Corporate Accounting: Analysis of Impairment Loss and Journal Entries

This report examines corporate accounting principles related to impairment loss, specifically focusing on the application of IAS 36. It defines impairment loss as the difference between an asset's carrying amount and its recoverable amount, emphasizing its impact on financial statements. The report discusses the recognition methods under IAS 36, including the identification of recoverable amounts, net selling values, and depreciation. It also explores the identification of impairment indicators from both external and internal sources. The report includes a practical example demonstrating the preparation of journal entries for impairment loss, detailing the allocation of the loss across various assets like patents, buildings, and fittings, and its impact on goodwill. The report includes a calculation of the value in use, and the distribution of impairment loss to different assets. Finally, it provides the journal entries to record the impairment loss, illustrating the practical application of accounting principles. The report references academic literature to support its analysis.

Running head: CORPORATE ACCOUNTING
Corporate Accounting
Name of the Student:
Name of the University:
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Table of Contents
Part A: Impairment loss for cash generating units excluding Goodwill........................2
Part B: Preparation of journal entries for any impairment loss occurring in 30 June
2015............................................................................................................................ 5
Reference:...................................................................................................................7

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Part A: Impairment loss for cash generating units excluding Goodwill
Impairment loss FB the carrying amount of an asset or cash generating unit,
which exceeds the recoverable amount. This directly indicates that the carrying
amount is recognized after deducting any accumulated depreciation and impairment
loss of an asset present within the organization. On the other hand, Glaum et al.
(2013) criticizes that rigorous implementation of the impairment loss could decrease
actual net profit of the organization. For example, the identification of recoverable
amount, net selling value, carrying amount and depreciation amount could be used
in identifying the actual impairment loss faced by the organization. The impairment
loss is mainly reflected in balance sheet and income statement of the organization
where total asset value is reduced. Under IAS 36, relevant method of recognition for
impairment loss is depicted, which could be used by the organization during the
formulation of their annual report. In this context, some researchers mentioned that
impairment loss is mainly a decrease in the net carrying value that exceeds future
undisclosed cash flow of the asset (Iasplus.com 2018).
Recognition method can be used in accordance with IAS 36, which allows the
organization to identify the impairment loss of the Asset. The impairment loss is
mainly identified when the carrying amount of asset is greater than the recoverable
amount. Impairment loss is directive reflected in comprehensive income of the
organization, where fair valuation method is used in accordance with IAS 16
standard. Therefore, it could be understood that for identifying impairment loss
comparison between carrying amount and recoverable amount of an asset needs to
be conducted by the organization. Furthermore, with the help of IAS 36 impairment
of assets, organizations are able to ensure that assets are not carried more than the

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actual recoverable amount, which is higher than the fair value less the disposable
cost. However, there is an exception towards the calculation of impairment loss,
where deductions from goodwill and certain intangible assets are conducted identify
the actual impairment loss incurred by the organization. There are certain test
regarding detection of impairment of an asset, which is used in detection of cash
generating units. Avallone and Quagli (2015) further stated that when fair value of
the asset declines below carrying amount the difference is written off, which is mainly
knows as impairment loss. The use of impairment loss directly allows the
organization to depict actual value of their assets in the annual report.
Adequate identification process of the impairment loss needs to be conducted
by the organization. This is mainly conducted at the end of each reporting period,
where entities are required to assess on the indication of impairment present in their
asset. The list of external and internal indicators of impairment are provided in IAS
36, which could allow the organization to adequately conduct impairment process on
their annual report. After the indication of an asset that may be impaired, asset
recoverable amount is calculated, which could be used in calculating the impairment
loss incurred by the organization. Andre, Dionysiou and Tsalavoutas (2018) argued
that without the indications companies are not able to detect the actual impairment
loss. However, there are certain indication of the impairment from the external
sources, which needs to be evaluated by the organization. Indication from external
sources mainly depict decline in market value, negative changes in technology,
market, economy or laws, increment in market interest rates and increment in net
Asset of the company than market capitalization. These identified indications mainly
state the possibility of impairment present in an organization, which could lead to
impairment loss.

