What is Tax Evasion and Tax Avoidance?

Goodwill refers to an asset that represents the economic benefits on the future basis from the acquisition of other assets with a business amalgamation that is not determined individually neither recognized separately (Tan, and Trotman, 2018). The need to begin a comparison of the carrying amount of the business cash-generating unit (CGU) inclusive of goodwill along with the recoverable amount, i.e.,  higher than the fair value minus disposal costs and used value.

Certain circumstances have been outlined by AASB 136, in which a company can do a reversal of an impairment loss. According to the standard, asset’s impairment loss could be reversed other than goodwill. Standards have covered certain assets, as these are generally such financial assets dealing with other related standards, for example, assets addressed as per the  with IAS 36. Reversal of an impairment loss is done merely if there is a change in estimations with the applicability to determine the recoverable assets amount at the period of prior impairment loss realization (Filip, Jeanjean and Paugam, 2015). In this case, carrying the amount of the asset should be enlarged to the recoverable amount. Furthermore, this increment will perform a reversal of an impairment loss in accordance with the suitable accounting adjustments.

However, the increase in the carrying value of assets is done on the basis of the past depreciation cost and will have been in a case the impairment had not. Reversal of impairment loss is immediately realized in the income statement unless and until financial assets are conducted at the revaluation amount. In this, the reversal will be said as the revaluation increase (Avallone and Quagli, 2015). Further, an impairment loss has been recognized in earlier period for the goodwill, and financial assets should be reversed, in a situation where there is change to determine asset’s recoverable amount.

It is required by IAS 36 that assets can be carried at not over than their recoverable value. For meeting the same objective, it is required by the standard, that business enterprise that is in the scope for possible impairment while indicating the existence of impairment on an annual basis for goodwill as well for intangible assets with imprecise estimated useful life (Glaum, Landsman and Wyrwa, 2015).

The goodwill and intangible assets recoverable amount along with imprecise estimated useful life and non-accessibility of intangible assets for the utilization  on the date of reporting is needed to consider on a yearly basis, regardless of if or if not  there is the presence of any impairment indicators.

At an earlier period of an asset other than goodwill, the recognization of the impairment loss is done, and the same must be reversed in case a change has been noticed in the assumption used to identify the recoverable amount of assets (Hong, Paik and SMITH, 2018).  Both goodwill and intangibles with vague useful life and those intangibles which are not yet accessible for the application to are required to be impaired yearly.  

This is completed by making a comparison of the assets carrying amount with the recoverable amount, despite the fact that whether there is the presence of indications for the impairment. Further, assets are needed to be impairment testing on frequent testing, if situations or changes in events indicate that the assets may be impaired (Cao, Shaari and Donnelly, 2018). On the other hand, once there is impairment then the IAS 36 Impairment of Assets enables the opportunity to business enterprises to do the reversal of impairment losses realized in the earlier time if the event has reverted and the rations of the same have improved or dropped.

Legal Consequences of Tax Evasion and Tax Avoidance

Conversely, the alternative of reversal is not accessible for the recognized assets in the financial statements. Thus, the IAS 36particullarly banns the impairment loss reversal in the earlier period in regards to goodwill (Glaum, Landsman and Wyrwa, 2015). The rationale behind the prohibition by IAS 36, is that if after the impairment losses of recognizing, with this the goodwill will increase in following periods then this increase will be stated as the increment in internal goods will rather than the increment of obtained or purchased goodwill.

The impairment loss on Goodwill’s account cannot be reversed in accordance with the IAS 36 standards. It is because, goodwill is considered as intangible assets, subsequent to IAS 36, it is prohibited to make the recovery of loss on the Goodwill impairment. Goodwill created from the purchase acquisition can be put in place for impairment testing (Sun, 2016). Furthermore, goodwill created on an internal basis must be accounted as per incurred expenditure. Reversal of impairment lost appears if there is regaining in impaired assets or bounces back in its actual value, further gain on that particular amount would be reported within the income statement which shall not exceed the actual impairment amount.

Under IAS 36 Impairment of Assets, a business entity is required to realize the reversal of the impairment loss, exclusive of goodwill for which an impairment loss will not be reversed at any condition.  Thus, IFRS standards are a little bit severe regarding goodwill, for instance, entities are required to conduct impairment testing for goodwill on each year (Skousen and Sun,  2016).  After the identification of CGU and the goodwill allocation, then the entity can conduct the impairment test. The entity must make a comparison of the CGU and allocated goodwill carrying amount and the CGU recoverable amount.

