Corporate Accounting: AASB 136 and Impairment of Assets Analysis

This assignment provides a comprehensive analysis of AASB 136, focusing on the impairment of assets in corporate accounting. The assignment begins with an overview of the standard, explaining its applicability to reporting entities and its objective of ensuring that the carrying amount of an asset does not exceed its recoverable amount. It details the conditions under which impairment losses may occur, distinguishing between external and internal sources of information. The core of the assignment explains the concept of recoverable amount, which is defined as the higher of fair value less costs of disposal and value in use. The calculation of both fair value and value in use are elaborated, including the steps involved in estimating future cash flows and applying an appropriate discount rate. The assignment then moves on to provide the journal entries for impairment loss, along with the working notes showing the computation of the impairment loss and its allocation to different assets like copyright, machinery, inventory and equipment. The assignment concludes with a list of relevant references.

Corporate accounting

TABLE OF CONTENTS
Part A...............................................................................................................................................3
Part B...............................................................................................................................................6
References........................................................................................................................................7

Part A
Accounting standard of AASB 136 Impairment of assets is applicable to every enterprise needed
to prepare financial statements according to the part 2M.3 of the Corporations Act which is said
to be a reporting entity. Further, the standard targets on ensuring that carrying the amount of
asset must not surpass the recoverable amount while laying the process that an enterprise applies
to make sure that the carrying amount of asset is not more than the recoverable amount (Huikku,
Mouritsen and Silvola, 2017). Impairment of asset is done when the carried amount of the same
surpasses recoverable amount.
Paragraphs 12–14 of the standard (AASB 136), depicts certain conditions stating that an
impairment loss may have incurred. Such indication is considered under two sources which are
external and internal sources of information.
Recoverable amount is a term based on financial accounting; it is referred to the larger part of an
asset’s value offered to the corporate of presently being used. The notion of recoverable amount
is generally used in terms of identifying the impairment testing of fixed assets such as plant,
property or equipment (Barker and Schulte, 2017). The further recoverable amount is the greater
of the fair value of an asset from which cost of sell and value in use as well as discounted cash
flow determination is deducted. Moreover, an enterprise shall test goodwill and some other
intangibles for impairment on an annual basis.
In case the disposal costs are said to negligible, then the asset’s recoverable amount is closer or
greater as compared to the revaluated amount. In such situation, after applying the revaluation
requirements, it is not likely that there is impairment of revalued assets and there is no
requirement of estimating recoverable amount.
In case the disposal costs are not said to negligible, then the fair value minus cost of disposal is
comparatively less than its fair value (Sellhorn and Stier, 2017). Thus, impairing of the revalued
asset will be done if the VIU is lesser than the revalued amount. In such situation, after applying
the revaluation requirements, this standard is applied by the enterprise to identify whether the
asset might be impaired.
Below is presented the calculation for recoverable computing amount:

The asset’s recoverable amount is the higher of the two key calculations; recoverable amount
equals to fair value less cost of disposal, and recoverable amount equals to value in use. By
considering this aspect, fair value is the price that will be gained while the asset is sold, whereas
the cost of disposal is the additional expenditure attributed directly to the alleviation of the asset.
IAS 36 has provided guidelines to financial users and accountant on this current topic as, if the
fair value of asset minus the cost of disposal is not able to be identified, wherein the recoverable
amount is equivalent to the value in use (Goncharov, Riedl and Sellhorn, 2014). In a situation
where a company aims to sell the asset, then the recoverable amount is equivalent to the fair
value of the same asset from which cost of disposal will be deducted.
Recoverable amount is the larger of the fair value of asset minus cost of disposal often known as
selling price and its value in use.
Fair value refers to the price that would be obtained by selling an asset or paying in order to
transfer a liability on an orderly transactional basis amongst market contestants during
measurement date (Whittington, 2015).
The value in use means the current value of the future cash flows likely to be obtained from an
asset or CGU. As per AASB 136 Value in use, is a crucial figure in considering whether an
impairment loss will take place while determining the value in use of the asset (Badia and et al.,
2017).
To estimate the VIU, there are some steps to be followed; initially, it is essential to estimate the
cash inflows and outflows of future basis which are to be derived from constant use and disposal
of an asset after that suitable discount rate is to be applied to the same future cash flows.
In order to determine recoverable amount, in a scenario where fair value minus cost of disposal
or VIU is greater as compared to the carrying amount, it is not required to compute the another
amount, it is because the asset is not assessed to be impaired under IAS 36.19 (Magnan, Menini
and Parbonetti, 2015). In case, it is not possible to determine the fair value minus cost of capital;
the recoverable amount is said to be the VIU as per the IAS 36.20. For the disposal of the assets,
the recoverable amount is assessed as a fair value from which cost of capital is deducted
according to IAS 36.21.

