Project Report: Corporate Accounting and Reporting - Impairment

This report delves into the core concepts of impairment accounting, crucial for determining the fair value of assets and providing transparent financial information to stakeholders. It explores key elements such as recoverable amount, value in use, and fair value less cost of disposal, as defined by AASB 136. The report outlines the process of impairment testing, emphasizing the importance of assessing the carrying value of assets against their recoverable amount. It explains how to calculate recoverable amount, considering the asset's fair value less costs of disposal or its value in use. The report further examines the calculation of value in use by considering future cash flows, discount rates, and other market factors. Finally, the report provides a sample impairment entry, illustrating how impairment losses are recognized and allocated across different asset categories, including goodwill, factory, patent, and building, with corresponding debit and credit entries. The report concludes by summarizing the key findings and emphasizing the significance of impairment accounting in financial reporting.

Running Head: Corporate Accounting and Reporting
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Project Report: Corporate Accounting and Reporting

Corporate Accounting and Reporting 2
Introduction:
The report has been prepared to identify and evaluate the various concept of
impairment accounting such as recoverable amount, value in use, fair value less cost of
disposal, etc. this report mainly focuses on their treatment and the process to reach over the
conclusion.
Impairment accounting:
Impairment accounting is a process in which an assets book value exceeds than the
recoverable cost of the business. Impairment of asset shows about the diminishing quality of
assets, the total strength amount of the asset and the value of an asset. The impairment
process is done by the companies on their assets on periodic basis to measure the worth of the
assets and record them in the books of the company (Brandt and Kavajecz, 2004). It is an
accounting principle which describes about the permanent reduction in the assets value of a
company which generally is a fixed asset. Normally, the long term assets, goodwill and
accounts receivables value are written down because the carrying value of these assets have a
longer period of time for the purpose of investment.
AASB 136 explains that process of impairment accounting in an organization. It
explains it is crucial for each business to evaluate total worth of the assets so that a better
treatment could be done and fair value about the business could be presented among the
shareholders and other stakeholders of the business (AASB, 2018).
Recoverable amount:
AASB 136 and impairment principles explain that an asset must not be carried by the
business more than the recoverable amount of the assets. In order to meet these objectives
and goal of impairment principles, the organization is required to test all the assets which fall
under the scope of impairment (Kieso, Weygandt & Warfield, 2010). The impairment test
must be done by the business on the long term assets, goodwill and accounts receivables
value when the impairment exist indicates about it or at least periodically on the assets which
has indefinite useful lives such as goodwill or intangible assets.
AASB 136 standards explains the recoverable amount as the asset’s higher amount or
the cash generating units (CGU) fair value out of which the cost to sell and the value in use of
the assets is deducted. The standard further explains that it is not necessary to get the value of
cost of sale and the value in use of an assets and thus if any of those asset exceed from the

Corporate Accounting and Reporting 3
carrying amount of the asset, the asset is not considered as impairment asset. However, an
asset’s cost of sales deducted from their fair value could be identified it the assets are not
traded in the active market (Hu, Percy and Yao, 2015). However, it becomes tough for the
entity to recognize the fair value of such assets and the amount which other parties willing to
pay for that asset is recognized as the recoverable amount of that asset.
The recoverable amount is calculated for an individual asset. In case, the asset does
not generate any cash inflows which is hugely depend on the other assets. In such cases, the
recoverable amount of the asset is determined on the basis of CGU that the asset belongs to:
 The cost of sell deducted from the fair value of the assets is higher than the carrying
amount of the asset
 Or the asset’s value in use could be measured near to the cost of sell deducted from
the fair value (AASB, 2018).
Value in use:
Value in use describes the worth of an asset which is expected from an entity through
deriving the asset in the market. The expectation in the possible fluctuations in the worth of
the asset and future cash flows from that asset also brief the value in use of the asset. While
evaluating the value in use of an asset, it is important for the entity to consider the time value
of money which is represented in the risk free rate of return of that particular market. The
price level in order to bear the uncertainty and fluctuations in the asset price of an
organization is also measured while evaluating the value in use of the business (AASB,
2015). Other factors, such as liquidity, market participants would replicated the pricing of the
future cash flows which could be used by the entity to reach over a conclusion about the
value of assets of the business.
Further, in order to estimate the value of future cash flows (inflows and outflows) to
be derived from continuing use of the assets and from the eventual disposal and it also applies
the appropriate discount rate to those future cash flows of the business (Dagwell, Wines and
Lambert, 2011).
Fair value less cost of disposal:
In case, a business does not have a binding agreement in the market, but the asset of
the company is traded in an active market than the cost of sell deducted from the fair value is
the market price less the cost of disposal of the asset. The fair value less cost of disposal is a

