Accounting For Impairment Of Assets- IAS 36 And AS 28

Discuss About The Financial Environment Business Development?

Both IAS 36 and As 28 deals with the accounting for impairment of assets. As per this, all the tangible and intangible assets needs to be analysed and assessed at regular intervals for permanent write down in the value of the assets in case the indicators of impairment so exists. These factors can be categorised as internal or external factors. The ultimate idea behind the IAS is the assets should not be carried in the books at more than the recoverable value i.e., the higher of the value in use and the fair value of the asset less the cost of disposal. (Fay & Negangard, 2017) The impairment loss is calculated by subtracting the recoverable value from the carrying value of the asset. Goodwill and other intangible assets having indefinite life are to be assessed annually through an impairment test. Moreover, in case the single asset is not able to generate revenue for the  company on independent basis as compared to the other assets, then a group or class of assets known as the cash generating unit which is capable of generating the revenues independently needs to be analysed for impairment as a group. It is not that the impairment loss once provided in the books cannot be reversed but it can be done so post reassessment in the future period if the positive indicators exists. IAS 36 is applies on land and building, plant and machinery, goodwill, intangible assets, investment in subsidiaries or any other company, etc. It is not applicable on some of assets like financial assets, agricultural assets, assets in the nature of employee benefits, inventories, deferred tax assets and non current assets held for sale purposes. (Buchanan, et al.,)

For giving the effect f impairment in the books, the company needs to the periodic evaluation whether the assets needs to be impaired or not based on the indicators. In case the indicators do exist, the identification of the same alongwith the recoverable value needs to be done. There can be 2 types of indicators namely external and internal. External indicators generally include factors like assets carried in the books is higher than the market capitalization, or the market value of the assets has declined considerably or there is a negative change in the fashion, trend, preferences or technology in the market area or that the market rates of interest have increased. (Das, 2017) These are generally outside the scope of the company and affects the entire industry. Internal indicators include physical damage being done to the asset, excessive obsolescence to the asset condition or asset is lying idle and is being kept for sale or the asset is expected too give least economic performance or the investment is joint venture or subsidiary is more than the investee’s assets recorded in the books. The list of the above examples is not exhaustive and there can be many others. Besides impairment, the company also needs to reassess the depreciation policy, the method, the estimated useful life, etc so that the asset are appearing correctly.

Conclusion

The recoverable value of the asset is the higher of the fair value less cost of disposal or the value in use of the asset, whichever is higher. The difference between the carrying value of the assets in the books and the recoverable value calculated above is recognised as impairment loss. Secondly, the recoverable value may be calculated for a single asset or a group of assets called the CGU. (Goldmann, 2016)

The value in use if the present value of the future cash flows expected to be earned from the asset at a rate of interest. This generally has 2 components:

1. Cash flows: The cash flows needs to be estimated keeping in mind aspects like uncertainity of the cash flows, illiquidity of the market, the time value of money while receiving those cash flows. Moroever, it should not include any major capital expenditure which the company is expecting to incur in the coming period.(Michaely & Jacob, 2017) The other considerations include it should be realistic and based on the supportings and evidences based on the latest financial statements and in case the time period is large, the same should be extrapolated as per IAS.
2. Rate of discount: the rate utilized here for the calculation should be pre tax rate as per the current market conditions and should include the uncertaininity or risk factor. (Mahapatra, et al., 2017) It should be the rate which the investor would have expected on investing in a particular project or the rate at which the funds would have been borrowed from the market to invest in the asset.

