Recognition and Disclosure of Impairment of Assets in Financial Reporting

This report explains the general principles in relation to the recognition of impairment for assets. Real-life examples of some major impairment losses recognized by the organization and disclosure of information about impairment losses within their financial statements and supporting notes will be discussed.

Running Head: FINANCIAL REPORTING
FINANCIAL REPORTING
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Table of Contents
Introduction................................................................................................................................2
Answer 1 – Recognition of Impairment of Assets.....................................................................2
Answer 2 – Recognition and Disclosure of Impairment Losses................................................5
Wesfarmers Ltd..................................................................................................................6
Rio Tinto Ltd......................................................................................................................6
Answer 3....................................................................................................................................8
Real life example of reporting the assets at over-valued amount..........................................8
Factors for not Recognizing Impairment Losses by Managers..............................................8
Conclusion..................................................................................................................................9
References................................................................................................................................11

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Introduction
The aim of this report is to explain the general principles in relation to the recognition
of impairment for assets. Impairment of assets is concerned with those assets whose market
price is less than the value of the assets which is listed in the balance sheet of the company. It
arises when the fair value of assets drops below their recorded value or cost. IAS 36 ensures
that all the organizations are following the principles regarding the measurement of the
assets. In addition, the details of real-life examples of some major impairment losses
recognized by the organization and disclosure of information about impairment losses within
their financial statements and supporting notes will be discussed. Moreover, the possible
factors that motivate the managers to choose not to recognize impairment losses even when it
appears that assets are over-valued as compared to their recoverable amount will be discussed
(Glaum et al. 2013).
Answer 1 – Recognition of Impairment of Assets
Impair is defined as damaging or weakening of asset in terms of its value. Impaired
asset is concerned with the valuation of assets which is impaired when the estimated sum
total of the future cash flow of the assets is lower than the asset’s book value. Impairment
occurs when the amount of the assets is non-recoverable. According to IAS 36, Impairment
of assets ensures that the assets of the organization do not exceed their recoverable amount
(André, Dionysiou and Tsalavoutas 2018). For certain intangible assets and goodwill, there is
the requirement of carrying out the impairment test annually. However, for other assets the
organization must conduct the test if there is any indication that the assets may be impaired.
The test is conducted for the cash generating unit (CGU) where the assets are not generating
inflows of cash which is independent from the other assets. Hence, it deals with testing of

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impairment for all the tangibles as well as intangibles assets except the assets which are
covered by the IFRS.
IAS 36 ensures that the assets in which there is an indication of their impairment, they
must be assessed. At the end of every reporting period, the organization should do the
assessment of the impairment. Estimation of the recoverable value of the assets gives the idea
whether the assets are impaired or not in case of any evidence of the impairment (Zuca 2013).
However, if there is no evidence of the impairment, estimation of the recoverable amount is
not required.
The recognition of the loss on impairment is done in the income statement or other
comprehensive income where there is decrease in the revaluation. The cash generating unit of
the assets is reduced and under that firstly, goodwill is reduced in addition with other assets
on the basis of pro rata. Over the remaining useful life of the assets, the depreciation charges
is then adjusted in the future period for allocation of the revised carrying amount of the
assets. Moreover, there is no reversal for the goodwill’s impairment losses (Filip, Jeanjean
and Paugam 2015). However, for other assets, the impairment losses are reversed back in
income statement or in the comprehensive income statement immediately after the situation
which caused the impairment loss is resolved. After the reversal, the carrying amount of the
assets is increased but it is not increased beyond the amount which it would have been
previously without impairment loss (Amiraslani, Iatridis and Pope 2013).
IAS 36 is applicable on all the assets except some assets such as deferred tax assets,
inventories, assets from employee benefit, fair value measured investment property,
biological assets, non-current assets which is for sale, assets from contracts of insurance and
so on for which other standards applies for impairment (Amiraslani, Iatridisand Pope 2013).
Following are the IAS 36 key requirement for accessing the impairment of the assets:

