Corporate Accounting: Impairment Loss Calculation and AASB 136

This assignment solution delves into the intricacies of corporate accounting and reporting, focusing on the definition of key terms such as value-in-use, useful life, cash generating unit, depreciable amount, fair value, impairment loss, and recoverable amount as per accounting standards. It provides a detailed explanation of how to calculate recoverable amount, value in use, and fair value less cost of disposal in accordance with AASB 136 - Impairment of Assets, including considerations for fair market value determination and cash flow estimation. The solution includes a practical example demonstrating the computation of impairment, allocation of impairment across various assets (factory, patent, building, inventory, and goodwill), and the corresponding journal entries. The assignment concludes with a list of references to support the analysis and calculations presented.

CORPORATE ACCOUNTING AND REPORTING
1. Definition of key terms
(a) Value –in-use: It is defined as the present value which the company is expecting to
derive from a particular asset or a cash generating unit.(Anon., 2017)
(b) Useful life: It is defined as the period over which the company is expecting to use the
asset or the number of units of a product company is expecting to produce from such
asset;(AssetWorks, LLC , 2018)
(c) Cash Generating Unit : It is the smallest identifiable group in the block of group of
company which has its own asset and liabilities and generate inflows which are of
independent nature from the cash flows of other assets of the company;(Anon., 2017)
(d) Depreciable Amount: It is stated as the cost of the asset or fair market values less
residual value;( Defined Term., 2012)
(e) Fair Value: It is the value that shall be derived on disposition of an asset in the market
in an orderly transaction between a buyer and seller;
(f) Impairment loss: It is represented as difference between the recoverable amount and
the carrying amount in the books of the company. Further, carrying value shall be
greater than recoverable amount;
(g) Recoverable Amount: It is the higher of fair value less cost of its disposal and value
in use.(Kin Lo, 2016)
2. Calculation of Recoverable Amount, Value in use , Fair value less cost of disposal
In terms of AASB 136- Impairment of Asset Fair value less cost of disposal is computed
in the manner provided here-in-below:
When Fair value of an asset or a liability is measured, one shall take into consideration
the characteristics of the asset or liability, if such characteristic shall be taken into
account by the market participants while valuing the property. Further, the pricing of the
asset shall be determined under an orderly transaction between the market participants a
transaction date under the market conditions..
Further, the calculation assumes that the transaction takes place in principal market or in
the next most advantageous market.
The model of computation assumes that the market participants are acting in their
economic best interest.

Further the following fact shall not be taken into consideration while determining the
price of the orderly transaction:
(a) Better price is available is next best advantageous market;
Further, the valuation technique to be adopted by the enterprise shall be such that
maximum data is available for valuation of fair value, maximises the observable inputs
usability and minimises the usability of unobservable inputs.
Fair Market Value for non-financial asset: It shall be determined by taking into account a
market participant ability to generate benefits of economic nature from the use of such
asset in its highest and best use or by selling it to the other who shall do the same;
Thus fair market value computation encompassed the details provided above as stated
under AASB 13.
In addition any cost which shall be incurred to materialise the disposal of asset other than
those that have been recognised as liabilities shall be reduced from fair market value to
ascertain fair market value less cost of disposal. For ex cost such as legal cost, stamp
duty etc.
For computing the value in use of an asset one needs to look at the following elements:
(a) An estimate of the expected future cash flows that company is expecting to derive
from such asset or cash generating unit;
(b) Analysis of the expectation of possible variations in the timing or amount of the cash
flows;
(c) The time value of money which is determined by the current market risk free rate of
interest;
(d) Uncertainty price inherent to such asset;
(e) Factors that are relevant like liquidity, that market participant shall take into
consideration while estimating the future cash flows of such asset.
Further, one must take consideration of the following while determining the value in use
of an asset:
(a) The estimated future cash inflows and outflows to be generated from such asset and
revenue at its ultimate disposal;
(b) Applying appropriate discount rate for determining the present value of such cash
flows.

Basis of estimating cash flows:
(a) The cash flows to be estimated shall be reasonable and the assumptions under taken
by management to estimate the cash flows shall be reliable. Further, it shall take into
consideration the economic conditions that shall prevail over the life of such asset.
Also, greater weight shall be given to external evidences;
(b) Any expected cash flow that may arise on the basis of future restructuring or any
other performance improvement measures shall not be taken into consideration. The
projection shall be based on five years unless a larger period required. The cash flows
shall be based on most recent budget estimates;
(c) The rate to be used for forecasting cash flow shall be declining or steady in nature
unless the same can be justified that the trend is upward moving. Further, the growth
rate shall not exceed the long term average growth rate for products, industries or
country or countries in which the company has operations in
(d) In addition cash flow prediction for future years shall also not include any cash flows
from financing activities and receipts or payments from income tax.
Measuring recoverable amount:
The recoverable amount that shall be determined on the basis of higher of value in use of
an asset or cash generating unit or the fair market value less cost of disposal of such
asset.
Further, the asset shall only be impaired if the recoverable value of such asset is lower
than the carrying value of the asset.
Thus on the basis of above value shall be computed.
Solution to question 2
Computation of Impairment
Sl
No Particulars Carrying Amount
1 Factory 636700
2 Patent 146000
3 Building 92000
4 Inventory 40000
5 Goodwill 33000
6 Total Carrying Asset 947700
7 Value in Use 848700
8 Sales less cost of disposal 612679
9 Recoverable Amount ( Higher of 7 or 8) 848700
10 Impairment 99000

Allocation of Impairment
Sl
No Particulars
Carrying
Amount
Allocation of
impairment
Value post
Impairment
1 Factory 636700 48042 588658
2 Patent 146000 11016 134984
3 Building 92000 6942 85058
4 Inventory 40000 Not Impaired 40000
5 Goodwill 33000 33000 0
6
Value of asset other than goodwill
and inventory 874700
Date Particulars Amount Amount
Impairment A/c..Dr 99000
To Goodwill A/c 33000
To Factory A/c 48041.8
To Building A/c 6941.8
To patent A/c 11016.3
( being Cash generating Unit Impaired)
Profit and Loss A/c….Dr 99000
To Impairment A/c 99000
(Being Transferred to Profit and loss A/c)
References:

Defined Term, 2012, Depreciable Amount, [Online]
Available at: https://definedterm.com/depreciable_amount
[Accessed 20 September 2018].
Anon., 2017, Cash Generating Unit, [Online]
Available at: https://www.accountingtools.com/articles/2017/5/4/cash-generating-unit
[Accessed 20 September 2018].
Anon., 2017, Value in Use, [Online]
Available at: https://www.accountingtools.com/articles/2017/5/8/value-in-use
[Accessed 20 September 2018].
AssetWorks, LLC , 2018. An Introduction to Useful Life and Depreciation, [Online]
Available at: https://www.assetworks.com/useful-life-and-depreciation/
[Accessed 20 September 2018].
Kin Lo, F. F. P. A. P, 2016, What is a recoverable amount of an asset? How is this calculated?.
[Online]
Available at: https://www.quora.com/What-is-a-recoverable-amount-of-an-asset-How-is-this-calculated
[Accessed 20 September 2018].