Analysis of Impairment Losses: Gail Ltd and AASB 136 Standard

This report provides a detailed analysis of Gail Ltd's impairment loss, focusing on the application of AASB 136. It examines the valuation of the company's China division as a cash-generating unit (CGU), including the carrying values of its assets and the relevance of AASB 136 in determining impairment losses. The analysis highlights the importance of the recoverable amount, which is the higher of fair value less costs of disposal and value in use. The report discusses the impairment of assets such as land, building, equipment and goodwill, emphasizing that the company did not account for goodwill impairment. It explores the implications of managerial discretion in asset valuation and its potential impact on agency problems. Furthermore, the report explains how the impairment loss is calculated and allocated across different assets, considering the fair value and the value in use. The conclusion summarizes the key findings and reinforces the significance of AASB 136 in ensuring accurate financial reporting and asset valuation. The report also references several sources to support the analysis.

Assignment Title
Student Name
Course Name
Instructor Name
Date
1

Introduction
Gail Ltd made valuation about their China division as a CGU. The unit has different
assets, and they are disclosed at their carrying value. It provides detailed information about the
carrying value of every asset. Carrying amount is the recognizable amount after adjusting for the
accumulated depreciation and any related impairment losses. AASB 136 is more relevant to Gali
Ltd case scenario. The company did not provide any provision for revaluing the goodwill of the
company. There is no indication of fair value less cost of all other cash generating assets except
for land. In this paper, there is a detailed discussion about the AASB 136 and their relevance to
the Gail Ltd while preparing the impairment loss account.
Analysis
AASB 136 is an accounting standard that deals with the impairment of assets. The
purpose of the accounting standard is to ensure that the assets of the company disclosed on the
balance sheet are not in excess to their recoverable amount (Dagwell, Wines and Lambert, 2007).
It aims at providing a true and fair accounting statement. Recoverable amount is the amount that
asset can generate it is the fair value after adjusting the value in use of the asset and the costs to
sell the asset.
As per AASB 136, assets that are subject to impairment are land and building, property,
machinery, goodwill and other intangible assets held by the company. Current assets of the
company are not subject to the impairment losses. In this case, the Gali Ltd is not considering the
goodwill for impairment loss determination. But as per AASB 136, goodwill of the company is
subject to impairment if the fair value after adjusting for the costs is lower than the amount that
is presented in the balance sheet of the company (IFRS, 2009).
2

In this case, there is no indication about the leases of Gali Ltd for performing the
calculation; therefore, AASB 117 that is related to the leases are irrelevant for this case (AASB,
2009). Gali Ltd did not indicate the impairment of goodwill which is mandatory while making an
evaluation of all the accounts of the company. When the company is making fair value valuation
of the assets, they should include goodwill in such valuation. If the company is not including the
goodwill in the revaluation and not charging for any impairment, then it indicates that the
managerial discretion highly dominates the company.
In this case, Gali Ltd is highly influenced by the decision of the management, and it will
give rise to more agency problem in the future. The main reason for Gali to avoid the goodwill
revaluation could be that their value would be much lesser than the value projected by them in
their books (Wiley, n.d.). It might result in pulling down the overall value of the total assets of
the company. Gali Ltd did not specify the assets that have caused the impairment losses by
indicating the fair value adjusted for the cost of the various accounts. There is the only indication
of the Land’s fair value less the cost of disposal (Department of Treasury and Finance, 2015).
The total value did not independently specify which account was undervalued or all
assets value was slightly lower than the market value therefore pro-rata basis is used for the
analysis. Carrying amount is the recognizable amount after adjusting for the accumulated
depreciation and any related impairment losses. In this case, Gali Ltd has reported the carrying
value of the assets of the division. As per AASB 136 inventory will not be revalued by the
business for any impairment losses (AASB, 2009). Thus, Gali Ltd will ignore the inventory
while determining the impairment losses. From the given information, it is clear that Gali Ltd did
not include goodwill for the impairment loss determination.
3

