Business Report on Impairment Testing

Added on - 19 Sep 2019

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Impairment TestingP a g e|1Part ABusiness ReportIntroductionThe report deals with various aspects of impairment testing including the reason was to whyimpairment testing is necessary and why it’s done. The report deals with the impairmenttesting and the role goodwill plays in it. The report further discusses various steps whichneeds to be followed when doing the impairment testing of the various items of the company(Aasb, (n.d.)).Let us first understand the term ‘impairment of asset’. The asset is said to be impaired if thecarrying value of the asset in books of accounts is more than the net realizable value of theasset then the asset is said to be impaired and is normally written down in the statement offinancial position with differential figure hitting the income statement directly.The purpose of the impairment testing is to reflect the true and fair position of the assets ofthe company which are normally the income generating sources for the business. If the assetsare inflated in the statement of financial position, then the size and the earning capacity of thebusiness may seem distorted may misled the investors as well. So, it becomes important tothat the assets are tested periodically for possible impairment.The existence of goodwill has a direct role to influence the impairment testing in accordancewith the accounting principles laid out in Australian Accounting Standard 136 Impairment ofAssets. As per AASB 136, paragraphs 58-64 deal with the losses on impairment other thangoodwill. Paragraph 65-108 of the accounting standard deal with impairment losses ongoodwill.
Impairment TestingP a g e|2The presence of goodwill changes the way the impairment testing is done. This is because theall the assets which are tangible like plant and machinery can be tested easily but theintangible assets are difficult to test. Among the intangible assets, the most difficult is thegoodwill because the goodwill is not sold in the market as it is. It is balancing figure whenthe entire assets or business transfer takes place. Also, the assets as per the accountingstandard are to be tested for each reporting period. However, there are certain exceptionsavailable for the tangible fixed assets. But, for the intangible assets having infinite useful life,impairment testing is to be done for each reporting period either during the reporting periodor at the end. The only condition to be satisfied is that it should be done for each reportingperiod and the asset which falls prominently in this category is goodwill. This is because incase of intangible assets, the future economic viability is subject to greater uncertainty.There several steps which are followed when the impairment testing is done.The basic step is first identify successfully which asset is exactly to be tested forimpairment.The internal or the external sources of the impairment should be searched by thecompany for the impairment testing. Some of which are as follows –oMarket value of the assets in the open market.oSignificant or adverse changes which have affected the business during thereporting period.oIf there are any increase in the market interest rate which has direct impact onthe discount rate which is used to calculate the value of the asset.oThe market capitalization and the carrying value of the asset.oPhysical damage of the asset.oHampered performance of the asset based on the internal department.
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