Asset Impairment Report

This report thoroughly explains the concept of asset impairment, its recognition, and measurement according to accounting standards like AASB 136. It defines asset impairment as a situation where an asset's carrying value exceeds its recoverable amount. The report details the accounting trea...Read More

Running Head: Asset Impairment
Impairment of an Asset

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Asset Impairment
PART A
Recognition and measurement of impairment of individual asset
Assets whether tangible or intangible are the critical resource possessed by an entity in the
course of its business. The assets have their own economic value and hence they are required
to be accounted for adequately. Considering the need of proper accounting and disclosures of
entity’s significant assets in the financial reports, Accounting Standard Board has issued
certain standards in relation to the accounting treatments to be given in various situations.
Asset Impairment is one of those crucial situations which requires appropriate measurement
and recognition in the financial statements of the company. Impairment of an asset has been
defined in the Australian accounting standard as the situation when carrying value of the asset
exceeds the amount that is recoverable from that particular asset.
Accounting treatment to be followed in case of impairment of assets is prescribed in the
AASB 136 issued by Australian Accounting Standard Board (Bond, Govendir & Wells,
2016), (Ji, 2013). Any asset whether it is a tangible asset or an intangible one it may be
subjected to impairment depending upon its characteristics. The assets that may be impaired
have been commonly identified as plant and machinery, property plant and equipment,
goodwill patents and the other intangible assets. An impairment loss on any individual asset
must be recognised in the statement of profit and loss immediately as an expense
(Amiraslani, Iatridis & Pope, 2013). But, if the revaluation reserve is existing for that
particular asset, impairment loss must be charged to the revaluation account to an extent
revaluation reserve is carrying a credit balance to cover the loss. Any amount of impairment
loss exceeding the balance of revaluation reserve must be taken to the profit or loss account
(Vanza, Wells & Wright, 2011). However, if the asset is not revalued previously the
impairment loss on such asset must be directly charged to the profit or loss account. The

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Asset Impairment
company must also disclose the fact of asset impairment in the financial reports in accordance
with the requirement of the accounting standard.
At every year ending the company has to assess as to whether there exists any indication
about the asset impairment. There are certain factors which may indicate the impairment of
an asset. Such factors are classified under two categories i.e. external and internal factors
(Laskaridou & Vazakidis, 2013). Following are some of the factors that many cast an
indication of impairment:
External factors:
 The market value of the asset is decreased significantly than the expected decline out
of due to normal usage or passing of time during the reporting period (Comiskey &
Mulford, 2010).
 Adverse technological, economical and legal environmental changes in the market
with which asset is associated
 The rate of interest in the market or rate of investments have been significantly
increased and such changes are likely going to negatively influence the discounting
rate which is used to determine the value of asset.
Internal factors:
 Obsolescence of asset or the asset is physically damaged.
 Evidence of the worst present or future economic performance of the asset is
available.
 Significant adverse changes in the ways in which asset is presently used or will be
used in future. Such as discontinuation plans of the asset or asset becoming disposable
so early than the expected useful life.

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Asset Impairment
There must be a critical assessment of the information which indicates the possibility of
impairment of an asset. Only after considering the true evidences of impairment indication,
the impairment of an asset must be measured and recognised in the financial statements.
Once the asset is impaired the carrying amount of the individual asset must be decreased to
account for the impairment.
The asset is considered to be impaired when its carrying value exceeds the amount
recoverable on that asset. Carrying amount is the amount with which the asset is being carried
in the financial statements of the company (Sun, Shipan & Xia). This amount is calculated by
deducting the accumulated depreciation from the historical cost of the asset. Recoverable
amount of any asset is the amount which is identified as higher of two values i.e. the value in
use and the fair value of asset. Value in use is the sum of estimated future cash flows from the
asset. Recoverable amount is identified for every single individual asset in this business until
or unless the asset do not generate the inflows of cash which are significantly depending on
cash flows of other single or group of assets. If any of these two values exceeds the amount
that is recorded in the financial statements then the asset is considered to be impaired
(Amiraslani, Iatridis & Pope, 2013). Therefore the amount with which the impairment loss is
to be recognised in the financial statement is the difference between the actual carrying value
of the asset and the amount that is recoverable therefrom. While recognising the impairment
loss if the loss amount exceeds the carrying amount of the asset, the company may create a
liability regarding it but this is only possible if there is a requirement of any other standard of
accounting. After recognising the loss of impairment, the amortisation cost or the remaining
depreciation charges thereon must be allocated to the revised carrying amount on a
systematic basis (Trottier, 2013).

