Understanding Impairment Loss and Impairment Test

Question:

Discuss About The Impairment Loss Reduction Of Value Assets?

As pr the IAS – 36 and AASB 136 on Impairment of assets, it must be sure that the assets of any company are not shown at the value which is more than the recoverable value of the asset. If the carrying value of any asset is assessed to be more than its recoverable value then the excess amount is determined as the impairment loss. Impairment loss is the reduction of value of assets and it does not take into consideration the increase in value (Lubbe, Modack and Watson 2014). The operations must carry out the impairment test regularly to measure the amount of impairment. Generally, when there is some indication for impairment then only the impairment test is carried out.

In other word, it can be stated that the impairment test is not carried out frequently; rather it is done on the occurrence of a few occasions which identifies the loss in the estimation of the benefit. In such situation the organization is required to carry out the impairment test for the entire identified asset (Rennekamp, Rupar, and Seybert 2014).

• Intangible asset that has indefinite life
• Goodwill
• Intangible asset that has not yet been put to use.

Under impairment test, the carrying amount of the asset is compared with the recoverable amount of the asset or the CGU. The recoverable amount here is considered as the higher among the value in use and the fair value reduced by the disposal cost. However, the accuracy of the impairment test shall be impacted by the subjectivity and extent of the judgements and estimates with respect to the parameters and inputs that are utilised for the determination of recoverable amount. Therefore, the application of the requirements for calculation of impairment requires careful consideration (Amiraslani, Iatridis and Pope 2013). The present global economic and environmental situations increase the chances of getting the assets impaired. 

While assessing regarding if there is an indication of impairment, the company shall take into consideration the following indications –

If during the period under consideration the market value of the asset has considerable declined as compared to what was expected to be reduced due to normal use (Linnenluecke et al. 2015).

The associated interest rate or the market interest rate of return on the investment has gone up and therefore, chances are there that it will have an impact on the discount value used for the measurement of value of asset and will decrease the recoverable amount of the asset significantly.

Indications of Impairment

Significant adverse changes have been taken place with respect to the organization or it is expected to take place that will have an impact on the economic, technological, legal or environmental aspects of the company.

Further, the internal information source for impairment test can be the available evidences regarding the physical damage or obsolescence for any asset or the significant changes in association with adverse impact on the company taken place or chances are there to take place in near future with respect to the asset or there are some evidences that are available from the source of internal reporting that may indicate that the asset’s economic performance is worse as compared to expectation.

As per the standard, the recoverable amount states the value that is expected to be recovered from the sale of the asset after deducting the selling cost. The recoverable amount is higher among the fair value of the asset and the value in use of the asset. As per the IAS 36, Para 78, while measuring the impairment loss, there must be some consideration for the liabilities associated with the asset, particularly for the CGU; generally, the liabilities are taken into consideration however, it depends on the judgement and rational that whether these factors are taken under consideration or not (Bond,  Govendir and Wells 2016).

Further, the value in use is the value that can be derived through the discounting factor of the entire cash flows that can be generated while using the assets. as per the IAS 36, Para 74-79 and Para 30-57, guidance are there to apply the principles for the value in use calculation for the CGU. The principles provided are sufficient to take all the computation related factors into consideration (Amiraslani, Iatridis and Pope 2013).

Both the value in use as well as the fair values reduced by disposable cost shall reflect the uncertainty and risk to the level that these will reflect in the transaction carried out at the arm’s length price. Further, the risk may reveal through adjustment of discounting rate or the cash flows. Further, if the recoverable amount of one particular asset cannot be estimated, the recoverable amount for the CGU under which the asset is included shall be determined (Amiraslani, Iatridis and Pope 2013). The instances where the recoverable amount cannot be estimated are where the value in use of the asset cannot be estimated or the cash flow generation from the asset are not happening that are largely independent from the other assets.

Impairment is the major element under the process of financial reporting irrespective of the fact that the company is first time adopter for IFRS. The assessing procedure for impairment can be time consuming and complex. However, it is important that the process owner, particularly the finance team shall plan the process earlier and shall access right skills like forecasting and business modelling. Further, the most appropriate approach, assumptions and model is dependent upon having the sufficient knowledge of financial and operational aspects of business and the industry under which the business operates. Therefore, the senior management shall be involved in providing support and reviewing the outcomes critically.

Account	Carrying amount
Plant	2,64,000
Equipment	61,000
Fittings	38,000
Inventory	16,000
Goodwill	13,000
Total carrying amount	3,92,000
Value in use	3,53,000
Impairment loss	39,000

Account	Carrying amount (CA)	Pro-rata	Allocation of impairment loss	Adjusted carrying amount
Goodwill	13,000		13,000	–
Plant	2,64,000	264/363	18,909	2,45,091
Equipment	61,000	61/363	4,369	56,631
Fittings	38,000	38/363	2,722	35,278
	3,63,000		39,000

[Note: Inventories will remain unimpaired as any asset cannot be reduced lower than the recoverable amount]

Fair value less cost of disposal	2,54,546
Adjusted carrying amount of plant	2,45,091
Amount to be reallocated	9,455

Account	Adjusted CA	Pro-rata	Allocation of impairment loss	Total loss allocation
Goodwill				13,000
Plant				9,454
Equipment	56,631	56631/91909	5,825	10,194
Fittings	35,278	35278/81909	3,629	6,352

Particulars	Debit	Credit
Impairment loss account	39,000
To Goodwill		13,000
To Plant		9,454
To Equipment		10,194
To Fittings		6,352
[Being impairment loss of CGU is allocated to goodwill, plant, equipment and fittings]

Reference

Amiraslani, H., Iatridis, G.E. and Pope, P.F., 2013. Accounting for asset impairment. London: Cass Business School.

Amiraslani, H., Iatridis, G.E. and Pope, P.F., 2013. Accounting for asset impairment: a test for IFRS compliance across Europe. Centre for Financial Analysis and Reporting Research (CeFARR).

Amiraslani, H., Iatridis, G.E. and Pope, P.F., 2013. Accounting for Asset Impairment: A Test for IFRS Compliance Across Europe: a Research Report by the Centre for Financial Analysis and Reporting Research, Cass Business School. Cass Business School.

Bond, D., Govendir, B. and Wells, P., 2016. An evaluation of asset impairments by Australian firms and whether they were impacted by AASB 136. Accounting & Finance, 56(1), pp.259-288.

Linnenluecke, M.K., Birt, J., Lyon, J. and Sidhu, B.K., 2015. Planetary boundaries: implications for asset impairment. Accounting & Finance, 55(4), pp.911-929.

Lubbe, I., Modack, G. and Watson, A., 2014. Financial Accounting GAAP Principles. OUP Catalogue.

Rennekamp, K., Rupar, K.K. and Seybert, N., 2014. Impaired judgment: The effects of asset impairment reversibility and cognitive dissonance on future investment. The Accounting Review, 90(2), pp.739-759.