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Impairment of Assets IAS 36

Added on - 23 Nov 2020

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PART AImpairment loss for cash generating units excluding goodwillImpairment loss can be defined as a reduction in the value of an asset when therecoverable amount of the asset is less than its carrying value (Waters-Wood And et. Al, 2012).Net Carrying value is the difference between the acquisition cost of the asset and depreciationcharged on it. Recoverable amount can be defined as the prevailing fair market value of the asset,if the asset sell it today. Impairment occurs when the net carrying value exceeds the Fair MarketValue of the asset. It is calculated by this formula is Asset's acquisition – Depreciation = Netcarrying value. For example, if the machinery whose net carrying value is $50,000 and itsprevailing recoverable amount in market is $20,000. Since Carrying value is greater thanrecoverable amount, the asset is said to be impaired. This asset will be treated as a loss in thebooks of the company even if it provides a tax benefit currently(Almardini and et. Al, 2017). Forcalculate impairment loss there is first identified the factors that related to the asset's impairment.In this include factors such as changes in market conditions, turn over in workforce, newlegislation or the asset simply became too old or outdated. After that estimate fair market valueof assets which were sold in the market. If fair market value recognised after that it is comparedwith carrying value of the assets that is listed on the financial statement of the company. Fromthe view of impairment, all assets are tested for impairment where there is an indication that theassets may be impaired. Although definite assets such as intangible assets are tested forimpairment annually even if there is no impairment indicator. Most of the assets are tested forimpairment in the group of assets that is known as cash generating units.Cash generating unit (CGU) is the smallest identifiable group of assets that generatescash inflows that are largely independent of the cash inflows from other assets or group of assets.An individual asset does not provide correct fair market value of the assets. Therefore a group ofsimilar assets is taken to evaluate the impairment of an asset(Neri and et. Al, 2014). This groupis known as CGU.CGU includes only those asserts that can be tested for impairment on anannual basis. For ascertaining the net carrying value of the CGU, it is important to use a base ormethod which is conformable with the way fair market value of CGU is calculated. For example– The XYZ company have tangible assets like plant ($40000), equipment ($6000) and building($10000) so there is create group of intangible assets that is known as cash generating unit($110000). After that assesses of CGU for impairment and calculate carrying amount and
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