Corporate Accounting Assignment: Gali Ltd. Journal Entries & Analysis

This assignment delves into the intricacies of corporate accounting, specifically addressing the reversal of impairment loss for individual assets under International Accounting Standard 136 (IAS 136). The solution outlines the standard's objective, which is to ensure assets are not carried above their recoverable amount, and its applicability to financial reporting. It details the assessment of impairment indicators from internal and external sources, the assets covered, and the assets excluded. The assignment also explains the reversal of impairment losses, the calculation of recoverable amounts, and the treatment of impairment losses for goodwill. Part B of the assignment provides a practical example with calculations for recoverable amounts, carrying amounts, and impairment loss allocation, including journal entries for Gali Ltd., with relevant references.

CORPORATE ACCOUNTING
Corporate accounting
Name of the student
Name of the University
Authors note

CORPORATE ACCOUNTING
Answer to Part A:
Reversal of an impairment loss for an individual asset
The impairment testing of all intangible and tangible assets are dealt with
International Australian standard 136 that requires assets should not be carried at
amount that is excessive of recoverable amount. The objective of this standard is to
ensure that assets are not carried at more than value of their recoverable amount.
This particular standard for asset impairment is applicable for the general purpose of
financial report of entities and requiring entities to prepare their financial report
according to part 2M.3 of the corporation act. In order for meeting this particular
objective, it is required by organization when there exist any potential for asset
impairment, then all the assets within the scope should be tested for impairment
(Bhasin 2015). At each reporting date, an entity is required to make the assessment
about the indicator of impairment of assets as per the standard. Assessment by
entity would be done by gaining information from both internal and external sources.
Some of internal sources involve physical damage to assets, internal restructuring
and any obsolescence. On other hand internal sources are adverse changes in
economy, market and technology, changes in the market interest rates, net value of
assets higher than market capitalization and legal environment in which entity
operates (Arnold et al. 2016).
The application of IAS 136 is provided to all assets excluding:
 Deferred tax assets
 Investment in property that is carried at fair value
 Inventories

CORPORATE ACCOUNTING
 Insurance contracts assets
 Assets that arise of generates from employees benefit
 Agricultural assets that assets carried at fair value
 Assets generating from contracts of construction
 Noncurrent assets that are held for sale
 Financial assets
Application of IAS 136 is mostly to the following assets:
 Machinery and equipments
 Goodwill
 Assets that are carried at revalue amount
 Intangible assets
 Buildings and lands
The assets impairment loss other than goodwill is decreased or they do not
exist might be indicated by some internal as well as external informational sources.
Some of internal changes might be favourable and significant changes in the
performance or use of assets and external conditions might be positive change in the
assets value and market conditions. Previously recognized impairment loss of assets
is reversed if there is improvement in recoverable amount since the recognition of
last impairment loss. Therefore, it can be said that any favourable changes in the
market conditions and with passing of time, there cannot be recognition of an
impairment reversal. The carrying amount of assets should be more than the
adjusted carrying amount of assets when there is recognition of an impairment
reversal. Such amount would have been determined if there were no previously
impairment loss. Their arises the need to review residual value of assets, it useful life

CORPORATE ACCOUNTING
and amortization and depreciation method. The reversal of impairment loss for
goodwill is specifically prohibited by IAS 136 (Chaibi et al. 2014).
Assets recoverable amount is the greater of its value in use and fair value less
cost to sell. Carrying value of assets is compared with their recoverable amount for
measuring the impairment. Amount that is obtained from selling an asset between
willing parties in an arm’s length transactions by reducing the disposal cost is fair
value less cost to sell. Determination of fair value in use for assets has a hierarchy
that is established by IAS 136 (Gordon and Hsu 2017). On other hand, present value
of future cash flows that is derived from cash generating unit of assets is referred to
as value in use.
There is no need for entities to carry out annual impairment tests for intangible
assets having indefinite lives or for goodwill. Irrespective of indication of impairment,
the recoverable amounts of assets are compared with their carrying value. Changing
circumstances indicating the impairment of assets calls for the need of testing for
impairment on frequent basis (Penner et al. 2016). Nonetheless, the impairment
calculations for previous period can be used by entities for impairment calculations of
intangible assets when meeting some of the criteria’s.
Extensive disclosures are required by IAS 136 in regard to recognition of
impairment and performing of impairment tests. Compared to other assets
impairment, disclosures for goodwill are more extensive. Following points depicts
some of the key requirements for disclosures:
 Application of valuation method and determining the appropriate assumptions
by using that approach.
 Cash generating unit goodwill amount

