Corporate Accounting and Reporting: Analysis of Goodwill Impairment

This report provides a comprehensive analysis of corporate accounting, specifically focusing on the reversal of impairment loss of goodwill. It defines impairment loss and its reversal, explaining how an asset's value is reassessed and potentially reinstated. The report examines the relevant accounting standards, including AASB 136, and how they govern the treatment of impairment losses, especially for goodwill. It clarifies that goodwill impairment loss cannot be reversed in the subsequent year according to AASB 136. The report explains the importance of impairment testing and the role of cash-generating units in the process. It also discusses the application of impairment tests, considering both enterprise value and equity value, and the implications of these valuations on goodwill. The report concludes with an example illustrating the non-reversal of impairment loss on goodwill under AASB 136. The document emphasizes the need for accurate asset valuation in financial statements and provides insights into the practical application of accounting standards in impairment scenarios. It also includes a detailed list of references that support the findings.

Running head: CORPORATE ACCOUNTING AND REPORTING
Corporate Accounting and Reporting
Name of the Student:
Name of the University:
Author’s Note:
Course ID:

1CORPORATE ACCOUNTING AND REPORTING
Reversal of an impairment loss of goodwill:
Reversal of impairment loss could be described as a situation, in which an
organisation could declare an asset as valuable, which was recorded previously in the
form of impairment loss. If the holding cost of the asset is more than its fair market
value, the asset is said to be impaired (Chen, Shroff and Zhang 2017). However, when
the impairment loss is reversed, the asset is considered as valuable. Thus, asset is not
treated in the form of burden to profit. Primarily, at the time of recognising impairment
reversal, the carrying amount of an asset is raised to its new recoverable amount.
However, it need not be more than the original amount or depreciated carrying value, as
this would result in no impairment recognised in the past. The impairment loss reversal
is realised as income in the income statement of an organisation. In case, the assets
are carried at re-valued amounts and there was previous write-off against impairment
loss revaluation, it is treated in the form of reversal of impairment loss (Linnenluecke et
al. 2015).
According to “Paragraph 109 of AASB 136”, all the requirements for reversing
impairment loss are realised for a cash-generating unit or an asset in prior periods. The
impairment loss could be reversed for three types of assets, which include individual
assets, cash-generating units and goodwill. The reversal of impairment loss in relation
to goodwill could be evaluated from “Paragraphs 124 and 125 of AASB 136”. It has
been assessed that impairment loss realised for goodwill need not be reversed in the
subsequent year, as laid out in “Paragraph 124 of AASB 136” (Aasb.gov.au 2018).
This is because goodwill is treated as intangible asset under the above standard. The

2CORPORATE ACCOUNTING AND REPORTING
standard allows realisation of past impairment reversals of goodwill only where the rise
in value could be attributed clearly to the unanticipated reversal of external event
causing the original impairment to be realised (Boennen and Glaum 2014).
“Paragraph 125 of AASB 136” states that “AASB 138 Intangible Assets” does
not allow internally generated goodwill to be recognised in the financial statements. This
is because any rise in recoverable amount of goodwill in the years following the
realisation of impairment loss for that goodwill is probable to be a rise in internally
generated goodwill, instead of impairment loss reversal realised for the acquired
goodwill (Bugeja and Loyeung 2015).
It is highly important to identify the true value of the items in the balance sheet
statement in the functioning of the business organisations. Hence, all the organisations
are required to conduct impairment test, if it is found on evaluation at the reporting date
that the recoverable amount of an asset is not more in contrast to its carrying amount.
However, it is necessary to take into account goodwill for impairment test annually. For
impairment test, goodwill acquired in business would influence the impairment test on
cash-generating unit, which is a group of assets that helps in generating cash flows for
a corporate entity. Goodwill needs to be allocated to the cash-generating units
estimated to derive benefits from the combination synergy of two businesses. In such
situation, the annual impairment test for the cash-generating unit to which goodwill is
distributed need to be carried out at reporting time (Detzen, Stork Genannt Wersborg
and Zülch 2016).

3CORPORATE ACCOUNTING AND REPORTING
It has been identified that in the process of impairment testing, cash-generating
unit would be tested for impairment excluding goodwill in business functioning. After
this, the individual test would be carried out in identifying the true values of all the
assets of a business organisation. With the help of this test, evaluation could be made
that whether the organisation has developed value through the acquisition of goodwill in
its business functioning. For this type of impairment testing, AASB 136 (IAS 36) requires
the business organisations to contrast with their past cash inflow values with the actual
cash inflow evaluated (Kabir and Rahman 2016).
If goodwill is found to be present in the business functioning of the business
organisation, the recoverable amount related to the intangible assets in impairment test
would be dependent on either equity value or enterprise value. When the recoverable
amount is formulated based on enterprise value, comparison needs to be made with the
invested capital. For equity value, it needs to be based on the equity of the
shareholders. In case the recoverable amount depending on enterprise value is lower
than the investment amount of the organisation, the impairment test would be enforced
for minimising the value of goodwill to the certain calculated amount. However, the
carrying values of the assets need not be minimised below the greatest of fair value less
value-in-use or cost of capital or zero (Vanza, Wells and Wright 2018).
In ascertaining whether the impairment loss could be reversed, the organisation
needs to consider the same information sources like for the original impairment loss.
The reversal of impairment loss is possible only, if the estimates are changed for
ascertaining the recoverable amount of the asset since the realisation of the last
impairment loss. If this is the situation, the carrying amount of the asset needs to be

4CORPORATE ACCOUNTING AND REPORTING
increased to its recoverable amount. Such rise would be the reversal of impairment loss
effectively. However, the impairment loss reversal might need adjustment to the
amortisation of asset in future periods.
An example has been considered, in which favourable change could be observed
in the estimates of the recoverable amount of the net assets of ABC Limited since the
realisation of impairment loss. The current recoverable amount stands at $800 million
and the carrying value of the net asset would be $720 million. It is further assumed that
the assets are depreciated at 20% diminishing balance. In this case, the impairment
loss reversal on goodwill could not be accounted in accordance with AASB 136. The
carrying amount of ABC Limited could be raised to the lower of the carrying amount and
recoverable amount of the net assets. Hence, it could be inferred that impairment loss
on goodwill could not be reversed in accordance with AASB 136 (IAS 36).

5CORPORATE ACCOUNTING AND REPORTING
References:
Aasb.gov.au., 2018. [online] Available at:
http://www.aasb.gov.au/admin/file/content105/c9/AASB136_07-04_COMPjun09_01-
10.pdf [Accessed 16 May 2018].
Boennen, S. and Glaum, M., 2014. Goodwill accounting: A review of the literature.
Bugeja, M. and Loyeung, A., 2015. What drives the allocation of the purchase price to
goodwill?. Journal of Contemporary Accounting & Economics, 11(3), pp.245-261.
Chen, W., Shroff, P.K. and Zhang, I., 2017. Fair value accounting: Consequences of
booking market-driven goodwill impairment.
Detzen, D., Stork Genannt Wersborg, T. and Zülch, H., 2016. Impairment of Goodwill
and Deferred Taxes Under IFRS. Australian Accounting Review, 26(3), pp.301-311.
Kabir, H. and Rahman, A., 2016. The role of corporate governance in accounting
discretion under IFRS: Goodwill impairment in Australia. Journal of Contemporary
Accounting & Economics, 12(3), pp.290-308.
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.
Vanza, S., Wells, P. and Wright, A., 2018. Do asset impairments and the associated
disclosures resolve uncertainty about future returns and reduce information
asymmetry?. Journal of Contemporary Accounting & Economics, 14(1), pp.22-40.