Impairment Loss and the Disclosures

Question: Describe about the Impairment Loss and the Disclosures. Answer: Introduction An impaired asset relates to the asset of the company that bears a market price lower than the amount listed on the balance sheet of the company. The probable accounts of the company to be written down are goodwill, long-term assets and accounts receivable for the carrying value bears a longer time span for impairment (Carlin and Finch, 2010). On the adjustment of the carrying value of an impaired asset, the loss is eventually recognized on the income statement. According to AASB 136, Impairment Loss refers to the value through which the carrying value of the asset or money producing unit surpasses its recoverable value. Here carrying value appertains to the amount upon which an asset is identified in the balance sheet after deduction of the accumulated depreciation along with accumulated impairment losses (Hashim, Li, and OHanlon, 2016). Nature of Impairment Loss An entity requires making a yearly assessment relating to each and every indication reflecting to each and every indication reflecting to an impairment of any asset. The following are considered as indications of impairment: (a) External source of data includes- 1.significant reduction in the market value of the asset, 2. adverse change in markets, technology, economic conditions, or laws, 3.increase in the rates of interest or rate of return.(b) The internal source of data include- 1.asset becoming obsolete or experiencing physical damage, 2.assets laying idle, being discontinued or operations being restructured, 3.An economic performance of the asset not meeting up with the expectations.(c) Dividend provided by the subsidiary, entity jointly controlled or associate- 1.in the investees consolidated financial statement, the assets including goodwill is exceeded by the carrying amount of the investment provided in a separate financial statement, 2. The dividend of the subsidiaries sur passes the entire comprehensive income which is jointly controlled entity during the term to which the dividend is declared. On receiving any indication regarding impairment of an asset, the entity needs to estimate the amount recoverable from the asset. Impairment assets possessing an indefinite useful life and goodwill are required to be tested relating impairment at least annually, whether having an indication of impairment or not. If it is difficult for estimating the recoverable amount relating to an individual asset then, in that case, the entity is required to determine the amount recoverable from the cash generation unit (CGU) belonging to the asset (Olante, 2013). These units are detailed in Para 66 to 79 of AASB 136, which are as follows: 1. It is the smallest group of assets identifiable, generating cash inflows independent from the cash inflows of other assets, 2. The existence of an active market relating to the production of output by an asset or the group, then the same should be recognized as Cash Generation Unit, 3. Consistent identification of the CGU must be accomplished from period to period for similar set or type of assets unless there is a justifiable change, 4. Determination of the carrying amount of CGU must be undertaken on a consistent basis in the manner in which the amount recoverable of the CGU is concluded. Relationship of the Goodwill CGU is provided in Para 80-90 of AASB 136 where in a business combination the goodwill acquired should be allocated to CGUs or its group by benefits expected by the synergies of the combination. Monitoring of every CGU to which the goodwill is apportioned should be least inside the entity for internal management purposes and to be smaller on an operating segment which is determined according to operating segments in AASB-8 (Payne, 2011). A CGU experiences impairment loss in the following manner: a) an impairment loss is equal to the excess of the CGUs carrying amount above its recoverable amount, b) allocation of impairment loss to CGU are as follows: 1. Reduction of the carrying amount of every goodwill which is allocated to the CGU, 2. reduction of the carrying amount of the other assets on pro rata basis, 3. While applying the rules an entity in the CGU, it should not reduce any asset lower than the highest value recoverable or zero. An impairment loss incompetent of getting allocated to any asset in the CGU is required to be allocated to the different assets in the CGU (Banker, Basu, and Byzalov, 2016). Reversal of Impairment Loss is provided in Para 109-125 of AASB 136 which are: 1) Assessment of every reporting data, if there is indication regarding any previously recognized loss of any asset apart from goodwill might not exist any longer or have diminished, 2) an impairment Loss will be allowed a reversal only if the estimates utilized for determination of the recoverable amount have changed, 3) when it is an individual asset- a) the increase in the carrying amount which is due for reversal should be less than the carrying amount provided there were no impairment experienced, b) Immediately provide for the reversal in the Profit and Loss account except that the asset is valued at revalued amount, c) consistent recognition of the reversal of the revalued assets along with revaluation requirement of the asset that is applicable in another standard, d) adjustment of the depreciation charge of an asset must follow the reversal for the remaining carrying value is apportioned systemati cally over its remaining useful life (Duh, Lee, and Lin, 2009). Para 126-137 of AASB 136 deals with the disclosures which are required to be provided relating to the following: 1) every class of assets, loss of impairment and reversals, 2) every segment that is reportable (as per AASB 8), impairment losses and reversals, a) the circumstances and events that caused reversals, b) features of an individual asset and its reportable segment, c) information regarding CGU if the current or fair value minus costs to the sale were utilized as a recoverable amount and the basis for the determination, 4) various disclosures relating to the estimates utilized for the measurement of the recoverable amount of the CGUs along with goodwill or indefinite impairment loss (Paugam and Ramond, 2015). Conclusion The main objective of (Australian Accounting Standards Board) AASB 136 is to determine the methods which an entity employs for making certain that the assets are not providing for higher than its recoverable amount. An asset is provided for at a value more than the amount recoverable only if the carrying amount is exceeding the value recoverable through the usage of an asset. An analysis of the financial statement is processed, and if the condition holds true, then an asset is termed as impaired. The standard assists in specifying the need for an entity to initiate a reversal of an impaired loss, supported with the disclosures. References Banker, R., Basu, S. and Byzalov, D. (2016). Implications of Impairment Decisions and Assets' Cash-Flow Horizons for Conservatism Research.The Accounting Review. Carlin, T., and Finch, N. (2010). Asset impairment.Managerial Finance, 36(9). Duh, R., Lee, W., and Lin, C. (2009). Reversing an impairment loss and earnings management: The role of corporate governance.The International Journal of Accounting, 44(2), pp.113-137. Guthrie, J. and Pang, T. (2013). Disclosure of Goodwill Impairment under AASB 136 from 2005-2010.Australian Accounting Review, 23(3), pp.216-231. Hashim, N., Li, W. and OHanlon, J. (2016). Expected-loss-based Accounting for Impairment of Financial Instruments: The FASB and IASB Proposals 20092016.Accounting in Europe, 13(2), pp.229-267. Olante, M. (2013). Overpaid acquisitions and goodwill impairment losses Evidence from the US.Advances in Accounting, 29(2), pp.243-254. Paugam, L. and Ramond, O. (2015). Effect of Impairment-Testing Disclosures on the Cost of Equity Capital.Journal of Business Finance Accounting, 42(5-6), pp.583-618. Payne, B. (2011). A Financial Profile Of Cash Generating Firms.JABR, 4(4), p.51.