CORPORATE ACCOUNTING
 Conducting impairment using sensitivity analysis indicating possible change in
key assumptions (Rennekamp et al. 2014).
 Circumstances causing and leading to impairment and the amount of
impairment reversal and recognition.
 There needs to be disclosure of discount and growth rate used and other
assumptions that are required for valuation purpose.
The recognition of impairment loss is done to the extent that recoverable
amount of assets is less than its carrying value. There are two method for assessing
the carrying value of assets that involves historical cost method and revaluation
method. Recognition of impairment loss of assets is treated as an immediate
expenses if the statement of profit and loss if the assets are carried at historical cost.
On other hand, Loss related to impairment is treated is decrease in revaluation if the
revaluation of impaired assets are done under IAS 138 or IAS 16. This decrease in
revaluation is directly recognized in the statement of comprehensive income that
lead to reduction of surplus generated from revaluation for that particular asset. If the
surplus generated from revaluation is lower than impairment loss, then the remaining
loss is recognized and treated as expenses in the profit and loss statement. When
an entity is to recognize the impairment loss, there will never be reduction of carrying
value of assets below the recoverable amount that is higher and zero ( Penner et al.
2016).
The key elements of financial reporting process of an organization are
impairment despite the fact that entity has adopted the standard for first time.
Impairment assessment process can be time consuming and complex and in this
regard, it is essential on part of entities to have access to right models and skills
such as forecasting and modelling (Goswami 2014).

CORPORATE ACCOUNTING
Part B:
Particulars Amount
Fair Value,less, Cost to
Sell $0
Value in Use
$3,30,00
0
Recoverable Amount
$3,30,00
0
(Higher of Fair Value &
Value in use)
Less: Carrying Amount
of CGU
$3,66,00
0
Total Impairment
Gain/(Loss)
($36,000
)
Allocation of Specified Impairment Loss:
Particulars
Carrying
Amount
Fair
Value
Impairmen
t Loss
Total Impairment
Loss $36,000
Less:
Plant
$2,46,00
0
$2,37,29
2 $8,708
Goodwill $12,000 $0 $12,000
Balance Impairment
Loss $15,292
Impairment Loss Allocation as per Weightage:
Particulars
Carrying
Amount Weightage
Impairment
Loss
Balance Impairment Loss $15,292
Equipment $57,000 52.78% $8,071
Fittings $36,000 33.33% $5,097

CORPORATE ACCOUNTING
Inventory $15,000 13.89% $2,124
Total $1,08,000 100% $15,292
In the books of Gali Ltd.
Journal Entries
Dr. Cr.
Date Particulars
Amoun
t
Amoun
t
30/06/2017 Impairment Loss A/c. $36,000
Plant A/c. $8,708
Equipment A/c. $8,071
Fittings A/c. $5,097
Inventory A/c. $2,124
Goodwill A/c. $12,000
(Being assets under the specific cash generating
unit impaired)
Profit & Loss A/c. $36,000
Impairment Loss A/c. $36,000
(Being impairment loss transferred to P/L A/c.)

CORPORATE ACCOUNTING
References:
Arnold, L.W., Harris, P. and Liu, M., 2016, January. CORPORATE ACCOUNTING
MALFEASANCE: AN OVERVIEW. In Global Conference on Business & Finance
Proceedings (Vol. 11, No. 1, p. 202). Institute for Business & Finance Research.
Bhasin, M.L., 2015. Corporate accounting fraud: A case study of Satyam Computers
Limited.
Chaibi, H., Trabelsi, S. and Omri, A., 2014. Investment opportunity set, corporate
accounting policy and discretionary accruals. Journal of Economic and Financial
Modelling, 1(1), pp.1-12.
Gordon, E.A. and Hsu, H.T., 2017. Tangible Long-Lived Asset Impairments and
Future Operating Cash Flows under US GAAP and IFRS. The Accounting Review.
Goswami, M., 2014. Corporate Environmental Accounting: The Issue, Its Practices
and Challenges; A Study on Indian Corporate Accounting Practices. IOSR Journal of
Business and Management, 16(5).
Penner, J.W., Kreuze, J.G. and Langsam, S.A., 2016. INSTRUCTORS'NOTES:
IMPAIRMENT ANALYSIS: COMPARISON OF IMPAIRMENT OF LONG-LIVED
ASSETS BETWEEN US GAAP AND IFRS. Academy of Educational Leadership
Journal, 22(2), p.90.

CORPORATE ACCOUNTING
Rennekamp, K., Rupar, K.K. and Seybert, N., 2014. Impaired judgment: The effects
of asset impairment reversibility and cognitive dissonance on future investment. The
Accounting Review, 90(2), pp.739-759.