Corporate Accounting and Reporting 2: Reversal of Impairment Loss

This report delves into the crucial accounting principle of impairment loss reversal, particularly within the context of corporate accounting and reporting. It focuses on the methodologies required to ensure that the carrying amount of an asset does not exceed its recoverable amount, as per AASB 136. The report examines the conditions under which impairment losses are recognized and subsequently reversed, differentiating between the cost model and the revaluation model. It explores the implications of impairment loss on financial statements, detailing the necessary journal entries and disclosures. Key concepts include the recoverable amount, fair value, and value in use, as well as internal and external indicators for impairment loss reversal. The report provides practical examples and references to relevant accounting standards and literature, offering a comprehensive understanding of the subject matter.

Running head: CORPORATE ACCOUNTING AND REPORTING
Corporate Accounting and Reporting
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1CORPORATE ACCOUNTING AND REPORTING
Reversal of impairment loss for cash-generating units:
One of the major accounting principles is that excessively valued assets need not
be present in the balance sheet statement. As a result, it requires some concepts
related to value in opposition to which the carrying amount of the asset could be
compared to determine whether it is excessive. According to “Paragraph 1 of AASB
136”, the impairment of asset would explain the methods that each organisation needs
to adopt for assuring that the asset carrying amount does not exceed the recoverable
asset amount. Moreover, according to the above-stated paragraph, assets are carried at
amounts, which exceed their overall recoverable amounts, if the amount expected to be
recovered from asset sale is lower compared to the carrying amount (AASB 2015). In
such case, the assets could be described as impaired and along with this, standard
requires the company to recognise losses of impairment and time related reversal of
impairment and compulsory disclosures.
There is realisation of impairment loss, in case; the asset carrying value is
greater compared to the recoverable amount, which is greater of the fair asset value
minus value in use and cost to sell. “Paragraph 59 of AASB 136” states that if the
carrying value of the asset is greater in contrast to its recoverable amount, the former
would be reduced to its latter. Such reduction would be considered as impairment loss
(Accounting, Part and Plans 2015). However, the procedure of recording impairment
loss would change depending on the pursuance of the asset to the revaluation model or
recorded at cost. As per “Paragraph 60 of AASB 136”, the impairment loss recognition
is required to be carried out urgently, until the asset carrying amount is conducted at re-

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valued amount according to the other standard. This yardstick would represent the
revaluation model in AASB 116. Hence, the loss of impairment related to a re-valued
asset is required to be considered as decrease in revaluation in compliance with the
other yardstick.
The assets could be impaired with the help of two methods and these methods
take into account the revaluation model and the cost model. Based on the cost model
and “Paragraph 61 of AASB 136”, the realisation of loss related to impairment is
required to be carried out instantly in gain or loss at the time cost is utilised for recording
any impaired asset. This signifies that there needs to be realisation of loss as expense
in the income statement of the organisation (Boennen and Glaum 2014).
As per the model of revaluation and “Paragraph 60 of AASB 136”, at the time of
carrying impaired asset like “property, plant and equipment” at re-valued amount, the
treatment associated with impairment loss is identical to decrease in revaluation. In
order to reiterate, the impairment loss associated with re-valued asset is recognised in
income statement in the primary phase. This would help in assuring that such amount
does not exceed the account pertaining to revaluation surplus for the same asset
(Detzen et al. 2016). The objective is achieved by debiting the account of remaining
revaluation surplus, which is applicable to the asset and the deferred tax liability before
any loss balance is recognised in the form of expense in the income statement.
However, some instances might be present, in which the recoverable amount of
written down asset in past exceeds the carrying value of the asset (Kabir and Rahman
2016). As per “Paragraph 110 of AASB 136”, a firm is required to locate any indication

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that impairment loss recognised in previous years for any asset besides goodwill might
have declined or the same does not exist. Hence, “Paragraph 110 of AASB 136”
requires various internal and external indicators for the impairment loss reversal. These
indications comprise of significant rise in the asset market value, considerable
modification with desirable effect on the organisation, decline in the rates of market
interest, desirable changes associated with asset utilisation and evidence. These signify
that the economic performance of the asset is greater compared to the expectations
(Guthrie and Pang 2013).
From the perspective of the cost model, the impairment loss reversal could not
increase the carrying value of the asset beyond the overall depreciated value. However,
it is noteworthy that the real policy of depreciation is applicable to the asset. Hence, for
an asset conducted at cost, the reversal of impairment loss would be recognised as an
income item in the income statement of a firm in compliance with “Paragraph 119 of
AASB 136” (Laing and Perrin 2014).
For example, it has been assumed that an amount of $13,000 impairment loss
has been realised on machinery and it has been recorded at 30th June 2015. The
assumption is made further at 30th June 2017, in which the machinery carrying value
has been $11,333. This takes into account cost of $50,000 minus accumulated
depreciation amounting to $25,667 and accumulated impairment loss of $13,000. The
recoverable amount has been valued at $18,000. The actual rate of depreciation is
assumed as 10% per year for six years. Under such situation, the carrying machinery
value would be $20,000. Since the carrying value is more than the recoverable amount,
the impairment loss realised in the past amounting to $6,667 could be reversed to

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restate the machinery carrying value to $18,000. As a result, the past carrying amount
would be increased. Under such scenario, the loss of accumulated impairment is to be
debited, while the reversal of impairment loss is to be credited and both have the same
amount of $6,667.
For the model of revaluation, in case, the loss of impairment is treated as
expense along with recording in income statement, the reversal would be carried out in
the same through crediting the income amount (Linnenluecke et al. 2015). For example,
a particular equipment item has carrying amount of $90,000 with $100,000 in equipment
account and $10,000 in accumulated depreciation. In order to record the past
impairment losses, there is revaluation decrement of $30,000. These losses have
reduced the balance of revaluation surplus and deferred tax liability account.

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References:
AASB, C.A.S., 2015. Investments in Associates and Joint Ventures.
Accounting, A., Part, B. and Plans, D.B., 2015. Notes to the financial statements.
Boennen, S. and Glaum, M., 2014. Goodwill accounting: A review of the literature.
Detzen, D., Stork Genannt Wersborg, T. and Zülch, H., 2016. Impairment of Goodwill
and Deferred Taxes Under IFRS. Australian Accounting Review, 26(3), pp.301-311.
Guthrie, J. and Pang, T.T., 2013. Disclosure of Goodwill Impairment under AASB 136
from 2005–2010. Australian Accounting Review, 23(3), pp.216-231.
Kabir, H. and Rahman, A., 2016. The role of corporate governance in accounting
discretion under IFRS: Goodwill impairment in Australia. Journal of Contemporary
Accounting & Economics, 12(3), pp.290-308.
Laing, G.K. and Perrin, R.W., 2014. Deconstructing an accounting paradigm shift: AASB
116 non-current asset measurement models. International Journal of Critical
Accounting, 6(5-6), pp.509-519.
Linnenluecke, M.K., Birt, J., Lyon, J. and Sidhu, B.K., 2015. Planetary boundaries:
implications for asset impairment. Accounting & Finance, 55(4), pp.911-929.