In addition to the above considerations, the firm should also adjust its projections based on the deficiencies and differences as fiund in the previous years’ estimate for over or understatement of the projections. (J, 2016)

The next factor is the calculation of the fair value less cost of disposal, which is the price at which the entity would have sold the asset at the arm’s length price to the willing and knowledgeable party. For finding this, the amount in the binding sale agreement or if the asset would have been sold in the active market can be used. If no other information is available then DCF technique can be used for the estimation. The cost of disposal should include all the direct costs related to the sale of the asset. (Meroño-Cerdán, et al., 2017)

Based on the above inputs impairment loss is calculated and shown in the profit and loss account. Moreover, the future years’ depreciation also needs to be adjusted on a prospective basis. For goodwill, the amount once impaired cannot be reversed back in any circumstance whatsoever. Like impairment, the amount posted can also be reversed if trhe positive indicators do exist indicating the improved status of the asset. (Mahapatra, et al., 2017

As per the data given, in the books of Gali limited ended on 30^th June, 2015, the impairment assessment needs to be done and fine china division has been identified as one of it CGU. (Goldmann, 2016) The carrying amount is as follows:

• In the case study, since the total fair value of the all the assets asset less cost of disposal is not provided, we are considering value in use ie., 645000 as the recoverable value of the entire CGU.
• Therefore, amount to be impaired arrives to (720000-645000) = 75000.
• Now the amount of 75000 needs to be allocated firstly to goodwill to the extent of 25000, and then to the other remaining assets. Therefore remaining impairment loss left to be apportioned is 75000-25000 = 50000.
• Inventory being a current asset held for sale does not comes in the ambit of impairment under IAS 36.
• The other workings of apportionment is below:
• Since the fair value less cost of disposal has been restricted for plant, the maximum amount uptill which the plant can be impaired is 465804 i.e., by 18196 and therefore the remaining 18195 would need to be apportioned across the other assets of the CGU. (Boccia & Leonardi, 2016)
• The revised allocation summary is shown below:
• Thus, the final allocation of the impairment loss comes out to be Goodwill: 25000, Plant, 18196, Equipment 19504 and Fittings 12300.
• The journal entry to effect for the above impairment loss is mentioned below:

Conclusion

Th etpic of impairment depends a lot on the judgement and estimates therefore a proper supporting and working is important considering the various factors and inputs. (kabir, et al., 2017) All the assumptions taken by the management needs to be justified and properly disclosed in the financial statements such as:

1. The basis of impairment taken and the amount of loss recognised and reversed;
2. Impairment loss being recognised or reversed on the revalued assets in OCI;
3. The quantum of reversal, the internal and external indicators leading to impairment;
4. Other critical considerations and circumstances.

References

Boccia, F. & Leonardi, R., 2016. The Challenge of the Digital Economy. Markets, Taxation and Appropriate Economic Models, pp. 1-16.

Buchanan, B., Cao, C., Liljeblom, E. & Weihrich, S., 2017. Taxation and Dividend Policy: The Muting Effect of Agency Issues and Shareholder Conflicts. Journal of Corporate Finance, Volume 42, pp. 179-197.

Das, P., 2017. Financing Pattern and Utilization of Fixed Assets – A Study. Asian Journal of Social Science Studies, 2(2), pp. 10-17.

Fay, R. & Negangard, E., 2017. Manual journal entry testing : Data analytics and the risk of fraud. Journal of Accounting Education, Volume 38, pp. 37-49.

Goldmann, K., 2016. Financial Liquidity and Profitability Management in Practice of Polish Business. Financial Environment and Business Development, Volume 4, pp. 103-112.

J, G., 2016. Principles of Australian Contract Law. Australia: Lexis Nexis.

kabir, H., Rahman, A. & Su, L., 2017. The Association between Goodwill Impairment Loss and Goodwill Impairment Test-Related Disclosures in Australia. 8th Conference on Financial Markets and Corporate Governance (FMCG) 2017, pp. 1-32.

Mahapatra, S., Levental, S. & Narasimhan, R., 2017. Market price uncertainty, risk aversion and procurement: Combining contracts and open market sourcing alternatives. International Journal of Production Economics, pp. 34-51.

Meroño-Cerdán, A., Lopez-Nicolas, C. & Molina-Castillo, F., 2017. Risk aversion, innovation and performance in family firms. Economics of Innovation and new technology, pp. 1-15.

Michaely, R. & Jacob, M., 2017. Taxation and Dividend Policy: The Muting Effect of Agency Issues and Shareholder Conflicts. Review of Financial Studies, 30(9), pp. 3176-3222.