Present study depicts that the increased carrying amount of assets exclusive of goodwill could be assessed for reversal for impairment loss. On the other hand, the reversal value in current context shall not surpass than amortization or depreciation carrying amount. In addition to this, AASB 136 has also affirmed that in a situation of reversal of impairment loss, adjustment of depreciation would be made from new carrying value from which residual value would be deducted. Further, accounting for this particular transaction will be conducted in other related income thereby increasing the revaluation of respective asset.

Calculation of Impairment Loss:

Carried Value of Balance Sheet $1,432,200

Value in Use of assets  $1,282,200

Impairment loss $150,000

Allocable Impairment loss to assets:

Total impairment loss – Amount of Goodwill – Impairment loss allocable to Land

= $150,000-$50000- ($962,200-$925,814)

= $63,614

Allocation of impairment loss to assets in proportionate to their book value:

Asset	Value in Use	Calculation	Allocable Impairment loss	Amount to be carried in Balance Sheet
Franchise	$221,000	29283*105000/199000	$33473.084	$187,527
Furniture	$139,000	29283*66000/199000	$21053.20	$117,947
Inventory	$60,000	29283*28000/199000	$9087.714	$50,912
	$420,000			$356,386

Journal Entry in the books of Gali Ltd:

30.06.2015 Impairment loss Dr. 150,000

Goodwill Cr.           $50,000

Accumulated amortisation and Impairment Losses (Franchise) Cr.          $33,473

Accumulated amortisation and Impairment Losses (Furniture) Cr.         $21,053

Accumulated amortisation and Impairment Losses (Inventory) Cr.         $9,087

Accumulated amortisation and Impairment Losses (Land) Cr.               $36,386

[Being impairment loss attributed to assets on pro-rata basis except for land and goodwill.] 

II Impairment Account

Date	Particular	Amount	Date	Particular	Amount
30 June 2015	Accumulated Impairment Loss A/c	$150,000	30 June 2015	Profit and Loss Account A/c	$150,000

In a situation where the carrying amount is higher than the recoverable amount, further, the entity needs to realize the impairment loss. Nevertheless, as the impairment loss is in relation to many assets in the CGU, then the entity needs to do allocation as per the given criteria (Hamberg and Beisland, 2014). Initially, the entity must make a reduction in goodwill to nil, and in case there is a certain loss of impairment remained, then the allocation will be done to the individual assets on the cash generating unit on the basis of pro-data. The entity must be careful not to decrease the assets carrying amount under its recoverable value to nil. It is important to be noted that, the entity must never do a reversal of any of the impairment loss in regards to goodwill. 

References

Avallone, F. and Quagli, A., 2015. Insight into the variables used to manage the goodwill impairment test under IAS 36. Advances in Accounting, 31(1), pp.107-114.

Cao, T., Shaari, H. and Donnelly, R., 2018. Impairment reversals: unbiased reporting or earnings management. International Journal of Accounting & Information Management, (just-accepted), pp.00-00.

Filip, A., Jeanjean, T. and Paugam, L., 2015. Using real activities to avoid goodwill impairment losses: Evidence and effect on future performance. Journal of Business Finance & Accounting, 42(3-4), pp.515-554.

Glaum, M., Landsman, W.R. and Wyrwa, S., 2015. Determinants of Goodwill Impairment: International Evidence.

Glaum, M., Landsman, W.R. and Wyrwa, S., 2015. Determinants of Goodwill Impairment under IFRS: International Evidence. Working Paper.

Hamberg, M. and Beisland, L.A., 2014. Changes in the value relevance of goodwill accounting following the adoption of IFRS 3. Journal of International Accounting, Auditing and Taxation, 23(2), pp.59-73.

Hong, P.K., Paik, D.G. and SMITH, J.V.D.L., 2018. A STUDY OF LONG-LIVED ASSET IMPAIRMENT UNDER US GAAP AND IFRS WITHIN THE US INSTITUTIONAL ENVIRONMENT. Journal of International Accounting, Auditing and Taxation.

Skousen, C.J. and Sun, L., 2016. ASC 820 level 3 net assets and goodwill impairment losses. International Journal of Economics and Accounting, 7(3), pp.250-264.

Sun, L., 2016. Managerial ability and goodwill impairment. Advances in Accounting, 32, pp.42-51.

Tan, H.C. and Trotman, K.T., 2018. Information Processing Biases in Impairment Decisions: Effect of Reversibility of Impairment Losses and Disclosure Transparency. Behavioral Research in Accounting.