Impairment of Assets: IAS 36 Standard, Journal Entries and Calculation

This report provides a comprehensive overview of asset impairment, focusing on the IAS 36 standard. It begins by defining asset impairment and explaining when to conduct impairment tests, emphasizing the importance of comparing carrying value with recoverable amounts. The report details the ...Read More

Impairment of Assets
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Contents
Part A: When to take the impairment test.........................................................................3
Introduction...................................................................................................................... 3
Impairment Test............................................................................................................... 3
Conclusion....................................................................................................................... 5
Part B: Journal entries and Calculation of Impairment Loss............................................5
References.......................................................................................................................9
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Part A: When to take the impairment test
Introduction
An asset is said to be impaired when it has lower market price in comparison to
its value recorded in the balance sheet of a business entity. The asset impairment is
debited as a loss or expenditure during making the journal entry and is subjected to
credit for the underlying asset. The net difference between the carrying value and the
market value of an asset attributes to the impairment value (Alexander and Archer,
2008) . In this context, the present essay emphasizes on the need of undertaking an
impairment test for an asset.
Impairment Test
The IASB (International Accounting Standards Board) has adopted and
implemented IAS 36 standard for identification and measurement of impaired value of
an asset. As per the standard, a business entity is requires to conduct asset impairment
testing whenever there is any identification of impairment except for the goodwill and
intangible assets. The IAS 36 standard is applicable largely for all the assets including
property, land, equipments, goodwill and intangible assets. The standard, however, still
not applies to non-current assets for selling, financial assets measured at fair value and
inventories (Epstein and Jermakowicz, 2008). The business entities identify the need of
impairment testing through their analysis at the close of each accounting period. The
indication of asset impairment exists when its carrying value is higher than its amount
recoverable. The carrying value of an asset refers to price at which its value is recorded
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in the balance sheet through reducing the net depreciation and the loss arising from its
impairment. The amount recoverable from an asset is either its selling price also
referred to as its fair value obtained through deducting the cost of disposal or its value in
use which ever is higher. The value in use is the current value of the cash inflows
expected to be realized from an asset (IAS 36 — Impairment of Assets, 2017).
The identification of the asset impairment is gathered from various external and
internal sources as per this standard. The external sources include the reduction in its
present market value, technological, legal or economical changes, rise in interest rate or
in the case if the total asset base is greater that its market capitalization. On the other
hand, internal sources of a company include physical damage, unused asset or being
restructured, low economic value in comparison to its expected value. Thus, the
presence of any of this situation indicates that an asset should be tested for impairment
for reviewing its useful life, accounting method for calculating deprecation or its
remaining value. Also, the asset need not be tested for impairment if it’s used value or
fair value less cost of disposal is higher than its net carried amount. The amount to be
recovered from an asset is treated as its value in use if its fair value obtained after
deduction of disposal cost cannot be calculated (IAS 36 — Impairment of Assets, 2017).
However, in the case if amount recoverable from an asset is less that its net
carrying value, them the loss arising from asset impairment is attributed to be
impairment loss and is treated as an expense. The cash-generating assets are also
tested for impairment if the amount to be recovered from its individual asset cannot be
determined. The cash-generating unit (CGU) is regarded to be smallest group of assets
that is capable of delivering the cash inflows and does not have any relation to the other
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group of assets. The goodwill is tested for impairment on an annual basis irrespective of
the fact that there is nay indication of asset impairment. The goodwill is attributed to its
overall cash-generating units and the net carrying value of the overall unit is compared
with its amount recoverable for conducting its impairment test. The goodwill is not
regarded to be impaired if the amount to be recovered from the CGU’s is higher that net
carrying value of the group of assets. However, in the opposite situation of net carrying
value greater than then amount recoverable from CGU’s, the goodwill indicates
impairments and the impairment loss is realized (Walton and Aerts, 2006).
The IAS 36 standard is developed for ensuring that all tangible and intangible
assets should not be carried at higher value than the amount to be realized from them in
the future. As such, there exists need for testing the assets for impairment that have any
indication of decrease in their market value and annually for intangible assets. The
indication of nay asset impairment should be followed by recognizing its recoverable
amount. The loss arising from asset impairment should be treated as expense in the
profit and loss statement and also a business entity is required to provide complete
information reading its asset impairment in its financial reports (Delaney and
Whittington, 2007). Thus, the process of asset impairments begins with identifying the
indicators of impairments, estimating the cash inflows, testing the assumption made and
comparing them with the market results. The impairment test except the intangible
assets can be done at any time of the financial year when ever there occur any
identification of the asset value subjected to impairment. However, the testing should be
done at the same time during each financial period when there is decrease in the
estimated cash inflows to be realized from an asset. The asset that reports impairment
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greater than 50% should be disposed off before its expected disposal date (Impairment
accounting – the basics of IAS 36 Impairment of Assets, 2017).
