Understanding and Reporting Impairment Loss in Financials

This report examines the challenges companies face in calculating and reporting impairment loss. It explores the complexities of asset valuation, particularly the use of discounted cash flow, and identifies issues in identifying cash-generating units. The report details the impact of impairment loss on financial statements, including the balance sheet, profit and loss statement, and cash flow statement, emphasizing the effects on profit, inventory valuation, and retained earnings. It also contrasts the US GAAP system's approach to asset impairment with other methods. The conclusion stresses the importance of early and skilled assessment of impairment, highlighting the need for expertise in business modeling and forecasting to ensure accurate financial reporting. References to relevant articles are also included.

Contents
EXECUTIVE SUMMARY.................................................................................2
INTRODUCTION............................................................................................2
MAIN BODY..................................................................................................2
Understanding and challenging asset valuation in financial reports........2
Impact on the financial statement of the company..................................2
Revaluation of an Asset and Loss on Impairment.......................................3
CONCLUSION...............................................................................................3
References..................................................................................................4

EXECUTIVE SUMMARY
The main challenges and difficulties which companies face in calculating
and reporting impairment loss of the company.The main challenge in
preparation of the financial statement of the company and disclosing such
impairment loss in the financials of the company which lead to decrease
in the profit of the company and reduction of retained earning of the
company.

INTRODUCTION
Impairment loss is a reduction in the carrying value of an assets that is
activated by the decline in the fair market price of an assets. When the
market value or the fair value of an assets decline below the carrying
value of an assets than the difference between the two is written off.
Carrying amount of an asset means the cost of purchase of an asset less
depreciation and charges for impairment if any. (Accouting Tools.com,
2018)
MAIN BODY
The common issues which arises in calculating and reporting impairment
loss are here in below:
Understanding and challenging asset valuation in financial reports
The above article was submitted to the Australian Institute of Company
Directors for publication of the semiconscious material misstatement was
found on impairment of non financial assets like goodwill, identifiable
intangible item, property plant and equipment. The calculation of
impairment often rely on the discounted cash flow which can be
complex .The cash flows do not match with the carrying amount of the
assets which is carried in forward which generate those flows like
inventories,receivables.The similar discounting rate is been considered
even the risk associated with it is different and the cash generating unit
too is locating on a different locations. The identification of cash
generating units are also done at too high a level. (Australian Securities
and Investment commission, 2018)
Impact on the financial statement of the company
The financial statement of the company i.e. the balance sheet, profit and
loss and cash flow statement of the company is impacted is impacted to
some extent due to impairment of an assets. The profit of the company is
also impacted if the impairment is carried out. The impairment of an asset
may not be as worth or helpful as estimated or expected initially. If the
inventory of the company becomes obsolete or not worthy than the value
of those stock is generally lower as compared to stock value of another
inventory. When the management of the company decides to reduce the
value of their inventory than the same impact is also to be shown in the
financial statements of the company. The write off value of the inventory

is the difference between the original cost of the inventory and the
current value .The same write down amount is to be reported as an
expense on the income statement of the company .If the amount is not
significant or immaterial than the same can be added to the cost of good
sold value. If the same amount is material though and significant than the
same amount must be shown as a separate line item on the income
statement of the company “loss of inventory due to write down”. Both the
methods ultimately reduce the net profit of the company and increase the
net loss of the company. The same also impact the balance sheet of the
company ,if the inventory is reported at $10,000 and the same
replacement cost of the inventory is worth $7,000 than the inventory to
be reports under assets section of the balance sheet is $7,000.Throigh
impairment the retained earning of the company is also impacted as the
write down of inventory lead to decrease in the retained earning of the
company and overall decrease in the owner’s equity . ( Hearst
Newspapers, LLC, 2019)
Revaluation of an Asset and Loss on Impairment
Under the US GAAP system once the asset is impaired the value of such
asset cannot be increased, whatever the market value of such asset
exists. The value of such an asset remains same unless the market price
of such asset declines again. Under the US GAAP it is considered to repair
the assets as soon as the fair market value of the assets decreases to a
certain level.
CONCLUSION
From the above it can be concluded that the impairment is the key
element in any organisation or company. The process to assess and
calculate impairment is complex and time consuming. It is generally very
much important in a company that the process of impairment must be
carried out an early stage and must be carried out with proper skill such
as business modelling and forecasting. Selection of the proper process is
required and it is based on having proper knowledge skill set on the
operational and financial aspects of the business on which it operates.

References
Hearst Newspapers, LLC, 2019. Appropriate Reporting Treatment for the
Write-Off of Inventory Due to Obsolescence. [Online]
Available at: https://smallbusiness.chron.com/appropriate-reporting-
treatment-writeoff-inventory-due-obsolescence-33462.
[Accessed 22 August 2019].
Accouting Tools.com, 2018. Impairment loss. [Online]
Available at:
https://www.accountingtools.com/articles/2017/5/10/impairment-l
[Accessed 22 August 2019].
Australian Securities and Investment commission, 2018. Asset
impairment. [Online]
Available at: https://asic.gov.au/regulatory-resources/corporate-
governance/corporate-governance-articles/asset-impairment
[Accessed 22 August 2019].