Corporate Accounting and Financial Reporting (ACC204) Impairment Loss

This report provides an in-depth analysis of impairment losses in corporate accounting, focusing on the guidelines outlined in AASB 136. It defines impairment, explaining when an asset's recorded value exceeds its market price, and details the process of assessing recoverable amounts for both individual assets and cash-generating units (CGUs). The report emphasizes the importance of identifying impairment indicators, both internal and external, and outlines how to calculate recoverable amounts using fair value less costs of disposal and value in use. It further discusses the allocation of impairment losses to CGUs, including goodwill, and explains the process of impairment testing. The report references relevant literature and provides a comprehensive understanding of impairment accounting practices.

Running head: CORPORATE ACCOUNTING AND FINANCIAL REPORTING (ACC204)
Corporate Accounting and Financial Reporting
Name of the Student
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Author Note

1CORPORATE ACCOUNTING AND FINANCIAL REPORTING
Part A: Impairment Loss for the cash generating units (Excluding goodwill)
The AASB 136 defines an asset of any company to be impaired if the value
recorded of that asset in the company’s balance sheet is found to be greater than the
actual market price of that specific asset. The written-down assets of a company are
known as the fixed assets and goodwill because the carrying value’s time spans for
those assets are larger for the purpose of impairment. If, however, a particular asset’s
carrying amount is found to be larger than the asset’s value recoverable, then in that
case that specific asset of the company is taken to be impaired (Bond, Govendir and
Wells 2016). Therefore, in the presence of symptoms of an asset to be impaired, the
concerned company needs to estimate the recoverable amount for that asset, for finding
out impairment in the asset (if any present). Generally, the companies conduct the test
of impairment on the concerned assets by estimating the amount recoverable for the
assets at the end of the reporting periods. However, if there are strong indications of
presence of impairment in assets, then the company can carry out the impairment test
not just annually, but more frequently (Rennekamp, Rupar and Seybert 2014).
Irrespective of the presence of symptoms indicating impairments in assets, the
companies need to test their intangible assets, which do not have a definite useful life,
or their tangible assets, which are yet unavailable for the purpose of impairment. For a
particular asset, the concerned company at any point can carry out the impairment test
within an accounting year. However, the company needs to perform the test on the
asset consistently at the same time in each of the successive accounting years. There
may be different times for impairment testing on different assets of the company.

2CORPORATE ACCOUNTING AND FINANCIAL REPORTING
There remain several indications towards the presence of impairment of assets in
the company, the indicators being both external as well as internal (Corgnati et al.
2013). The internal indications include – a) physically damaged or obsolescent available
assets, b) evidences of changes which affect the companies adversely (these changes
mainly include the presence of idle or restructured assets, disposal plans for the assets
prior to the end of their expected life, presence of idle assets and others). On the other
hand, the external indicators of impairments of a company’s assets include- a) the
presence of symptoms of considerable dynamics with potential negative impacts on the
concerned company, b) presence of assets with significantly decreased market value
than the expected value, c) presence of increased return or interest rate, the rate
increasing considerably within a specific span of time, thereby having potential
implications on the company’s discount rate, which in turn is used by the company for
the purpose of the estimations of the value of the assets (Johnson 2014).
In general, the recoverable value of an asset is the higher value among the
assets’ fair value less the disposal cost and the value in use of the same. The same
notion is also applicable not only for the individual assets but also for the cash
generating units of the company. The estimation of the value of the asset is done
through- a) the future expected time variations or the variations in the cash flow which
are anticipated to occur, b) the uncertainty cost, which is inherently included in the
assets, c) future cash flow estimations which the company expects to generate, d) other
exogenous determinants like the market participation, market liquidity and the expected
cash flows in the future for the company (Guthrie and Pang 2013).

3CORPORATE ACCOUNTING AND FINANCIAL REPORTING
In turn, the expected cash flows includes- a) the cash flows expected to be
received for asset disposal, b) the estimations of the inflow cash which are expected to
be acquired from the generation of cash inflow from consistent asset usage.
As per the Para 66-108, of the AASB 136, there are guidelines for the
identification requirements for those assets including cash generating units, for
determination of the carrying amount and for the recognition of the impairment losses
for the cash generating units and the goodwill. If there are indications of impairment in
any asset, then the company in concern needs to calculate the amount recoverable for
the same. However, it may happen in some cases that the estimation of the recoverable
amount of the asset in concern is not feasible (AASB 2014). In such cases, the
company can assess the recoverable amount of the CGU, which includes the asset
considered. CGUs are primarily the smallest group of assets, which involve the
regulation of cash flow and are independent of cash inflows from other assets or from
other group of assets. The recoverable amount of a CGU is generally the higher value
among the fair value less disposal cost and the CGU’s value in use.
In the process of impairment testing of a CGU or a group of CGU, with the
goodwill allocated, the impairment loss is first allocated to the carrying amount of that of
the goodwill and after that allocation, the remaining amount of loss is distributed among
the other assets, present within the same CGU (Dinh et al.). The loss is allocated on the
carrying amount of each of those asset, in pro rata basis. This process does not
decrease the carrying amount of the asset under the higher between the asset’s
recoverable amount and zero. The process of allocation of impairment loss is same for
an individual CGU or a group of CGUs. If there arises cases where goodwill allocation

4CORPORATE ACCOUNTING AND FINANCIAL REPORTING
to a single CGU is not feasible on non-arbitrary basis, then in those cases, impairment
test is conducted at the company’s lowest level, whose goodwill has been indentified for
the purpose of internal management.
As per Para 5 of the IFRS 8, the concerned level should not be higher than the
operating segment. The allocation of the goodwill to the group of CGU can lead to
multiple requirements of the test for impairment. For example, the testing of one CGU
can be done for individual CGU and for the CGU group, which has the goodwill
allocated to it. Therefore, to allocate the loss arising out of impairment to a CGU,
excluding the goodwill, the same has to be conducted on a pro rata basis and it has to
be done on the carrying amount of the other assets which are also included under the
concerned CGU (Linnenluecke et al. 2015).

5CORPORATE ACCOUNTING AND FINANCIAL REPORTING
Part B
Impairment loss computation

6CORPORATE ACCOUNTING AND FINANCIAL REPORTING
Note – inventories are valued at market value or cost, whichever is lower and therefore,
is not accounted for impairment.
References

7CORPORATE ACCOUNTING AND FINANCIAL REPORTING
AASB, C.A.S., 2014. Business Combinations. Disclosure, 66, p.77.
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.
Corgnati, S.P., Fabrizio, E., Filippi, M. and Monetti, V., 2013. Reference buildings for
cost optimal analysis: Method of definition and application. Applied energy, 102, pp.983-
993.
Dinh, T., Kang, H., Morris, R. and Schultze, W., Evolution of Intangible Asset
Accounting: Evidence from Australia. Journal of International Financial Management
and Accounting.
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.
Johnson, P.F., 2014. Purchasing and supply management. McGraw-Hill Higher
Education
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.
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.