Impairment Of Assets: Accounting Standard 28 And IAS 36

Introduction to Impairment of Assets

 The accounting standard 28 and IAS 36 should be applied for the impairment of all assets excluding impairment of inventory, financial assets, deferred tax assets, construction contract, agricultural assets, and non-current assets being held for sale. Impairment means permanent decline in the value of assets, which means the carrying amount of an assets exceeds its recoverable amount (Carlin, 2011). The primary objective of impairment of the asset is that the assets should not be disclosed in the books at a value higher than the recoverable value. The company need to focus on all those factor which impair the value of assets. In case, they exist, the company needs to take the impact of impairment on the value of assets. Some assets, which need to be assessed on annual basis for impairment, like goodwill and intangible assets. However in case of other assets can be impaired only when the indicators of impairment exists. If a single assets able to generate revenue on standalone basis and is completely independent of other units then impairment regarding this assets assessed separately or else the smallest group of assets that can be recognised and is capable of generating revenue should be assessed. Such smallest group of assets is called cash generating unit (Alexander, 2016). In case in future some positive indicator exist regarding those assets, then the earlier impairment cost can be reversed based on the relevant indicator. However, in case of goodwill, once it is impaired, it cannot be reserved at any point of time.

In case indicator of impairment loss or impairment loss already posted in the books do exist, then the company need to assess the individual assets as well as the CGU for impairment loss. In case the result is positive, first we need to calculate the value in use and the fair value less cost of disposal. The higher of the two will be called the recoverable value. Indicators can be either internal or external (Bromwich & Scapens, 2016). Some of internal indicator are like obsolescence, physical damage to the assets of the company, being kept idle or held for sale, no economic benefit in coming future, etc. Apart from all this there are some external indicators like book value of assets is greater than market capitalization, market value falls down sharply or the negative change in the tastes and preferences of the customer or due to technology improvement in the market existing technology become useless. Due to this entire factor, which is not under the control of company, they may affect the entity on standalone basis or the entire industry as a whole. This is just a sample list and not an exhaustive one. The company need to give focus on many other relevant factor like impairment methods, the estimated useful life and residual life of the asset.

Application of Accounting Standard 28 and IAS 36

At the time of the impairment of assets, first we need to allocate the impairment loss towards the goodwill and after that if any impairment loss exists it should be allocated to other assets. The next area, which is complex, is how the impairment loss to be reversed is to be determined (Belton, 2017). The same method applied in impairment assessment is applied here to calculate impairment loss. If any point of time we realise that positive indicators of impairment do exists, and the carrying value of the asset is less than fair value less cost of disposal or the value in use, then the impairment loss posted earlier to the profit and loss account needs to be reversed and if any amount exists, should be transferred to revaluation account. Sometime, when it is not possible to calculate the fair value of assets, then the value in use is taken as the recoverable value. The fair value of the asset is to be determined as per the provision of fair value measurement under IFRS 13 (Carlin, 2009). The value in use calculated based on variable factors like time value of money, the discounting factor, present value of estimated future cash flows, ability of the asset to generate the cash flows and other factors including the amount of uncertainty. The cash flows are forecasted based on past and current data. The interest rate is calculated after considering the effect of the time value of money and other market conditions. The rate should be that the investor would expect to earn while investing their money.

Conclusion and Disclosure requirements

Based on all the factors, it is concluded that difference between the recoverable value of the CGU and the carrying value should be charged to the profit and loss account. The carrying amount of the assets should not be reduced below zero and in case of CGU; the value of goodwill should be proportionately allocated among other assets and after that assessed for impairment. Future depreciation on assets needs to be adjusted based on all this factors on a prospective manner (Dumay & Baard, 2017). As per the financial reporting framework, these are the mandatory factors, which are compulsory to disclose in financial statement for the true and fair view of financial statement, are:

• The impaired assets
• The value of impairment Loss
• The method of calculating value in use and the fair value(Dichev, 2017)
• Impairment loss is presented or reversed through the profit and loss account
• Internal and external factors which indicate existence of impairment loss existing in the market
• The cash-generating unit and the classes of asset held by entity.

In the given question, an entity Gali Limited has been given where a cash-generating unit – China Division has been identified and the same has been assessed for the purpose of impairment as on June 30^th, 2015. The carrying amount details of the assets of the company as given in the question has been listed below:

The value in use has been given as $ 283200 and the fair value less cost of disposal has been given only for the plant as $ 204212.

• In the given question, since total fair value less cost of disposal has not been given for the entire division therefore value in use will be considered as the recoverable value(Visinescu, et al., 2017).
• On the basis of that the impairment will be $ (316200-283200) = $ 33000
• Out of the total impairment loss of $ 33000, $ 11000 will be first allocated towards goodwill and the then the remainder $ 22000 will be allocated towards the other assets of the division.
• Inventory will not be considered for impairment purposes since it falls in the list of exception being a current asset
• The apportionment working has been shown below in the table.

• In the given question, since fair value less cost of disposal for the plant is already given to be $ 204212. Therefore, the plant cannot be impaired below this value. Hence, the maximum impairment amount which can be allocated to plant is $ 7988 and the remainder $ 7989 will be allocated to the rest of the assets in the division.
• The revised apportionment table has been prepared below:

• The final apportionment is Plant: $ 7989, Patent: $ 8582, Building: $ 5430 and Goodwill: $ 11000
• The requisite journal entry to give effect to this transaction is shown below:

Impairment Loss Dr 33000

Goodwill  Cr 11000

Accumulated depreciation and

Impairment loss – Plant    Cr  7988

Accumulated amortisation and

Impairment loss –Patent  Cr  8582

Accumulated amortisation and

Impairment loss –Building   Cr  5430

(Allocation of impairment loss being made)

References

Alexander, F., 2016. The Changing Face of Accountability. The Journal of Higher Education, 71(4), pp. 411-431.

Belton, P., 2017. Competitive Strategy: Creating and Sustaining Superior Performance. London: Macat International ltd.

Bromwich, M. & Scapens, R., 2016. Management Accounting Research: 25 years on. Management Accounting Research, Volume 31, pp. 1-9.

Carlin, T. a. F. N., 2011. Goodwill impairment testing under IFRS: a false impossible shore. Pacific Accounting Review, 23(3), pp. 368-392.

Carlin, T. F. N. a. L. N., 2009. Goodwill accounting in Malaysia and the transition to IFRS – a compliance assessment of large first year adopters. Journal of Financial Reporting & Accounting,, 7(1), pp. 75-104.

Dichev, I., 2017. On the conceptual foundations of financial reporting. Accounting and Business Research, 47(6), pp. 617-632.

Dumay, J. & Baard, V., 2017. An introduction to interventionist research in accounting.. The Routledge Companion to Qualitative Accounting Research Methods, p. 265.

Visinescu, L., Jones, M. & Sidorova, A., 2017. Improving Decision Quality: The Role of Business Intelligence. Journal of Computer Information Systems, 57(1), pp. 58-66.

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