Goodwill Impairment Loss Reversal: Analysis & Journal Entries

This assignment provides a detailed analysis of the reversal of impairment loss for goodwill, referencing AASB 136 and other relevant accounting standards. It explains the nature of impairment loss, its recognition as a revenue expenditure, and the conditions under which reversal can occur for cash-generating units (CGUs), but explicitly states that impairment losses for goodwill cannot be reversed. The assignment further includes a practical application involving Gali Ltd, demonstrating the calculation and journal entries for an impairment loss in a CGU, allocating the loss across various assets like land, patents, buildings, inventory, and goodwill, while adhering to the principle of first writing off the goodwill. The conclusion emphasizes the importance of proper disclosure in financial statements as per IAS 136 to maintain transparency for stakeholders. Desklib offers a wide range of solved assignments and past papers for students.

RUNNING HEAD: Reversal of impairment loss for Goodwill
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Name of the student
Topic- Reversal of impairment loss for Goodwill
University

Reversal of impairment loss for Goodwill 2
Assessement-1
Introduction
With the ramified economic changes, every organization needs to implement the
implement the impairment test to identify the true and faire view of the assets and liabilities
recorded in the books of accounts of company. It is analyzed that every company needs to follow
the proper impairment test to identify the fair view of the assets and liabilities recorded. As per
the AASB 136, impairment test is implemented on periodically basis to revaluate the business
assets and liability of company. The Reversal of impairment loss for Goodwill is determined
only after computing the carrying value of the assets, recoverable values and impairment loss
charged from the cash generating units of the organization.
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The impairment loss is charged on the profit and loss account f company as per the
accounting standards AASB 136. The impairment loss could be described as amount which
could be computed by deducting recognized value of the assets from the carrying value of the
assets (AASB 136. 2007).
Nature of Impairment Loss
The impairment loss is recognized and revenue expenditure which is charged from the
profit and loss account. As per the international accounting standards, assets should be revalued
on periodical basis so that it could showcase the true and fair view of the recorded assets and
liabilities in the books of accounts of company (Yoo, Choi, and Pae, 2018). However, before
computing the impairment loss, company needs to compute the carrying value of its assets. It
could be computed by using the following formula (AASB 136. 2007).
Carrying amount= [higher of fair value-expenses or value in use]
If in case, carrying amount is lower than its recoverable value then the differences will be
counted as impairment loss charged from the profit and loss account. Firstly, it will charged from
the goodwill and rest impairment loss would be deducted from the cash generating units of the
organization (Hu, Percy, and Yao, 2015).
Reversal of impairment loss for Goodwill
With the changes in time, there might be possible situation when the value of the business
increased due to the positive business factors. The reversal of the impairment loss of the cash
generating units could be reversed but organization needs to comply with the all the applicable
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rules and regulations given under IAS 136. It is analyzed that reversal of the impairment loss for
goodwill is done only in certain circumstances. It is considered that if the recoverable value of
the assets exceeds the carrying amount then the company which have recognized impairment
loss previously will go for its reversal (Bepari, & Mollik, 2015). It is ideally find when company
has created value on its investment and strengthen its overall brand image. This will not only add
value the goodwill value but also fictitiously increase the profit and loss. As per the IAS 136,
impairment of the assets would require an entity to reversal of the impairment loss except for
goodwill for which it has impaired its assets. The impairment loss for goodwill cannot be
reversed (Brigham, and Ehrhardt, 2013).
It is analyzed that there are several list of the indicators which could mirror the list of the factors
for indenting impairment with main two expectations. First is when the carrying amount of the
recorded assets in the reporting financial statement is more than its market capitalization. Second
is that when entity changed the estimation of the impairment which it used previously while
recording the impairment loss (Dinh, Kang, Morris, and Schultze, 2018). In simple words, it
could be analyzed when there is improvement in the assets opposed to the reversal being the
result of the undertaken passage of time. However, while reversal of the impairment test;
company needs to make proper disclosure of the impairment loss which has been reversed in its
books of account. There should be complete details of the charging the impairment loss reversal
which company needs to disclose in its books of accounts (AASB 136, 2007).
IAS 136 requires extensive disclosure in respect of the impairment tests be performed and
