Corporate Accounting and Reporting: IAS 36 and Asset Impairment

This report provides an analysis of corporate accounting, specifically focusing on asset impairment in accordance with IAS 36. It explains the concept of impairment, which occurs when the net carrying amount of an asset exceeds its recoverable amount. The report details how to calculate impairment loss, considering factors such as market conditions and obsolescence. It outlines the requirements for measuring and recognizing impairment loss, including reducing the carrying amount to the recoverable amount and recognizing the loss in the income statement. The report also discusses the treatment of impairment loss in relation to revalued assets, referencing specific paragraphs from AASB 136. A practical example involving XYZ Limited illustrates the application of these principles, demonstrating the impact on the financial statements. The report concludes with a list of relevant references, providing a comprehensive overview of the topic and supporting the analysis with academic sources.

Running head: CORPORATE ACCOUNTING AND REPORTING
Corporate Accounting and Reporting
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1CORPORATE ACCOUNTING AND REPORTING
Table of Contents
Part A:.............................................................................................................................. 2
Part B:.............................................................................................................................. 6
References:......................................................................................................................7

2CORPORATE ACCOUNTING AND REPORTING
Part A:
The decline in net carrying amount of the asset is above the generation of future
unrevealed cash flows. The net carrying value could be obtained by deducting
depreciation from the cost of asset acquisition. Impairment occurs when a firm sells or
abandons its asset due to fall in its ability to fetch benefits1. Thus, it is not needed to
realise the impairment loss as loss in the profit and loss account of the firm. For
calculating the impairment loss, the influential dynamics resulting in asset impairment
are to be identified. Such influential dynamics include variations in the market
conditions, new regulations, staff turnover or the obsolescence of the asset. Based on
this, the fair market price of the asset is to be anticipated and it is the value to be
obtained after it is sold in the market. This could be realised as asset’s recoverable
value or the expected generation of future cash flows, if the operation is continued.
The fair market price is to be contrasted with the asset’s carrying value listed on
the financial reports of the firm after allocating the former. If the fair market value falls
below the holding cost of the asset, it indicates the asset impairment. Even though tax
benefit could be obtained with the help of impairment, the outcome might not be
effective from an organisational perspective. The reason is that the requirement for
investment increases2.
1 André, Paul, Dionysia Dionysiou and Ioannis Tsalavoutas, "Mandated Disclosures Under IAS 36
Impairment Of Assets And IAS 38 Intangible Assets: Value Relevance And Impact On Analysts’
Forecasts" (2017) 50(7) Applied Economics
2 Avallone, Francesco and Alberto Quagli, "Insight Into The Variables Used To Manage The Goodwill
Impairment Test Under IAS 36" (2015) 31(1) Advances in Accounting

3CORPORATE ACCOUNTING AND REPORTING
In order to measure and recognise impairment loss, three requirements need to
be followed. Firstly, the carrying amount is to be reduced to the recoverable amount, if
the recoverable amount is lower in contrast to the carrying value. Secondly, impairment
loss is arrived at by obtaining the difference between the reduction from the last carrying
value to the recoverable value. Finally, the realisation of impairment loss is made in the
income statement unless the revaluation decrease treatment is prescribed in another
accounting standard3. This would occur, if there is upward revaluation of the asset, as
per “IAS 16- Property, Plant and Equipment” in the past and in order to allocate the
right impairment, revaluation surplus is used.
In accordance with “Paragraphs 59-64 of AASB 136”, it is possible to identify
the requirements in order to gauge and realise impairment loss for a distinct asset.
“Paragraphs 59-64 of AASB 136” cites that the carrying amount is to be reduced to the
recoverable amount, if the recoverable amount is lower in contrast to the carrying value.
This reduction is treated as impairment loss. According to “Paragraph 60 of AASB
136”, the recognition of impairment loss would be made in profit or loss, unless the
asset’s carrying value is made at re-valued amount with conformance to another
standard such as the model of revaluation, as laid out in AASB 116. Any loss of
impairment related to re-valued asset would be considered as fall in revaluation in
conformance to another standard.
“Paragraph 61 of AASB 136” cites that impairment loss pertaining to assets that
are not re-valued are realised in the income statement. However, the recognition of this
3 Gros, Marius and Sebastian Koch, "Goodwill Impairment Test Disclosures Under IAS 36: Disclosure
Quality And Its Determinants In Europe" [2015] SSRN Electronic Journal

