Recognition And Measurement Of An Impairment Loss For An Individual

Question: Discuss about the Recognition And Measurement Of An Impairment Loss For An Individual Asset. Answer: Impairment Loss: Impairment loss occurs when carrying amount of asset or cash generating unit exceeds the recoverable value of asset or cash generating unit. Then, carrying value of the asset is required to be reduced by the difference. This reduced amount will be recognized as an Impairment loss. The same statement can be described through the following formula: Impairment loss = Carrying amount - recoverable amount. Carrying amount: - Book value of the asset or cash generating unit as per the accounting records. Recoverable amount: - Recoverable amount is higher of the following 2 factors:- V. (Expected price to be received on sale of the asset) less transfer expenses (all the costs associated with the sale of asset) and Value in use (Present value of the cash inflows expected in future from the assets or cash generating unit) Key Indicators of Impairment loss of asset or cash generating unit are:- Internal factor - Some examples of internal factors are: damage of the asset, economic performance of the asset is not as per expectation, held for disposal, etc. External factor - Some examples of external factors are: Change in economy, obsolete technology, reduction in market value of asset, change in legal environment, etc. Impairment loss reversal defines the rise in the potential service of asset for balancing period, which can be either from use or sale, from the date when organization last assessed an impairment loss for asset- (Hamilton, 2011) The value of the asset which is in use could be more than carrying amount of asset as Present value of future cash flows will increase when they come closer. But, Assets potential of service cannot be increased. Thus, impairment loss cannot be reverse due to the time passage Even if recoverable amount of asset becomes higher than its carrying amount-(Thomas, 2011) Impairment loss reversal for a CGU (which is also known as cash generating unit): Firstly, Impairment loss on reversal of CGU (which is also known as cash generating unit) shall be distributed to Asset rather than goodwill to increase the carrying amount of particular asset, afterwards it will be allocated to goodwill. This process should be done on pro rata basis. Carrying amount of asset by which it increases shall be treated as impairment loss reversal for asset (only individual) and will be recognized accordingly. While doing allocation for impairment loss reversal for CGU, then in that case Carrying amount of CGU or asset shall not exceed the lower of the following: Amount which is recoverable; if it can identified by the organization or Assets carrying amount which is identified, but it should be net of depreciation and no impairment loss on asset should had been identified for the particular asset during previous years. The amount of the reversal of the impairment loss that would otherwise have been allocated to the asset should be allocated to the other assets of the unit on a pro-rata basis. The reversal amount of impairment loss of asset or CGU shall be distributed to the assets of the unit on specified basis i.e. pro rata basis Journal entry for recognizing impairment loss: Impairment Loss Account Debited Asset Account or Impairment Allowance Account Credited In case, if firm/company is unable to compute the recoverable amount for an individual asset, then in such scenario recoverable amount for the whole cash generating unit is computed and accordingly impairment loss is computed for the cash generating unit. Then, such impairment loss of the cash generating unit should be allocated to the individual assets. If company is having revaluation reserve against the asset, which is required to be impaired, then impairment loss to the extent of revaluation reserve will be adjusted against the revaluation reserve, thereafter impairment loss if any, will be charged to statement of profit and loss account. Further, depreciation will be computed for the remaining useful life of the asset on the revised carrying amount. Impairment of capital generating unit (AASB-136) After performing impairment test for asset, amount which should be recoverable will be calculated for individual asset. When it is not possible to assess the value of individual, then in that case estimate the recoverable amount of CGU (capital generating unit) to which such asset belongs. Capital generated unit is the smallest group of asset which can be identifiable and which has capacity to generate independent cash flow. Under cash generating unit, Impairment of loss will be allocated to asset in the provided way; first goodwill will be allocated to the cash generation unit, after that other assets will be allocated on pro rata basis. Under cash generating unit, carrying amount of asset should not be less than highest of the following: Net SP (selling price) / Value in use / 0 (zero). For example: There is a bus operator who obtains four licenses for buses in four different routes. Out of four routes, three routes are profitable whereas one is not profitable route. Now, in this case government ensures that transportation service should be available to all routes. So, government imposed restriction upon bus operator that he shall operate his buses on all the routes, otherwise he will not be allowed to operate his bus at any route. Impairment of goodwill If financial statement of the organization have goodwill with respect to Cash generating unit then organization should perform Bottom up approach, which means that identification should be done if goodwill will be allocated to cash generating unit after that compare the recoverable amount with carrying amount( by taking the impact of goodwill) to recognize impairment loss. But, if goodwills carrying amount cannot be allocated on consistent basis, then in that case Top down approach will be followed. Top down approach can be performed by identifying smallest cash generating unit on which goodwill is allocated then comparison should be done between recoverable amount of larger cash generating unit and carrying amount( after taking the impact of goodwill) to recognize impairment loss. For example: A limited has three units of x, y and z. Goodwill shown in the books is $40 and it cannot be identified and allocated to any of the unit i.e x, y and z. Carrying amount of X = 150 Carrying amount of Y = 100 Carrying amount of Z= 35 Cumulative carrying amount = 285 Recoverable amount of X = 115 Recoverable amount of Y= 105 Recoverable amount of z= 40 Answer: Bottom up for X Carrying amount = 150 Recoverable amount =115 Impairment loss= 35 Top down for X and Y Carrying amount (40 + 100+ 115) = 255 Recoverable amount = 220 Impairment loss = 35 Now, the impairment loss of 35 will be adjusted against goodwill of 40. Remaining goodwill of $5 will be carry forward and total impairment loss will be recognized of $70. Reversal of Impairment loss:- If company has the positive indicators which indicate that impairment loss booked in the previous years might have reduced, then there will be reversal of Impairment loss. Journal entry in such case would be: Asset Account or Impairment Allowance Account Debited Reversal of Impairment Loss Account Credited References Thomas (2011),"Understanding Impairment Accounting: What It Is and When It Is Used", API Press, London. Anonymous, "IAS 36 Impairment of Assets", IAS Plus. Deloitte [Accessed: 22nd May 2017] Hamilton (2011), "Impairment: IASB-FASB Comparison" (PDF), Drake Management Review, America. Paperback (2009), Impairment of asset, Gee publishing, London. John Wiley (2014), IFRS (International Financial Reporting Standards), London. Roman. L (2013), Financial reporting: An introduction to accounting, United Kingdom. Ron degwell (2012), Corporateaccounting in Australia, Pearson publication, Sydney. Stickney (2010), AASB-136, API hall, Australia.