impaired. In case of Reversal of impairment loss for Goodwill, the disclosure is more extensive.
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However, there are following information should be disclosed in case of reversal of impairment
loss for Goodwill in the annual report of company (Zhuang, 2016).
The amount of capital Reversed of impairment loss for Goodwill and added to the particular
assets value (Dagwell, Wines, and Lambert, 2011) such as The amount of goodwill, CGU values
and reversal value set off with the same, the key assumptions and estimation which have been
applied by entity while rreversal of impairment loss for Goodwill (Huikku, Mouritsen, & Silvola,
2017), the impairment calculation and recorded reversal in the cash generating units. It could be
inferred that while reversal of the impairment test; company needs to make proper disclosure of
the impairment loss which has been reversed in its books of account so that it could reveals the
true and fair view of the recorded assets and liabilities (Drenik, Pereira,. and Perez, 2018).
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Conclusion
After analysing all the information about Reversal of impairment loss for Goodwill, it
could be inferred that a company could never do Reversal of impairment loss for Goodwill. It is
analyzed that if the Reversal of impairment loss for other cash generating units is given then it
could be possible. In addition to this, in case of Reversal of impairment loss for cash generating
units is done then it would be done in different aspects such as when the estimation is
manipulated and second is related to when the recognized value of the impairment assets is
increased through the time. Now in the end, after analyzing the case, it could be inferred that key
entity should make the proper key disclosure in its books of accounts as per the IAS 136 to make
business more transparent to its stakeholders.
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Part B: Journal entries for Impairment loss
Gali Ltd has determined that its fine china division is a CGU
Asset Carrying Amount
Land 997700
Patent 229000
Building 144000
Inventory 62000
Goodwill 51000
$ 1 483700
Note:- All the impairment loss would allocated to individual assets in different proportion to the
carrying amount. Firstly, impairment loss would be writing off from the goodwill and then will
be deducted from the other cash generating units.
Carrying amount of assets = $1483700
Recoverable amount = $1330700
Impairment loss = $113000
Firstly impairment loss would be deducted from the Goodwill= 113000-51000= $62000
Carrying Proportion Allocation Net Carrying
Amount of Loss (62000 Amount
Land $997700 997/143.2(69%) 43201 956498
Patent 229000 229/143.2 (16%) 9896.1 21903.6
Building 144000 144/143.2(10%) 6222.9 137777.1
Inventory 62000 62/143.2 (4.3%) 2679.3 59321
$1432700 62000 1372700
It is assumed that inventory is carried at lower cost and net realisable value of impairment loss
but still would be taken for the inventory loss.
It is analyzed that fair value of the cost of land is $960579 and it cannot be reduced below this.
The fair value less therefore, the maximum impairment loss allocable to land would be $ 37121.
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The extra $ 6080.645 would be allocated to other assets.
Carrying Proportion Allocation Net Carrying
Impairment loss Dr 113000
Goodwill account Cr $ 51000
Land Cr $ 37121
Patent (9896+3201.075) Cr $ 13097
Building (6222+2012.9) Cr $ 8234.9
Inventory Cr $866.66
(Allocation of impairment loss)
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References
AASB 136. (2007). Impairment of Assets. [Online]. Available at:
http://www.aasb.gov.au/admin/file/content105/c9/AASB136_07-04_COMPapr07_07-07.pdf
[Accessed on: 20 January 2018].
Bepari, M. K., and Mollik, A. T. (2015). Effect of audit quality and accounting and finance
backgrounds of audit committee members on firms’ compliance with IFRS for goodwill
impairment testing. Journal of Applied Accounting Research, 16(2), 196-220.
Brigham, E.F. and Ehrhardt, M.C., (2013). Financial management: Theory & practice. 4th ed,
USA: Engage Learning.
Dagwell, R., Wines, G., and Lambert, C. (2011). Corporate accounting in Australia. 2nd,
Australia: Pearson Higher Education AU.
Dinh, T., Kang, H., Morris, R.D. and Schultze, W., (2018). Evolution of intangible asset
accounting: Evidence from Australia. Journal of International Financial Management &
Accounting. 66(1), pp.29-44
Drenik, A., Pereira, G. and Perez, D.J.,(2018). Wealth Redistribution after Exchange Rate
Devaluations. In AEA Papers and Proceedings 108(3), pp. 552-56.
Hu, F., Percy, M. and Yao, D., (2015). Asset revaluations and earnings management: Evidence
from Australian companies. Corporate Ownership and Control, 13(1), pp.930-939.
Huikku, J., Mouritsen, J., and Silvola, H. (2017). Relative reliability and the recognizable firm:
Calculating goodwill impairment value. Accounting, Organizations and Society, 56, 68-83.
Yoo, C.Y., Choi, T.H. and Pae, J.,( 2018). Demand for fair value accounting: The case of the
asset revaluation boom in Korea during the global financial crisis. Journal of Business Finance
& Accounting, 45(1-2), pp.92-114.
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Zhuang, Z., (2016). Discussion of ‘An evaluation of asset impairments by Australian firms and
whether they were impacted by AASB 136’. Accounting & Finance, 56(1), pp.289-294.
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