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Asset Impairment
Therefore it is highly recommended to the companies possessing goodwill or any other
intangible assets of like nature, to have an adequate system of impairment check for all the
relevant and significant assets at yearly intervals so as to avoid the consequences of sudden
decline in the values of the assets. However assets other than the intangible assets are
required to checked for impairment only when there indications of impairment. Decline in the
market value of the assets than the asset’s net value after depreciation charges is an important
trigger for the Impairment testing. However, it there is any increase in the recoverable
amount of an asset more than its net asset value then such an increment must be ignored.
Asset Impairment requires immediate recognition as it a material loss in the economic value
of the assets.

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Asset Impairment
Part B
Computation of Impairment Loss
of Gali Ltd.
A. Carrying amount of cash generating unit including goodwill
(30th June 2015)
Amount.
Plant less Accumulated depreciation 4,84,000.00
Equipment 1,11,000.00
Fittings 70,000.00
Inventory 30,000.00
Goodwill 25,000.00
Total 7,20,000.00
B. Recoverable amount
(a) Value in Use 6,45,000.00
B. Recoverable amount 6,45,000.00
C. Impairment Loss (A-B)
75,000.
00
Allocation of impairment loss
Goodwill 25,000.00
Land 18,196.00
Accumulated Impairment Losses 31,804.00

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Asset Impairment
Journal Entries of Impairment Loss for Gali Ltd
Impairment Loss A/c Dr ... 75,000.00
To Goodwill A/c 25,000.00
To Equipment A/c 18,196.00
To Accumulated Impairment Losses 31,804.00
Accumulated Impairment Losses A/c Dr … 31,804.00
To Profit & Loss A/c 31,804.00
Note: Firstly, whole carrying amount of goodwill is to be written off against impairment loss
and then the remaining impairment loss is to be allocated to other assets in the proportion of
their carrying amounts. However, in the case of Equipment, the maximum allocation will be
limited to its fair value less costs of the disposal and the remaining balance to be transferred to
accumulated impairment loss and eventually to Profit & Loss A/c.

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Asset Impairment
References
Amiraslani, H., Iatridis, G.E. and Pope, P.F., 2013. Accounting for asset
impairment. London: Cass Business School.
Bond, D., Govendir, B. and Wells, P., 2016. An evaluation of asset impairments by
Australian firms and whether they were impacted by AASB 136. Accounting &
Finance, 56(1), pp.259-288.
Comiskey, E.E. and Mulford, C.W., 2010. Goodwill, triggering events, and impairment
accounting. Managerial Finance, 36(9), pp.746-767.
Ji, K., 2013. Better late than never, the timing of goodwill impairment testing in
Australia. Australian Accounting Review, 23(4), pp.369-379.
Laskaridou, E.C. and Vazakidis, A., 2013. Detecting asset impairment management: Some
evidence from food and beverage listed companies. Procedia Technology, 8, pp.493-497.
Sun, Shipan, and Xia Xu. "Study on the Asset Impairment Accounting." International
Journal of Business and Management 5, no. 6 (2010): 199.
Trottier, K., 2013. The effect of reversibility on a manager's decision to record asset
impairments. Accounting Perspectives, 12(1), pp.1-22.
Vanza, S., Wells, P.A. and Wright, A., 2011. Asset impairment and the disclosure of private
information.