Impairment Accounting Solutions

This document presents solutions to two questions related to impairment accounting. The first question explores the concept of impairment reversal on goodwill, explaining that under Australian Accounting Standards (AASB 136) and other international standards (IFRS 3), reversal of impairment loss on goodwill is not permitted. The solution details the reasons behind this prohibition, emphasizing the prevention of internally generated goodwill being recorded. The second question involves a practical calculation of impairment loss on a cash-generating unit. It demonstrates the calculation of impairment loss, its allocation across different assets (patent, building, fittings, goodwill), and the corresponding journal entry. The solution uses specific figures to illustrate the process, showing how to determine the recoverable amount (higher of value in use and fair value less costs of disposal) and allocate the impairment loss proportionally based on carrying amounts. The document includes a bibliography citing relevant accounting standards and academic articles.

Student ID 11600447
Impairment accounting
Date September 12, 2017

Contents
Question 1........................................................................................................................................3
Impairment reversal on goodwill.................................................................................................3
Introduction..............................................................................................................................3
Impairment loss........................................................................................................................3
Impairment loss of goodwill.....................................................................................................3
Reversal of impairment loss.....................................................................................................3
Conclusion................................................................................................................................4
Bibliography....................................................................................................................................5
Question 2....................................................................................................................................6

Question 1
Impairment reversal on goodwill
Introduction
Impairment refers damage. In reference to the accounting prospective impairment refers to a
reduction in value or reduction in future benefits from any asset or profit generating unit.
Impairment accounting under Australian accounting standards is done under AASB 136. This
essay is written for putting lights on the topic of reversal of impairment loss on goodwill.
Impairment loss
Additional book value of assets in the cash generating unit over the recoverable amount, of cash
generating unit, known as impairment loss on such cash generating unit (Anon., 2017). Book
value means carrying amount of asset or carrying amount of all assets in cash generating unit.
Recoverable amount means amount that can be recovered by the organization from assets in cash
generating unit. Such amount can be recovered either through use or through sale in open
market. Highest amount that can be recovered from the assets in cash generating unit is known as
recoverable amount of cash generating unit.
Impairment loss of goodwill
Self generated goodwill is not allowed for the organization to record as accounting asset. It can
be recorded only when a company pays price for assets and liabilities at an amount higher then
identifiable amount. Impairment of goodwill recorded when recoverable amount of assets of cash
generating unit of goodwill will become lower than their carrying amount (Seetharaman et al.,
2006). Under this method firstly organization required to identify cash generating unit then
determine book value of assets in cash generating unit and amount that can be recovered by the
organization from cash generating unit’s assets. After this impairment loss for the cash
generating unit will determine. This impairment loss firstly apportioned to the goodwill and
remaining will apportioned to all assets of cash generating units in the ratio of their carrying
amounts (Shoaf & Zaldivar, 2005).
Moreover, as per IFRS 3 goodwill cannot be amortized on the basis of discretion of the
organization. This standard mandates that goodwill can only be tested for impairment annually
and cannot be undergone to other unsystematic amortization.
Reversal of impairment loss
An impairment loss is allowed to reverse for assets other than goodwill when impairment loss
decreased. This reversal of impairment loss on assets other than goodwill always remains below
the amount of impairment loss net of amortization accounted earlier on the assets other than
goodwill (International Accounting Standards Committee, 1998). Due to the reversal of
impairment loss future depreciation on assets other than goodwill will be effected.

However, the rules for reversal of impairment of goodwill are different from the rules for
reversal of impairment loss on tangible assets. As per AASB 136, paragraph 124 and 125,
reversal of impairment of goodwill is cannot be done. If goodwill related to any cash generated
unit impaired ones then it cannot be reversed like other assets of cash generated units by the rule
of reversal of impairment loss (Australian Accounting Standards Board, 2007).
Moreover, as per AASB 136 goodwill can only record by the organization when such goodwill
such goodwill purchased by the organization. When goodwill ones impaired by the organization
then it will terminate to be an asset. When an impairment loss is reversed by the organization on
such impaired goodwill then such reversal will result in the accounting of internally generated
goodwill in the books of accounts on the basis of self generated estimates (Australian
Accounting Standards Board, 2007). In turn, this will result in a violation of the Australian
accounting standard.
Furthermore, not only AASB 136 but also various accounting standards like US GAPP, IFRS
(Wines et al., 2007), Indian accounting standards etc also impose a prohibition on the reversal of
impairment of goodwill. IAS 36 specifically imposes a ban on the reversal of impairment loss on
the goodwill. These accounting standards also prohibit such reversal due to same reason i.e.
reversal of impairment loss on the impaired good will result in the accounting of internally
generated goodwill in the books of accounts on the basis of self generated estimates. In turn, this
will result in a violation of the accounting standard. In addition to this, as there is a prohibition
on the accounting of internally generated goodwill in the books of accounts on the basis of self
generated estimates, hence revaluation of goodwill is also prohibited. Because revaluation of
goodwill also results in the accounting of internally generated goodwill in the books of accounts
on the basis of self generated estimates.
Conclusion
Above discussion provides various arguments regarding the accounting for the impairment and
specifically accounting for impairment of goodwill and reversal of impairment loss on goodwill.
This discussion presents a clear conclusion that it is not possible to account reversal of
impairment loss on goodwill. Organizations can only reduce the amount of goodwill at their own
discretion, judgments and accounting estimations but they cannot increase the amount of
goodwill either by making a revaluation of goodwill asset or by reversing goodwill impairment.
Since, this addition will result in the accounting of self generated goodwill asset, which is
prohibited.

Bibliography
1. Anon., 2017. IAS 36 — Impairment of Assets. [Online] Available at:
https://www.iasplus.com/en/standards/ias/ias36 [Accessed 2017 september 12].
2. Australian Accounting Standards Board, 2007. Impairment of Assets. [Online] Available
at: http://www.aasb.gov.au/admin/file/content105/c9/AASB136_07-04_COMPapr07_07-
07.pdf [Accessed 12 september 2017].
3. International Accounting Standards Committee, 1998. Impairment of assets. International
Accounting Standards Committee.
4. Seetharaman, A., Sreenivasan, J., Sudha, R. & Ya Yee, T., 2006. Managing impairment
of goodwill. Journal of Intellectual Capital, 7(3), pp.338-53.
5. Shoaf, V. & Zaldivar, I., 2005. goodwill impairment. Review of Business, 26(2), p.31.
6. Wines, G., Dagwell, R. & Windsor, C., 2007. Implications of the IFRS goodwill
accounting treatment. Managerial Auditing Journal, 22(9), pp.862-80.

Question 2
In the present case amount of impairment loss can be calculated in following manner,
Carrying amount
Patent 447,000
Building 103,000
Fittings 65,000
Inventory 28,000
Goodwill 23,000
Total carrying amount 666,000
Value in use = 597,000
Fair value less cost of disposal = 430,283
Recoverable amount= 597,000 i.e. higher of value in use and fair value less cost of disposal
Impairment loss on cash generating unit = Carrying amount - Recoverable amount
Impairment loss on cash generating unit = 666,000 - 597,000 = 69,000
Allocation of impairment loss,
Asset Carrying amount Loss amortization Carrying amount after impairment
Patent 447,000 33,434 413,566
Building 103,000 7,704 95,296
Fittings 65,000 4,862 60,138
Goodwill 23,000 23,000 -
Total 638,000 69,000 569,000
Journal entry for accounting of impairment loss,
Date Description Debit Credit
30 June Impairment loss 69,000
Patent 31,978
Building 7,369
Fittings 4,650
Goodwill 23,000
(Impairment loss Recognized)