For determining the fair value less cost of capital; fair value is identified by considering and
complying with the IFRS 13 Fair Value Measurement. Furthermore, the cost of disposal is only
directly added costs, nor current cost neither overhead costs as per IAS 36.28.
According to AASB, the calculation of the value in use shall showcase the components
represented as below:
A prediction of the cash flows based on future, probably derived from the asset as expected by
the entity.
Expectations regarding the potential variation in the duration or amount of future cash flow.
The theory of time value of money, stated by the existing market risk-free rate of interest.
The price for tolerating risks and uncertainty associated with the asset.
Other related factors like illiquidity that the market contestants would state while pricing the
future cash flows, probably derived from the asset as expected by the entity (Hull and White,
2014).
From the above study, it can be concluded that the recoverable amount can be calculated by
deducting the cost of disposal from fair value, and also the value in use also equals to
recoverable amount. The fair value is held when the asset is sold, or payment is made on liability
transfer, while the value is used is calculated when the future cash flows are estimated gained
from the continuing use and disposal asset.

Part B
Journal entries
Date Particulars Dr. Amount Cr. Amount
30.06.201
5
Impairment loss Dr. $42,000.00
To Goodwill $14,000.00
To Accumulated amortisation and
Impairment Losses (Copyright)
$9362.325
To Accumulated amortisation and
Impairment Losses (Machinery)
$34,056.00
To Accumulated amortisation and
Impairment Losses (Inventory)
$14,474.00
To Accumulated amortisation and
Impairment Losses (Equipment)
$10167.00
30.06.201
5
Profit and Loss Account A/c Dr. $42,000.00
To Impairment loss $42,000.00
Working note
Statement showing computation of impairment loss
Particulars Amount
Carried Value of assets in books $407,200.00
Less: Value in use of assets ($365,200.00)
Impairment loss on assets $42,000.00
Statement showing computation of Allocable Impairment loss to assets

Particulars Amount
Impairment loss on assets $42,000.00
Less: Amount of Goodwill ($14,000.00)
Less: Impairment loss allocable to equipment ($10167.00)
$17833.00
Asset Value in
Use Calculation Allocable
Impairment loss
Amount to be carried in
Balance Sheet
Copyri
ght $63,000 17833*63000/1
20000 9362.325 $53,638
Machin
ery $40,000 17833*40000/1
20000 5944.333333 $34,056
Invento
ry $17,000 17833*17000/1
20000 2526.341667 $14,474
$120,000 $102,167

References
Badia, M., Duro, M., Penalva, F. and Ryan, S., 2017. Conditionally conservative fair value
measurements. Journal of Accounting and Economics, 63(1), pp.75-98.
Barker, R. and Schulte, S., 2017. Representing the market perspective: Fair value measurement
for non-financial assets. Accounting, Organizations and Society, 56, pp.55-67.
Goncharov, I., Riedl, E.J. and Sellhorn, T., 2014. Fair value and audit fees. Review of
Accounting Studies, 19(1), pp.210-241.
Huikku, J., Mouritsen, J. and Silvola, H., 2017. Relative reliability and the recognisable firm:
Calculating goodwill impairment value. Accounting, Organizations and Society, 56, pp.68-83.
Hull, J. and White, A., 2014. Valuing derivatives: Funding value adjustments and fair
value. Financial Analysts Journal, 70(3), pp.46-56.
Magnan, M., Menini, A. and Parbonetti, A., 2015. Fair value accounting: information or
confusion for financial markets?. Review of Accounting Studies, 20(1), pp.559-591.
Sellhorn, T. and Stier, C., 2017. Fair Value Measurement for Long-Lived Operating Assets:
Research Evidence.
Whittington, G., 2015. Fair value and IFRS. The Routledge Companion to Financial Accounting
Theory, pp.217-235.