Analysis of Goodwill Impairment Reversal: Accounting Standards Report

This report delves into the accounting principles surrounding the impairment and reversal of goodwill, an intangible asset representing a company's reputation and future economic benefits. It examines the concept of impairment, where the value of an asset is reduced due to a decline in its recoverable amount, and the relevant accounting standard AASB 136. The report details the calculation and treatment of impairment losses, including the allocation of goodwill to cash-generating units. It highlights the prohibition of reversing goodwill impairment losses, unlike other impaired assets, as per IAS 36. The report contrasts the treatment of impairment for goodwill with other assets, considering the revaluation and cost models, and provides practical examples to illustrate the accounting entries and financial reporting implications. It also references key publications and standards to provide a comprehensive understanding of the subject matter. The report stresses the importance of understanding these principles for accurate financial statement analysis.

Running head: REVERSAL OF IMPAIRMENT LOSS OF GOODWILL
REVERSAL OF IMPAIRMENT LOSS OF GOODWILL
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REVERSAL OF IMPAIRMENT OF GOODWILL
Impairment refers to an accounting principle which is associated with permanent
reduction in the value of the assets of the company which are generally fixed assets.
The testing of the impairment of assets the profits, cash flows and other benefits which
are associated with the specific assets. If the book value of the assets exceeds the
benefits associated with the assets than such a difference is written off and the assets
value is decreases in the balance sheet (Capalbo 2013).
The impairment of assets is only done when the difference between the fair value
and carrying amount is deemed to be unrecoverable. The calculation of impairment of
assets is covered by AASB 136 which is a standard issued on impairment of assets by
the Australian Accounting Standard Board (Aasb.gov.au. 2018). Goodwill refers to the
payment which the company incurs in order to get certain economic benefits in future. In
some sense it also refers to the good reputation of the company among the general
public. This is considered to be an intangible asset of the company and the same is also
subjected to impairment principles (AbuGhazaleh, Al-Hares and Haddad 2012). The
calculations of impairment of goodwill is done by allocating the goodwill to a cash
generating unit which is of the lowest level. As per AASB 136 ‘s Paragraph 1
impairment of assets states what are the techniques which business use in order to
make sure that the assets are being carried out in right amounts and the value does not
exceed the amount level which are recoverable (Aasb.gov.au. 2018). This paragraph
also states that in case the asset’s value are carried over than the amount which is
recoverable, the recoverable amount which is received by selling the asset is lower than
the carried over value. AASB 136 requires the company to recognize such impairment

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losses along with the timing of the loss and also requires proper disclosure of the above
in the financial reports.
In a case where carrying amount is more than the recovery amount than it is said
that an impairment loss has occurred. This is higher than assets ‘s fair value minus the
selling cost and the value which is in use (Kuzmina. and Kozlovska 2012). As per the
paragraph 59 of the standard, if the recoverable value of an assets is less than its
carrying value then carrying value will be minimized to that value as the recoverable
amount. The method of estimating and calculating may differ from organization to
organization. The standard also states that the impaired loss is to be realized as soon it
is recognized with exceptions that other standards apply or the asset has been
revalued. The standard is also very useful in analyzing the revaluation model of AASB
116.
The methods which are used in the impairments of assets are the
revaluation model and the cost model. As per the cost model, when an impaired asset is
recorded on the cost basis than the same should be recorded in the profit and loss in
terms as soon as possible. Therefore it is clear that the same loss should be recorded in
the income statement as an expense for that particular organization. As per Paragraph
60 of AASB 136, revaluation method is considered when impairment is done for assets
like plant and machinery, equipment at a revalued amount than such a loss is treated
similar to that of a decrease in revaluation. In case of revaluation model, if the
impairment loss is taken as an expense and recorded in the profit and loss account than
the reversal will be posted in the credit side of the profit and loss account which cancel
out the situation and reversal will be done. For example, an assets which has a carrying

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amount of $70,000 and as depreciation an amount of $15,000. $25,000 of revaluation
decrements can be seen to have been realized while previous impairment loss
recording. The losses in their turn have minimized the balance of the revaluation surplus
and deferred liability of tax account.
The recoverable amount of the same is $ 15000 and so for reversal recording of
$10,000, the loss of impairment previously, the accumulated depreciation and
equipment accounts needs to be debited and has $15,000 balances each. Accounts of
revaluation surplus and deferred liability of tax will also be credited and will have
$14,000 and $6,000 respectively. Thus from the above example is clear that the
treatment of revaluation and depreciation in the impairment treatment and reversal of
impairment as well.
In case of goodwill, the impairment provisions which are applicable for assets are
quite different (Trottier 2013). The first thing that needs to be understood is that goodwill
is prohibited from being amortised. The previous policy involved amortising goodwill
over a period of year not exceeding 40 years in case of purchased goodwill. With the
introduction of IFRS 3 goodwill is only now required to be tested for impairment loss on
an annual basis. The policy of amortization of goodwill is not allowed anymore (Alves
2013).
Any assets which is impaired as per IAS 36 which is an International Standard on
Impairment of Assets, can be reverse the impairment loss of the assets which was
recorded in the previous year if the factor responsible for such impairment has improved
or subsided (Cpaaustralia.com.au 2018). However such reversal option is not available
in case of goodwill (Biancone 2014). Earlier businesses were allowed to reverse

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impairment loss on goodwill which was caused due to some external factor and such
factor were not expected to recur. In recent times IAS 36 has specifically declared that
there will be no impairment loss reversals in case of goodwill. The reason due to which
the IAS 36 prohibited the reversal of impairment loss of goodwill is if the value of
goodwill is increased subsequent years than such increase will be considered as
increase in internal goodwill of the company and not that of purchased goodwill
(Ramanna and Watts 2012). As internal goodwill of the company is not allowed be
recognized as an asset of the company, hence there is no scope of increase or
decrease which can be accounted in relation to internal goodwill (Guthrie and Pang
2013).

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Reference
Aasb.gov.au. (2018). Available at
http://www.aasb.gov.au/admin/file/content105/c9/AASB136_07-04_COMPapr07_07-
07.pdf [Accessed 21 Jan. 2018].
AbuGhazaleh, N.M., Al-Hares, O.M. and Haddad, A.E., 2012. The value relevance of
goodwill impairments: UK evidence.
Alves, S., 2013. The Association Between Goodwill Impairment and Discretionary
Accruals: Portuguese Evidence. Journal of Accounting, Business & Management, 20(2).
Biancone, P.P., 2014. IFRS: Italian Experience on Impairment Test of
Goodwill. International Journal of Advances in Management Science.
Capalbo, F., 2013. Impairment of Assets.
Cpaaustralia.com.au. Available at:
https://www.cpaaustralia.com.au/~/media/corporate/allfiles/document/professional-
resources/reporting/reporting-ifrsfactsheet-impairment-of-assets.pdf?la=en [Accessed
21 Jan. 2018].
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.

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Kuzmina, I. and Kozlovska, I., 2012. ACCOUNTING MEASUREMENT OF LONG-
LIVED ASSETS: A CASE OF IMPAIRMENT PRACTICE. Journal of Business
Management, (5).
Ramanna, K. and Watts, R.L., 2012. Evidence on the use of unverifiable estimates in
required goodwill impairment. Review of Accounting Studies, 17(4), pp.749-780.
Trottier, K., 2013. The effect of reversibility on a manager's decision to record asset
impairments. Accounting Perspectives, 12(1), pp.1-22.