4CORPORATE ACCOUNTING AND REPORTING
impairment loss is carried out at the extent that this loss does not exceed the amount of
revaluation surplus for the same asset. Thus, the revaluation surplus is minimised due
to the loss of impairment on re-valued asset. According to “Paragraph 61(1) of AASB
136”, impairment loss of re-valued asset is recognised in the income statement for non-
profit companies. However, the recognition of this impairment loss is carried out at the
extent that this loss does not exceed the amount of revaluation surplus for the class of
asset4. Thus, the revaluation surplus is minimised due to the loss of impairment on the
class of asset.
“Paragraph 62 of AASB 136”, cites that when the estimated amount of
impairment loss is greater in contrast to the asset’s carrying value to which it belongs, a
liability would be realised, if another standard fulfils the same. According to “Paragraph
63 of AASB 136”, adjustment is to be made in relation to the depreciation or
amortisation expense for the asset in order to assign the revised carrying amount less
residual amount after the impairment loss is realised. This is to be conducted in a
systematic way over the remaining useful life5. Finally, in compliance with “Paragraph
64 of AASB 136”, if impairment loss is realised, ascertaining the deferred tax assets or
liabilities is required to comply with AASB 112 by comparing the revised carrying
amount of the asset with the tax base6.
4 Guthrie, James and Tsz Ting Pang, "Disclosure Of Goodwill Impairment Under AASB 136 From 2005-
2010" (2013) 23(3) Australian Accounting Review
5 Kieso, Donald E, Jerry J Weygandt and Terry D Warfield, Intermediate Accounting (John Wiley & Sons,
Incorporated, 2014)
6 Kieso, Donald E, Jerry J Weygandt and Terry D Warfield, Intermediate Accounting (John Wiley & Sons,
Incorporated, 2014)

5CORPORATE ACCOUNTING AND REPORTING
For example, XYZ Limited has a machine having carrying amount of $160,000 at
the beginning of the financial period. The asset was re-valued previously and the
revaluation surplus account has a balance of $10,000. During that year, one staff has
caused damage to the machine because of which the asset is to be impaired. The
estimated recoverable value of the machine is $120,000 and the overall depreciation
amount to be incurred for this asset is $16,000.
$10,000 could be made as offset in contrast to the revaluation surplus of the
asset and it is reported as negative figure in the statement of other comprehensive
income for this year, out of this loss of impairment7. The leftover amount of $30,000 is to
be written off as expenditure in the year and the carrying value of the asset would match
with the recoverable value, which is $120,000. In the next year, the depreciation
expense would depend on the new asset’s carrying value, which is $120,000 minus
estimated residual amount. Hence, the depreciation expense related to the impaired
asset would be adjusted in the future years8.
7 Mazzi, Francesco, Giovanni Liberatore and Ioannis Tsalavoutas, "Insights On Cfos’ Perceptions About
Impairment Testing Under IAS 36" (2016) 13(3) Accounting in Europe
8 Oghoghomeh, Tennyson, and Fynface N. Akani, "Assets Impairment Testing: An Analysis Of IAS 36"
(2016) 10(1) African Research Review

6CORPORATE ACCOUNTING AND REPORTING
Part B:

7CORPORATE ACCOUNTING AND REPORTING
References:
André, Paul, Dionysia Dionysiou and Ioannis Tsalavoutas, "Mandated Disclosures
Under IAS 36 Impairment Of Assets And IAS 38 Intangible Assets: Value Relevance
And Impact On Analysts’ Forecasts" (2017) 50(7) Applied Economics
Avallone, Francesco and Alberto Quagli, "Insight Into The Variables Used To Manage
The Goodwill Impairment Test Under IAS 36" (2015) 31(1) Advances in Accounting
Gros, Marius and Sebastian Koch, "Goodwill Impairment Test Disclosures Under IAS
36: Disclosure Quality And Its Determinants In Europe" [2015] SSRN Electronic Journal
Guthrie, James and Tsz Ting Pang, "Disclosure Of Goodwill Impairment Under AASB
136 From 2005-2010" (2013) 23(3) Australian Accounting Review
Kieso, Donald E, Jerry J Weygandt and Terry D Warfield, Intermediate
Accounting (John Wiley & Sons, Incorporated, 2014)
Loftus, Janice et al, FINANCIAL REPORTING 1E (Wiley, 2015)
Mazzi, Francesco, Giovanni Liberatore and Ioannis Tsalavoutas, "Insights On Cfos’
Perceptions About Impairment Testing Under IAS 36" (2016) 13(3) Accounting in
Europe
Oghoghomeh, Tennyson, and Fynface N. Akani, "Assets Impairment Testing: An
Analysis Of IAS 36" (2016) 10(1) African Research Review