it is usually compared with the price mentioned in thebook value. Various times it is observed that the book value of the asset increases with timehowever the life of assets was actually decreasing. In general both the values are taken intoconsideration and they are written off by the organization and this result in the decline of valueof asset in the balance sheet of the company (Henderson, Peirson, Herbohn, and Howieson,2015). A decline in the asset can be estimated when the required amount cannot be recoveredfrom the same asset, this causes a situation of dilemma for the business organization. In thiscontext, the essay aims to explain the IAS 36 accounting standard implemented by IASB forrecognizing and measuring the impairment loss arising from individual assets.Objective of the IAS 36 The IAS 36 aids the organization in identifying an asset which is damaged and thesubstitute ways that can be done to incur fewer losses (IAS 36 Impairment of Assets, 2017). Theimpairment of fixed assets refers to a decline in its fair value due to any type of damage whichhas to be recorded in the balance sheet and income statement. The IAS 36 standard has beendeveloped for recognizing the losses that arises due to asset impairment. As the process ofdeclining of an asset is quite normal, it is highly essential for the business entities to adopt IAS36 standard in order to implement accurate accounting approach to identify and measure suchloss. The core idea of IAS36 is that an asset which has declined completely and cannot be usedagain should not be included in the balance sheet of that company. The asset is declined whenits cost is more than the cost which can be gained through selling the same. When an asset isdeclined, it is situation of loss for a company, but this process is a continuous aspect so most ofthe companies cannot avoid the same so it became quite important for business organization toadopt certain measures through which the percentage of their losses can be reduced. In this wake2
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IAS36 provides a ray of hope as it aids the business organization in identifying the asset whichhave chances to be declined and the ways through which business organization can incur lessloss (Impairment accounting – the basics of IAS 36 Impairment of Assets, 2010). IAS36 assessthe assets of the companies and suggest timely sell out of the same so that company can earnsomething which could be greater form the amount of their losses. The key definitions coveredunder the IAS 36 standard are as follows:Impairment Loss: The amount through which the carrying value of an asset exceeds itsrecoverable amountCarrying Amount: The recognition amount of an asset in the balance sheet afterdeducting the deprecation and all the losses arising from its impairment.Recoverable Amount: The difference in amount between the fair value of an asset and itsdisposal costs. Fair Value: The price realized for an asset sale or given for a liability transfer in anordered transaction between the participants in the market on the date of measurementValue in Use: The net value of potential cash inflows that is likely to be generated froman assetThe concept of IAS36 has become quite popular as it implies to all kinds of assets. IAS36 isimplied to all the assets which operate in groups or individually. IAS36 concept suggests propermanagement and analysis of all the assets on periodical basis in order to gain a proper andaccurate idea about their impairment. This aids the business organization in planning futurecourse of action through assessing its recoverable amount in advance (Saracino, 2007). IAS36 in Organization for recognizing and measuring impairment lossThe IASB has mandated the business entities to implement IAS 36 standard fordetermining the recoverable amount from an impaired asset. The standard has been in use since1999 in the business entities for ensuring that entity assets are not measured at the value that islarger than its recoverable amount. It is important to note that IAS36 can be applied to variouskinds of organization but especially it has been used by the firms which have been listed in thestock exchange. In addition to this, it can also be applied to the firms which maintain their books3
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