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 Any indication regarding impairment, asset’s recoverable amount is determined.
 Goodwill and intangibles assets with the useful life which is indefinite and those
which are not for use need to be measured annually irrespective of the indications of
the impairments.
 Higher ‘fair value less the cost to sell’ and value in use is defined as recoverable value
(Amiraslani, Iatridisand Pope 2013).
 If the carrying amount of the assets exceeds the recoverable amount of the assets then
the cash generating unit is impaired.
 In case of impairment losses and impairment test, there is the requirement of the
extensive disclosures.
 Recognition of the impairment losses as an expense in the income statement for the
assets which is carried at cost. It is first recorded against the revaluation gains, which
is previously recognized in the statement of the other comprehensive income
statement (Baek and Lee 2016).
 For the determination of the recoverable amount of the assets, the changes in the
estimates are used. If this is the situation then the impairment loss which is prior
recognized for the assets and goodwill needs to be reversed.
The organization must consider external as well as internal information sources for
the assessment of the impairment of the assets (Bond, Govendir and Wells 2016).
Consideration of the external sources of information helps in assessing the impairment of
assets which include following:
 Reduction and declining of the value of assets which is generally more than normal
depreciation.

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 The asset’s amount which is recorded in the financial accounts after impairment
losses and accumulated depreciation is more than the market value or capital of the
company, chances are there that the assets may be impaired.
 The assets value of the company which is in use may be affected, in case of the
increase in the interest rate of the market.
 The other factors such as environmental, economical, legal and technological also
plays vital role in accessing impairment of assets.
Following are the factors which help in the indication of the impairment of the assets
by the internal sources of the information:
 The physical damages of the assets or obsolescence.
 The change in the value of assets such as poor performance of the assets, idleness of
the assets, disposal of the assets before their expected date, restructuring or
discontinuance of the operations of the assets in which it belongs and reassessment of
the life of the assets as finite despite of it being infinite (Christensen and Nikolaev
2013).
Apart from the internal and external sources of the information, annual impairment
tests have to be done which is necessary to check impairment even there is no any evidence
for the impairment at least once in a year which includes following –
 The assets which are intangible and have indefinite useful life.
 The goodwill which is acquired by the company.
Answer 2 – Recognition and Disclosure of Impairment Losses
Following are the real life examples of the organizations those have some major
impairment losses in the year 2018 and the disclosure of the information regarding the
impairment losses in the financial statement and the supporting losses:

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Wesfarmers Ltd.
Wesfarmers Ltd. is the Australian company based in Perth in the Western Australia
which is engaged in the services of the retail, mining and production of coal, gas processing,
and distribution of the safety and industrial products (Group 2019). It recognizes and tests for
the impairment for plant and equipment, property, intangibles and goodwill. The impairment
expenses are determined when the asset’s carrying amount exceeds the recoverable amount.
The impairment loss or expenses of the Wesfarmers ltd. is $421m which includes impairment
of plant, equipment and assets of $306m, impairment of freehold property of $68 and
impairment of goodwill of $47.The carrying values of the assets for both BUKI and Target
cash generating units has exceeded from their recoverable amounts during the first half year
and in the impairment expenses, pre-tax impairments for $1,167m (post tax $1,253m) was
recognized for the target and part of the discontinued operations for the BUKI (Alves 2013).
The decline in the recoverable amount of cost generating unit for Target indicates the
company’s moderated outlook for their business and difficulty in the trading conditions of the
company in the competitive market. Recognition of the impairment was in the respect of
goodwill of the Target which is $47m, brand name of $238m and $21m for other fixed assets.
Long term moderated outlook for the businesses and Home-base store’s deteriorating
financial performances is the result of decreased recoverable amount for the cash generating
units of the BUKI. The impairment recognized for the brand BUKI was $18m and goodwill
of $777m which was a part of the discontinued operations, write down of stock was $66m
and write off for deferred tax asset was $92m. In addition, during the financial year 2018,
there was no impairment reversal (Group 2019).
Rio Tinto Ltd.
Rio Tinto Ltd. is the multinational company based in London, United Kingdom which
is the world’s largest corporation of metals and mining. It is engaged in finding, mining and