Conclusion
Thus, it can be said from the overall discussion of the report that an asset is
tested for impairment when its estimated cash flows report losses or the presence of
any situation that have resulted in the change of its value.
Part B: Journal entries and Calculation of Impairment Loss
In this part a given practical problem will solved using the pro rata allocation of
impairment loss and after that journal entries will passed. In the given example there is
CGU of Gali Limited, Fine China and impairment has been calculated on the various
assets. Impairment loss is divided only among the fixed assets not in current asset.
Therefore inventory will not be included for the calculation impairment loss.
Impairment loss will equal to = Total Carrying Value of CGU Assets-Value in use
= $111,000.00
It is first divided wholly to the goodwill after that to the remaining fixed assets.
Total Impairment loss $ 111,000.00
less goodwill amount $ 37,000.00
Remaining part $ 74,000.00
Assets Carrying Pro Rata Impairment Adj. CA
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Amount Loss
Goodwill
$
37,000.00
$
37,000.00
$
-
Patent
$
708,000.00 708/974*74000
$
53,790.55
$
654,209.4
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Building
$
163,000.00 163/974*74000
$
12,383.98
$
150,616.0
2
Fittings
$
103,000.00 103/974*74000
$
7,825.46
$
95,174.54
$
974,000.00
$
74,000.00
$
900,000.0
0
Carrying amount $ 944,000.00
less : Inventory $ 44,000.00
Adjusted CA $ 900,000.00
In the question the value of patent the fair value less cost is given as $681104.50
which is greater than as calculated in above table. So it should be adjusted.
Assets Carrying Pro Rata Impairment Adj. CA
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Amount Loss
Plant
$
681,104.5
0
Equipme
nt
$
150,616.02
150616.02/245790.55*26895
.05
$
16,480.80
$
134,135.2
1
Fittings
$
95,174.54
95174.54/245790.55*26895.
05
$
10,414.25
$
84,760.29
$
245,790.55
$
26,895.05
$
900,000.0
0
Below is table of all the value of fixed assets after impairment.
Calculation of total Impairment
Assets
Carrying
Amount Impairment Loss Adj. CA
Goodwil
l
$
37,000.00
$
37,000.00
$
-
Patent
$
708,000.00
$
26,895.50
$
681,104.50
Building $ $ $
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163,000.00 28,864.79 134,135.21
Fittings
$
103,000.00
$
18,239.71
$
84,760.29
$
1,011,000.00
$
111,000.00
$
900,000.00
(Impairment accounting – the basics of IAS 36 Impairment of Assets, 2017)
Journal Entries
Impairment loss on assets of CGU of Gali Ltd $ 111000.00
To impairment of Goodwill $37000.00
To Impairment Loss Patent $26895.50
To Impairment Loss Building $28864.79
To Impairment Loss fittings $18239.71
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References
Alexander, D. and Archer, S. 2008. International Accounting/Financial Reporting
Standards Guide. CCH.
Delaney, P. and Whittington, R. 2007. Wiley CPA Examination Review 2007-2008,
Problems and Solutions. John Wiley & Sons.
Epstein, B. and Jermakowicz, E. 2008. Wiley IFRS 2008: Interpretation and Application
of International Accounting and Financial Reporting Standards 2008. John Wiley &
Sons.
IAS 36 — Impairment of Assets. 2017. [Online]. Available at:
https://www.iasplus.com/en-us/standards/international/ias/ias36 [Accessed on: 21st
September 2017].
Impairment accounting – the basics of IAS 36 Impairment of Assets. 2017. [Online].
Available at:
http://www.ey.com/Publication/vwLUAssets/Impairment_accounting_the_basics_of_IAS
_36_Impairment_of_Assets/$FILE/Impairment_accounting_IAS_36.pdf [Accessed on:
21st September 2017].
Walton, P. and Aerts, W. 2006. Global Financial Accounting and Reporting: Principles
and Analysis. Cengage Learning EMEA.
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