The fair value of land is determined appropriately as per the AASB 136 requirement that
it is after charging for the costs associated with the sales. Gail Ltd indicates the total value of the
division and value in use for the total cash generating assets held by the company. In this case,
the journal entry related to the impairment loss over cash generating assets can be charged
directly to the land, equipment and building and not with inventory. In this case, the company
did not specify the fair value less the cost associated with the sales in specific instead there is an
indication of the value in use for the division therefore, they are considered as recoverable
amount (Ernst & Young, 2008).
The value in use for the division will include the land, equipment, and building for the
company. The value in use of the division is different from the fair value of the asset. The value
in use is the net worth or the value of an asset based on the future cash flow generating capacity
(Ernst & Young, 2008). It can be equal to the recoverable amount that is essential to determine
the impairment losses. Equipment and building are subject to impartment but there is no fair
value less cost of sales for these two assets, therefore pro-rata basis is used for determining the
impairment losses.
In this case, the entry and adjustment related to the impairment loss on cash generating
asset will be made for the Land, building and equipment (AASB, 2009). The carrying value of
the land will be decreased by $21,122 in the balance sheet of the company. The remaining
$1,879 is charged to equipment and building. Similarly, the impairment loss about the asset will
be charged to the income statement of the company, and it will reduce the net income of the
company. Thus, all criteria fit only for determining the impairment losses associated with the
land, building and equipment are met.
4

Conclusion
AASB 136 is an accounting standard that deals with the impairment of assets. As per
AASB 136, assets that are subject to impairment are land and building, property, machinery,
goodwill and other intangible assets held by the company. Current assets of the company are not
subject to the impairment losses. The recoverable amount can be either the fair value after
adjusting the costs to sell the asset or the value in use amount. Thus, an impairment loss for Gali
Ltd will be charged to Land, building and equipment and not for inventory.
5

Reference
AASB (2009). Compiled AASB Standard – RDR Early Application Only. [online] Victoria:
Australian Accounting Standards Board. Available at:
http://www.aasb.gov.au/admin/file/content102/c3/AASB117_07-04_ERDRjun10_07-
09.pdf [Accessed 25 May 2017].
AASB (2009). Impairment of Assets. Compiled AASB Standard AASB 136. [online] Australia:
Australian Accounting Standards Board. Available at:
http://www.aasb.gov.au/admin/file/content105/c9/AASB136_07-04_COMPjun09_01-
10.pdf [Accessed 25 May 2017].
Dagwell, R., Wines, G. and Lambert, C. (2007). Corporate Accounting in Australia. 4th ed.
Sydney N.S.W.: UNSW Press Ltd.
Department of Treasury and Finance (2015). III Asset Accounting Framework. Accounting
Policy Framework. [online] South Australia: Department of Treasury and Finance.
Available at:
http://www.treasury.sa.gov.au/__data/assets/pdf_file/0016/3238/Asset-Accounting-
Framework-12-May-2015.pdf [Accessed 25 May 2017].
Ernst & Young (2008). Impairment accounting – the basics of IAS 36 Impairment of Assets.
International Financial Reporting Standards update. [online] Available at:
http://www.ey.com/Publication/vwLUAssets/Impairment_accounting_the_basics_of_IAS
_36_Impairment_of_Assets/$FILE/Impairment_accounting_IAS_36.pdf [Accessed 25
May 2017].
6

IFRS (2009). IFRS Foundation: Training Material for the IFRS® for SMEs. [online] London:
IFRS Foundation. Available at:
http://www.ifrs.org/IFRS-for-SMEs/Documents/Module%2027_version2012-
08_Impairment%20of%20Assets.pdf [Accessed 26 May 2017].
Ramanna, K. and Watts, R. (2008). Evidence from Goodwill Non-impairments on the Effects of
Unverifiable Fair-Value Accounting. [online] HBS. Available at:
http://www.hbs.edu/faculty/Publication%20Files/08-014.pdf [Accessed 25 May 2017].
Wiley (n.d.). Chapter 11 Depreciation, Impairments, and Depletion ·. [online] Available at:
http://www.wiley.com/legacy/college/kieso/0470587237/ifrs_supp/ch11 [Accessed 26
May 2017].
7