Corporate Accounting and Reporting 4
term which is used in the impairment accounting to recognize the impaired cost of an asset. If
an asset is not qualified enough and it is not traded in the active market than it becomes tough
for the business to recognize the actual worth of the business and at that time, the disposal
worth of the asset is calculated and deducted from the fair value of the asset to measure the
impairment worth of the assets (Brigham and Ehrhardt, 2013). This makes it easier for the
business to recognize the impairment price of an asset.
Conclusion:
On the basis of the above study on various concept of impairment accounting such as
recoverable amount, value in use, fair value less cost of disposal, etc. it has been found that
these concepts are crucial for an entity to get the fair value of an asset. It offers the
transparent and fair information to the shareholders of the company.
Impairment entry:
A. Carrying amount of cash generating unit including
goodwill
Amount
($)
Factory 636,700.00
Patent 146,000.00
Building 92,000.00
Inventory 40,000.00
Goodwill on acquisition of competing the
impairment 33,000.00
Total 947,700.00
B. Recoverable amount 848,700.00
C. Impairment Loss (A-B) 99,000.00
S. No. Account Titles Debit Credit
1 Impairment Loss
99,000.0
0
Goodwill
33,00
0

Corporate Accounting and Reporting 5
Factory
24,02
1
Patent
25,75
2
Building
16,22
7
(Being impairment loss has been recognized)
2 Profit and Loss 99,000.00
Impairment Loss 99,000.00
(Being impairment loss has been charged to
P&L)
Impairment
Loss 99000
Goodwill 33000
66000
Total assets for
allocation of
impairment 874,700.00
Weight
Impairment
Loss Extra loss
Impairment
Loss Weight
Impairment
Loss
Factory 0.72790671 48041.84 24,021.00 24,020.84
Patent 0.16691437 11016.35 0.61 14735.48
Building 0.10517892 6941.809 0.39 9285.368

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References:
AASB 136. 2018. Impairment of Assets. [Online]. Available at:
http://www.aasb.gov.au/admin/file/content105/c9/AASB136_07-04_COMPapr07_07-07.pdf
[Accessed on: 18 September 2018].
AASB, C. A. S. 2015. Investment Property. International Journal of Accounting, 25(4), 140.
Brandt, M.W. and Kavajecz, K.A., 2004. Price discovery in the US Treasury market: The
impact of orderflow and liquidity on the yield curve. The Journal of Finance, Vol. 59, no. 6,
pp.2623-2654.
Brigham, E.F. and Ehrhardt, M.C., 2013. Financial management: Theory and practice. 4th ed,
USA: Engage Learning.
Dagwell, R., Wines, G., and Lambert, C. 2011. Corporate accounting in Australia. 2nd,
Australia: Pearson Higher Education AU.
Hu, F., Percy, M. and Yao, D., 2015. Asset revaluations and earnings management: Evidence
from Australian companies. Corporate Ownership and Control, 13(1), pp.930-939.
Kieso, D. E., Weygandt, J. J., and Warfield, T. D. 2010. Intermediate accounting: IFRS
edition (Vol. 2). John Wiley and Sons.