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then processing from the mineral resources of earth (Riotinto.com 2019). In the year 2018,
the 1impairment loss amounted to $132m which comprises of Aluminium-ISAL Smelter
whose pre-tax amount was ($123m) and post-tax was $25m, Energy & Minerals- Rossing
was pre-tax ($9m) and non-controlling interest was $3m. Other impairment charges includes
($2m) for intangible assets and ($130m) for property, plant and equipments (Riotinto.com
2019). The impairment charges includes following:
Aluminium- ISAL Smelter: The Company has made the agreement or selling of the ISAL
smelter in the Iceland. In the Netherland’s Aluchemie anode plant, the company have 53.3%
interest and in Sweden’s Aluminium Fluoride plant, company have 50%. The company
recognizes an impairment expense of $123m after the anticipated sales amount of $345m was
less than the carrying amount of these assets. It results in withdraw of the offer by Hydro.
The company have not recognized any further indications of the impairment or its reversal
(Linnenluecke et al. 2015).
Energy & Minerals- Rossing, Namibia: During 2017, the company assessment of the
annual impairment at the cash generating unit of the Rossing Uranium identified that due to
oversupply there is the drop of its price in the market. The assessment of the amount of
recoverable of the assets has resulted in the impairment of the plant and equipment, property
and other assets which is of non-current nature and resulted in the pre-tax impairment
expense of $267m.The company also decided to sell the shares of Rossing uranium to the
China National Uranium Corporation Ltd. The company has recognized the pre-tax
impairment expense of $9m for transferring the assets during the year (Kasipillaiand
Mahenthiran 2013).
The Company strives to review continuously for indications of the impairment by
recognising cash generating unit.

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Answer 3
Real life example of reporting the assets at over-valued amount
BHP which was previously known as BHP Billiton is headquartered in Melbourne,
Australia which is the trading entity of BHP Group plc and BHP Group Ltd., public listed
company of petroleum and metals as well as multinational mining of Anglo-Australian(BHP,
2019). By the market value, it is one of the world’s largest miners which are listed. In 2017,
the company decided to exit from the US shale operations (Gao and You 2015). The effect of
this news was the sharp lift in the second half dividend of the BHP which moved back to the
annual profits. However, BHP has looked for the ways to increase the profitability, value and
marketability of the operations of the shale. As other competitors BHP has also focussed to
strengthening of its balance sheet by cutting down its costs. The company said that they are
willing to improve their shareholders value and return on capital. The net profit of $5.89
billion was recorded in the year 2017 which was less than the expectations of the analyst.
After the impairment hit on the business of the onshore of US oil and gas and Brazil’s failure
of the 2015 fatal dam in the operation of Samarco iron ore, the company has improvement in
the earlier loss of $6.39billion.However, Elliott Management Corporation which is New York
hedge fund has campaigned regarding the criticism for BHP’s defensive operations in the
recent months and wasting the shareholders fund in the US shale at the height of mistimed
share buybacks and boom of natural gas (BE, MARKET and BONUSES 2015).Elliott has
raised its stake of 5% in the BHP for being in the position to call shareholders meeting as and
when it chooses (Elliott Management, 2019). The company has admitted that they have
pivoted the conventional assets and overspent on the shale assets.
Factors for not Recognizing Impairment Losses by Managers
Over the impairment of assets, sometimes the managers of the company use their
discretion. According to the strategy of the conservative reporting, the company record the

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impairments of assets for conveying the private information. Impairment is considered as one
of the major and key decisions of the accounting. However, the managers use their discretion
in respect of not showing the bad news. They do not believe in the corporate governance of
the company neither they believe in indicating the advantages and importance of the
mechanisms for monitoring for determining the way of handling their impairment decisions.
The managers sometimes intentionally manipulate the performance of the company by
avoiding the decline of the share price value, downgrading the debt of the company and
violations regarding the conventions of the debt, bankruptcy of the company followed by the
losses they are incurring. Impairment loss is not recognized until and unless the recoverable
amount is not recognised. The impairment test requires sufficient experience, knowledge,
time and money for performing test. It also requires the management to have overall
understanding of the businesses and the indicators of the impairment (Trottier 2013). Hence,
these factors are responsible for the managers for not choosing for recognising impairment
losses.
Conclusion
Hence, it is concluded from the report that the companies must follow the principles
and guidelines relating to impairment of the assets which refers to the fact that asset’s
carrying value should not be more than its recoverable amount. In case of any indication
regarding assets need for being impaired then assets impairment is required. For the
impairment, companies must conduct annual impairment test of all the tangible and
intangible assets in recognising if any assets is impaired or not. In addition, both Wesfarmers
Ltd. and Rio Tinto have recognised the impairment expenses or losses in the financial year
2018 and they have shown it into their income statement which is followed by the respective
notes. Moreover, the discussion have been done on the details of the Australian based
company, BHP about the criticism for impairment losses in reporting the over valuation of

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the assets and identification on the factors which is responsible for choosing not to recognise
the losses of the impairment even if the assets are identified to be more than its recoverable
amount. Therefore, identification, recognition and recording of the impairment of the assets
are necessary for all the companies who follow the business ethics and corporate governance.

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