Impairment Loss: IAS 36, Measurement, Recognition, and Journal Entries

This report offers a comprehensive analysis of impairment loss, focusing on the International Accounting Standard (IAS) 36. It begins with an introduction to impairment loss, emphasizing the importance of identifying impaired assets and measuring their recoverable amounts. The report details the objective and application of IAS 36, explaining how firms assess assets for impairment using both internal and external indicators. The report covers the identification of impaired assets, the calculation of recoverable amounts, and the significance of both. Furthermore, the report includes a practical application with journal entries, demonstrating how to account for impairment losses in a real-world scenario. The report concludes by summarizing the key concepts and emphasizing the importance of periodic asset assessment to maintain financial stability. The report also provides references to relevant academic sources.

Impairment Loss: Measurement and Recognition

Contents
Part A: Impairment Loss: Measurement and Recognition..............................................................3
Introduction......................................................................................................................................3
Impairment Loss.............................................................................................................................3
Objective......................................................................................................................................3
Application of IAS 36..................................................................................................................4
Indentifying impaired asset and Measuring Recoverable Asset..................................................4
Recoverable Amount....................................................................................................................5
Conclusion.......................................................................................................................................6
Part B: Journal entries......................................................................................................................7

Part A: Impairment Loss: Measurement and Recognition
Introduction
An entity requires assessing their assets that are impaired or not and for this purpose an
entity requires a standard that can be used to do the same. To gain information, a business
organization considers various means. In order to have a proper understanding, it uses its
external and internal sources to get an idea about the performance of their assets. IAS36
impairment of assets is a standard that is quite commonly used by the entities for the assessment
of their assets (Impairment accounting – the basics of IAS 36 Impairment of Assets, 2008).
IAS36 is a measure that helps firms in determining the assets that are impaired and cannot earn
back recoverable amount. IAS36 assist the firms in categorizing their assets which are not
performing and what alternative measures can be used for the same to incur less losses.
The application of IAS 36 is quite wide. Due to the recent economic uncertainty the
subject of impairment has came to spotlight. After which various entities has decided to reassess
their impairment testing models and processes (Dagwell, Wines and Lambert, 2015). The essay
portrays the importance of identifying assets that are impaired and cannot be used further. The
subject matter of the essay deals with the significance of measures which helps in identifying the
assets that are impaired. In the essay IAS36, a widely accepted and popular method is discussed.
Identification of Impaired Assets and Losses

Objective
IAS 36 impairment of assets ensures that an entity’s assets are not carried for more than
their recoverable amount which means that the higher the fair value and less cost of disposal of
the asset. The assets that have impaired burdens the organization with huge amount of cost and
expenses, in such a scenario when innovation and technology has reached its peak, assets are
becoming obsolete quite rapidly. In such a scenario, IAS36 provides a reliable platform to
identify the assets which are becoming impaired (IAS 36 — Impairment of Assets, 2017).
Organization in general assesses their assets on periodic bases. The managers are aware of the
assets and about their working life that are being used in the organization. Hence in order to
maintain the losses, organization requires keeping an eye on their assets. IAS36 is a quite famous
method that is being used by various organizations (Impairment of Assets, 2007). This method is
applicable to every kind of assets irrelevant of their nature. It helps the organization to maintain
assets that can be recovered at the position of no loss and no gain.
Application of IAS 36
IAS 36 is a measure or standard that is used by various firms to assess their impaired
losses. It is also important to know that how and where this standard is applied. IAS36 is a
method that can be applied to various assets and is in being used by firms from several years. It
provides accurate data about the asset and organizations plan out their strategies for the asset on
the same way (Henderson, Peirson, Herbohn and Howieson, 2015). In general IAS36 is a method
that can be applied to any firm, but specifically a firm which is listed in the stock exchange or
that which maintains a proper balance sheet can gain benefit from the method. The method
IAS36 helps in assessing various kinds of assets of the organization on time to time basis (IAS
36 — Impairment of Assets, 2017).

Identifying impaired asset and Measuring Recoverable Asset
Assets play an important role in increasing the goodwill of an organization. However
they have a fixed working life after which they become obsolete. In today’s dynamic
environment, the assets of a firm are becoming obsolete very quickly, in such a situation an
origination is required to manage its assets in such a way that it generates less losses (Alexander
and Archer, 2008). The method IAS36 is widely because assesses the assets of the organization
on the basis of external and internal indicators. It is significant for an organization to recover its
losses from the assets that has become obsolete. To maintain goodwill in the market
organizations carries on asset assessment, in addition to this it also helps it to remain up to date
with the market changes. A proper order to conduct asset assessment is annually, however due to
changing scenario, organizations have started to do this periodically such as quarterly.
An asset is impaired when its carrying amount exceeds its recoverable amount. At the
end of each reporting period an entity is required to assess whether there is any indication that
the asset is impaired (Henderson, Peirson, Herbohn and Howieson, 2015). The standard IAS 36
has a list of internal and external indicators related to impairment of asset. If here is any
indication that the asset is impaired then the asset’s recoverable amount is required to be
calculated. The recoverable amounts of the certain intangible assets are measured annually, this
involves, an intangible asset with an indefinite useful life, an intangible asset not yet available
for use and goodwill acquired in a business combination (Alexander and Archer, 2008).
An organization uses various methods to identify assets that have been impaired.
However, the most efficient way is to gather information from sources which can be external or
internal (International Financial Reporting Standards (IFRS) 2014, 2014). The following
discusses the ways through which an organization can identify its assets is losing value:

 The best way to identify that the assets have become obsolete is decline in its market
value. This will make the firm realize that the assets should be sold down.
 The market changes are also an indicator that helps firms to plan different strategies. A
negative change in the market trends helps the managers to make new policies and plan
things accordingly.
 Increase in market interest rates also act as an indicator that helps the firm in planning
alternative ways.
Apart from the external sources there are certain internal sources that indicate that the asset has
impaired. This may include:
 Any kind of physical damage to an asset can make the asset obsolete
 Physical damage or obsolescence of the asset
 Asset is not in use and is held for disposal
 Worse economic performance
 Dividend exceeds the total comprehensive income
When an asset become obsolete it becomes quite important for the organization to sell
down it so that it can cover its losses. In addition to this when a firm makes a decision to sell
down its assets it become quite important for the managers to determine cash inflows and their
judicial utilization (Dagwell, Wines and Lambert, 2015).The assessment of cash inflow should
be done on the basis of present scenario so that it will generate more returns for the organization.
Conclusion

Essay deals with the impairment of assets, their recognition and measures for the same.
An entity is required to assess their assets periodically in order to gain an idea about the impaired
assets. Assets are treasure for an organization, so every form tries to maintain them with utmost
care. However the lives of assets are quite limited so it is significant for a firm to consider that
before an asset became obsolete it should sold the same so that firm can maintain the position of
no gain and no loss. The standard that is widely used in this aspect is IAS 36 impairment of
assets. This measure helps the firm to perform their assessment efficiently. The role of external
and internal sources is quite important in this regard. These sources aid the entity in assessing
their assets. IAS 36 applies to all the assets of the entity are a quite reliable measure that is used
by the entity. An entity should try its best to generate as much recoverable amount from the asset
so that it can maintain its equilibrium. In this regard a cash flow prediction also plays an
important role, it should be done diligently and while projecting cash flow entity should view
their recent budget and market predictions.

Part B: Journal entries
According to the given information:
Total impairment loss to the CGU (Fine China) of the Gali Limited
= Carrying Amount Less Value in use
= $634000-$568000
= $66000
This impairment has to be divided by the properties of CGU division on priority but the
reputation and name of the firm requires being impaired completely following with remaining
assets on pro rata basis. Inventory is current asset and it is not required to be impaired.
Assets
Carrying
Amount Pro Rata
Impairment
Loss Adj. CA
Goodwill 22000 22000 0
Plant 425000 425/585*44000 31965.81 393034.19
Equipment 98000 98/585*44000 7370.94 90629.06
Fittings 62000 62/585*44000 4663.25 57336.75
585000 66000 541000
In this case, the value of the plant that has been obtained is more than the amount.
Therefore, we have to make necessary adjustment to the adjusted carrying value of plant and
reallocate the impairment loss again.

As the case, value of asset at the time of clearance is 409017 which is more than the cost
of impairment that can be allocated to the plant is 425000-409017= 15983. The remaining
amount 15982.81 will be provided to the other assets of the organization (Except Goodwill) on
pro rata basis.
Assets
Carrying
Amount Pro Rata
Impairment
Loss Adj. CA
Plant 409017.00
Equipment 90629.06 90629.06/147965.81 9789.47 80839.59
Fittings 57336.75 57336.75/147965.81 6193.34 51143.41
147965.81 15982.81 541000.00
Journal Entry
Impairment Loss Dr 66000.00
Acc. Goodwill 22000.00
Acc. Depr. & Impairment Losses – Equipment 17160.41
Acc. Depr. & Impairment Losses – Plant 15983.00
Acc. Depr. & Impairment Losses – Fittings 10856.59

References
Alexander, D and Archer, S. 2008. International Accounting/Financial Reporting Standards
Guide 2009. CCH.
Dagwell, R, Wines, G. and Lambert, C. 2015. Corporate Accounting in Australia. Pearson.
Henderson, S., Peirson, G, Herbohn, K and Howieson, B. 2015. Issues in Financial Accounting.
Pearson Higher Education AU.
IAS 36. 2017. Impairment of Assets. [Online]. Available at:
https://www.iasplus.com/en/standards/ias/ias36 [Accessed on: 5 September, 2017].
Impairment accounting – the basics of IAS 36 Impairment of Assets. 2008. International
Financial Reporting Standards update. [Online]. Available at:
http://www.ey.com/Publication/vwLUAssets/Impairment_accounting_the_basics_of_IAS_36_I
mpairment_of_Assets/$FILE/Impairment_accounting_IAS_36.pdf [Accessed on: 5 September,
2017].
Impairment of Assets. 2007. Compiled Accounting Standard. [Online]. Available at:
http://www.aasb.gov.au/admin/file/content105/c9/AASB136_07-04_COMPapr07_07-07.pdf
[Accessed on: 5 September, 2017].
International Financial Reporting Standards (IFRS) 2014. 2014. John Wiley & Sons.