Corporate Accounting and Financial Reporting - Impairment Assessment

This report delves into the intricacies of corporate accounting and financial reporting, with a specific emphasis on asset impairment. It meticulously explains the concepts of recoverable value, value in use, and fair value less cost of disposal, as defined by AASB 136. The report outlines the methods for measuring these values and determining whether an asset is impaired. It includes a discussion on impairment tests for intangible assets, the estimation of fair value, and the computation of impairment loss, offering a comprehensive understanding of the accounting treatment of impaired assets. The report also covers the journal entries for impairment losses, providing a practical application of the theoretical concepts discussed. The references provided offer additional resources for further study on the topic.

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

1CORPORATE ACCOUNTING AND FINANCIAL REPORTING
Part A: Calculation of Recoverable value, value in use, Fair value less cost of
disposal
According to the assertions of the AASB 136, impaired assets of a company are
those assets whose real market valuation is found to be less than the value of the
same, which is recorded in the balance sheet of the company in consideration. In case
of presence of impairment in any asset of a company, the carrying amount of the same
is observed to be greater than the recoverable value of the same (AASB 2014). If there
are indications of the presence of impairment in any asset of a company, then the
concerned company needs to assess the amount recoverable amount of that particular
asset to find out whether impairment is present or not. The impairment tests on the
assets of the company are usually carried out at the end of each period of reporting.
However, with the presence of indications of impairment in any asset, the test can be
carried out more frequently by the concerned company (Rennekamp, Rupar and
Seybert 2014).
The companies need to carry the test on their intangible assets without any
definite useful life or on those intangible assets, which are not yet available for the same
purpose. Impairment test can be carried out by the company on an asset at any point of
time within one accounting year, provided the company performs the test on the same
asset at the same time in each of the following accounting years (Bond, Govendir and
Wells 2016). For the performance of the test for impairment, it is to of crucial importance
to estimate the recoverable amount, value in use and the fair value less the disposal
cost of the concerned asset properly, which is discussed in the following sections of the
essay.

2CORPORATE ACCOUNTING AND FINANCIAL REPORTING
Measuring recoverable amount of assets
The recoverable value of an asset or a cash-generating unit can be defined as
the higher one among the value in use and the fair value less selling cost of the
concerned asset or CGU. As per Para 19-57, the rules of estimating the recoverable
value is same for an individual asset or a CGU. If any of the value in use and the fair
value less selling cost of an asset or a CGU is above the carrying amount of the same,
then the asset is concerned to be impaired (Amiraslani, Iatridis and Pope 2013). In such
cases, there remains no necessity to estimate the value of both the fair value less
disposal cost and the value in use of the same. If however, the estimate of fair value is
not possible, due to the lack of the basis for reliable estimation of the amount, then the
company can take the value of the asset or CGU in use as the recoverable amount of
the same.
If there is no indication of the value in use of any asset or CGU exceeding the fair
value less disposal cost, then the latter can be considered as the recoverable amount,
which may often be relevant for assets, which are for disposal. If the assets concerned
generate cash inflows which are mostly not dependant on the inflows from other assets
or asset groups, then the recoverable amount for the concerned assets are estimated
from the CGU containing the same asset (Guthrie and Pang 2013). However, this is
done if the fair value less disposal cost of the asset is higher than the carrying amount
of the same or the value in use is close to the fair value less selling cost of the asset.
As per the Para 10 of the AASB 136, for an intangible asset with no definite
useful life, the test for impairment has to be conducted annually and it has to be done

3CORPORATE ACCOUNTING AND FINANCIAL REPORTING
with the comparison of the carrying amount with the amount recoverable of the same. In
case of such assets, the previous period’s estimation of the recoverable amount of the
asset has to be used in the current period if- a) if the cash inflows are not generated
from the intangible asset that are independent of the same from other asset or asset
groups, b) if the recent estimation of the recoverable amount of the asset exceeds the
value of the carrying amount substantially, c) if based on the current events and
circumstances since the most recent estimation of the recoverable amount, there is
remote likelihood that the current recoverable amount estimation would be less than the
carrying amount of the asset.
Estimation of Fair value less cost of disposal
The fair value less cost of selling of an asset is the price in the binding
agreement of sale, in the arm’s length transaction, which is adjusted for the incremental
cost, which are attributable directly to the asset’s disposal. In the absence of the binding
sales agreement if the asset is traded in the active market, then the fair value less
selling cost of the asset concerned is nothing but the market price of the same less the
disposal cost. The market price of an asset is most appropriately the recent bidding
price of the same (Krishnan 2012). However, in absence of the same the recent
transaction price can be taken provided there are no considerable changes in the
circumstances between the two dates. In the absence of sale agreement or active
market, the fair value of the asset depends on the information, which are best available
to estimate the amount that the company can obtain at the end of each reporting period
from the disposal of the same. In the estimation of fair value less selling cost, the
disposal costs barring the liabilities are deducted. In the process of asset disposal, the

4CORPORATE ACCOUNTING AND FINANCIAL REPORTING
buyer is required to assume liability and only one fair value less disposal cost available
for asset as well as liability (Barth 2013).
Estimation for Value in Use
As per the assertions of the Para 30 and 31 of the AASB 136, the estimation of
the value in use of an asset reflects the future cash flows which the company expects to
derive, the expected variations in the timing and amount of the same, money’s time
value, the price for inherent uncertainty bearing for the asset and other exogenous
factors like illiquidity and others. The value in use estimation includes the future cash
inflow and outflow estimation, which is obtained from the continuous asset usage and
from the disposal of the same and includes the application of proper discount rates to
the future flows of cash (Linnenluecke et al. 2012).

5CORPORATE ACCOUNTING AND FINANCIAL REPORTING
Part B
Computation of Impairment loss
Journal entries

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

7CORPORATE ACCOUNTING AND FINANCIAL REPORTING
References
AASB, C.A.S., 2014. Business Combinations. Disclosure, 66, p.77.
Amiraslani, H., Iatridis, G.E. and Pope, P.F., 2013. Accounting for asset impairment: a
test for IFRS compliance across Europe. Centre for Financial Analysis and Reporting
Research (CeFARR).
Barth, M.E., 2013. Measurement in financial reporting: The need for
concepts. Accounting Horizons, 28(2), pp.331-352.
Bond, D., Govendir, B. and Wells, P., 2016. An evaluation of asset impairment
decisions by Australian firms and whether this was impacted by AASB 136.
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.
Krishnan, S., 2012. Inventory valuation under IFRS and GAAP. Strategic finance, 93(9),
p.51.
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.