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There are certain indications that might generate from internal source, which
could allow the organization to detect impairment in their operations. These internal
sources are obsolescence or physical damage of asset, asset being idle, part of
destruction or held for disposal, worst economic performance than expected and
investment in subsidiaries or joint ventures. This above identified internal sources
could directly lead to impairment loss incurred by the organization, which might
directly reflect in their income and balance sheet. Hence, by using both external and
internal source of indications, organizations are able to detect impairment in their
assets, which could reduce fair value of their assets. This impairment loss detection
could also help in formulating accurate financial condition of the organization to the
shareholders, which might help them to make adequate investment decisions.
According to IAS 36, impairment losses and reversement is conducted in profit and
loss statement, which helps in detecting losses incurred by the organization.
However, the impairment loss incurred by the organization is deductible by goodwill
maintained by the company. This relevant deduction eventually helps in reducing the
impairment loss incurred by the organization during the fiscal year. Shaari, Cao and
Donnelly (2017) stated that the use of impairment loss directly allows the
organization to detect actual value of their asset in the annual report.
Hence, it could be understood that organizations with the help of IAS 36 are
mainly able to detect actual impairment loss incurred during the fiscal year. The
detection of recoverable amount, disposable amount and fair value of an assets
allows the organization to calculate the actual impairment loss incurred during the
fiscal year. According to IAS 36, cash flow projection should be based on reasonable
assumptions which are attainable by the organization in future. Therefore, the

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detection of fair value and carrying value could help in identifying actual impairment
present in the asset.
Part B: Preparation of journal entries for any impairment loss occurring in 30
June 2015
Particulars Amount
Patent 213,000.00
Building 49,000.00
Fittings 31,000.00
Inventory
Goodwill 11,000.00
Total 304,000.00
Gali Ltd calculated the value in use of the division to be 284,000.00
Impairment loss 20,000.00
Goodwill 11,000.00
Remaining impairment losses for tangibles 9,000.00
Distribution of impairment
loss
Amount Portion Allocation
loss
Net carrying
amount
Patent 213,000.00 72.7% 6,542.66 206,457.34
Building 49,000.00 16.7% 1,505.12 47,494.88
Fittings 31,000.00 10.6% 952.22 30,047.78
Total 293,000.00 100% 9,000.00 284,000.00

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Journal Entries for impairment loss:
Particulars Amount Amount
Impairment loss Dr 9,000.00
Accumulated depreciation and impairment loss-patent 6,542.66
Accumulated depreciation and impairment loss-building 1,505.12
Accumulated depreciation and impairment loss-fittings 952.22
(Allocation of impairment loss)

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Reference:
André, P., Dionysiou, D. and Tsalavoutas, I., 2018. Mandated disclosures under IAS
36 Impairment of Assets and IAS 38 Intangible Assets: value relevance and impact
on analysts’ forecasts. Applied Economics, 50(7), pp.707-725.
Avallone, F. and Quagli, A., 2015. Insight into the variables used to manage the
goodwill impairment test under IAS 36. Advances in Accounting, 31(1), pp.107-114.
Glaum, M., Schmidt, P., Street, D.L. and Vogel, S., 2013. Compliance with IFRS 3-
and IAS 36-required disclosures across 17 European countries: company-and
country-level determinants. Accounting and business research, 43(3), pp.163-204.
Iasplus.com. (2018). IAS 36 — Impairment of Assets. [online] Available at:
https://www.iasplus.com/en/standards/ias/ias36 [Accessed 9 Jan. 2018].
Shaari, H., Cao, T. and Donnelly, R., 2017. Reversals of impairment charges under
IAS 36: evidence from Malaysia. International Journal of Disclosure and
Governance, 14(3), pp.224-240.