Corporate Accounting and Reporting: IAS 36 Impairment Loss Analysis

This report delves into the crucial topic of impairment loss within the realm of corporate accounting and reporting, focusing on the application of IAS 36. It provides a step-by-step analysis of how impairment tests are conducted, emphasizing the importance of assessing the recoverable value of assets. The report covers key principles, including the recognition and measurement of impairment losses for individual assets and at the cash-generating unit (CGU) level. It highlights the indicators of impairment, both internal and external, and explains the treatment of goodwill impairment. Furthermore, the report addresses the reversal of impairment losses, outlining the accounting procedures involved. The content is supported by references to relevant literature and standards, offering a comprehensive understanding of impairment accounting practices. The report is a valuable resource for students studying corporate accounting and finance.

ACCOUNTING AND REPORTING 1
CORPORATE ACCOUNTING AND REPORTING
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Recognition and measurement of an impairment loss for an individual asset
The recently experienced economic and financial uncertainties have brought asset
impairment to the spotlight. Many companies are now focused on reassessing asset
impairment as stipulated by the IAS 36 on Impairment of Assets. An asset is considered
to be overvalued if its current value exceeds the amount to be recovered from its sales
or use. The IAS 36 standard address when it is necessary to conduct an impairment
test, how to conduct it and ways in which impairment losses can be recognized. This
paper examines a step by step analysis on how impairment test can be conducted for
the first time by the IAS 36 (Brown & Tarca, 2005, p. 16).
Key principles and requirements for Impairment
According to the IAS 36, impairment test should be conducted on both the tangible and
intangible assets. Impairment test seeks to ensure that the price of an asset is
equivalent to its recoverable value. To fulfill this objective, companies are required to
test all their assets for impairment as far as impairment indicators exist. In the same
manner, test for impairment should be conducted on a yearly basis for intangible assets
and goodwill (AASB, 2009). However, some assets such as inventories, assets
generated from construction contracts, deferred tax assets, employee benefit assets,
financial assets listed under IAS 39, non-current assets, and investment property are
excluded from a test of impairment (Beatty, A & Weber, 2006, pp. 257-63).
Note: the recoverable value is calculated as the higher of Fair value less disposable
cost or Value in use.

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IAS 36 – Recognizing and Measuring an Impairment Loss for an Individual Asset
For an individual asset, an impairment loss is realized by the carrying amount is higher
than the recoverable amount. The carrying amount refers to the value of an asset less
amortization (accumulated depreciation) and accumulated impairment losses if any. The
impairment loss is referred to the difference between the two amounts. This type of loss
is treated immediately as a profit or loss unless there a revaluation of the same asset
under another accounting standard (IAS 16) other than the IAS 36 (Niven, 2011, p. 37).
It proves difficult to assess whether or not impairment of an individual asset because the
cash inflow from a single asset cannot be independently identified and separated from
that of other assets. Therefore, impairment recognition and measurement of assets are
done collectively at the Cash-generating unit (CGU) level (Hilton & O’Brien, 2009, p.
183). The CGU is defined as the recognizable unit of assets that generates largely
independent cash inflows from other assets. Notably, the CGU should comprise of
consistent assets whose values can be determined from time to time.
Recognizing impaired assets
At the end of a financial year, a company is required, under IAS 36, to evaluate where
there are impairment indicators on its assets. Test of impairment must be conducted on
goodwill, intangible asset (not in use) and indefinite life intangible assets regardless of
the existence of impairment indicators (Gaffikin, et al., 2003, p. 79).
Indicators of impairment can be found from either internal or external sources of
information. Internal indicators comprise of obsolete assets or those with physical
damages, adverse changes of assets usefulness, the adverse economic performance of

ACCOUNTING AND REPORTING 4
assets (Gaffikin, et al., 2003, p. 87). On the other hand, external indicators include
declined the market value of an asset, adverse changes in the market, legal, a
technological or economic environment which the company operates, increase the
interest rates and investment rate of return in the market and when a company's market
capitalization is lower than its net assets (Beatty, A & Weber, 2006, p. 279).
Impairment loss: Recognition and measurement
The impairment loss occurs when an asset's fair value is higher than its recoverable
amount. The amount in excess (impairment loss) should be reduced and treated as an
expense. Conversely, when an asset has a revalued amount, then the impairment loss
is recognized as the revaluation decrease in the books of accounting (Brown & Tarca,
2005, p. 18).
Under the CGU, impairment loss is meant to reduce the book value of goodwill existing
in the CGU and reconcile the value of individual assets in the CGU. However, the
carrying value of any individual assets in the CGU should not go below the highest
amount between fair value less disposable cost and fair value less the use value (Leo,
et al., 2012, p. 97).
Goodwill and impairment of assets
Goodwill arises from CGU units that do not generate inflows while the CGU is
comprised of assets Goodwill should be tested for impairment on an annual basis
irrespective of the existence of impairment indicators. A CGU comprising of goodwill
ought to be tested for impairment annually. The carrying value of a CGU containing a
goodwill should be compared to its recoverable amount (Mard, et al., 2012, p. 101).

ACCOUNTING AND REPORTING 5
Impairment loss reversal
After the value of an asset had been previously impaired, an entity may realize that the
recoverable amount is higher than an asset's current carrying value. In such a
circumstance there would be the need to reverse the previous impairment loss on the
said asset.
The reversed impaired loss should be treated as shown below;
 Impairment loss reversal should be immediately treated as income in the
comprehensive income statement of that year.
 In the same manner, the carrying of that asset must be increased to match the
value of the new recoverable amount.
However, the impairment loss reversal should not exceed the asset's carrying amount if
the impairment loss previously excluded has not been recognized. After the reversal,
the amortization/ depreciation charge should be adjusted in the future financial period to
revise the carrying amount of the asset. However, the impairment loss recognized on a
goodwill asset should not be reversed in a subsequent year/ period. The reversal of the
carrying amount should be done on the systematic basis over the assets remaining
useful life after deducting the residual value (Leo, et al., 2012, p. 115).
When reversing an impairment loss for a CGU, the reversal should affect all the assets
within the unit by the pro rata of each asset in the unit except for the goodwill asset.

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References List
AASB, 2009. Impairment of asset. [Online]
Available at: http://www.aasb.gov.au/admin/file/content105/c9/AASB136_07-
04_COMPjun09_01 -10.pdf
[Accessed 17 09 2017].
Beatty, A, A. & Weber, J., 2006. Accounting discretion in fair value estimates: an
examination of SFAS 142 Goodwill impairment. Journal of accounting research, 44(2),
pp. 257-288.
Brown, P. & Tarca, A., 2005. FASB ISSUES STATEMENT ON ASSET IMPAIRMENT.
Journal of accountancy, 6(16-18), p. 179.
Gaffikin, M., Dagwell, R. & Wines, G., 2003. Corporate Accounting in Australia. 1 ed.
New York: UNSW Press.
Hilton, A. & O’Brien, P., 2009. Inco Ltd.: Market value, fair value, and management.
Journal of accounting research, 47(1), pp. 179-211.
Leo, K., Hoggett, J. & Sweeting, J., 2012. Company accounting. New York: 9.
Mard, M., Hitchner, J. & Hyden, S., 2012. Valuation for financial reporting: fair value,
business combinations, intangible assets, goodwill, and impairment analysis, New York:
CQUniversity library.
Niven, D., 2011. asic’s focus on financial reporting. EBSCOhost, 82(2), pp. 30-66.