In order to present the assets in the true and fair view, the companies are required to carry out the impairment test of the assets. In this test it is checked if the assets are being carried at amounts which is not more than its recoverable amount. The companies are required to check for impairment of goodwill and other intangible assets on an annual basis (Alvarez, 2013). They are also required to check if conditions for impairment of other assets exist. An asset is said to be impaired when its recoverable amount falls below the carrying amount. In such cases the companies are required to account for the impairment loss and record the assets in the book at the revised values. When the asset is not individually capable of generating cash flows, then impairment test for the cash generating unit should be done (Australian Accounting Standards Board).
Calculation of impairment loss requires collection of some financial data. The management needs to know the recoverable amount of the asset in order to compare it with the carrying amount of the assets. Where there are assets which for a part of cash generating unit, then the values for such cash generating units are to be calculated (Elaine, 2015).
Recoverable amount refers to the amount that the company would receive if the asset is sold in the market at the time of impairment test. Any selling expenses which are to be incurred in connection with the sale of the asset are to be deducted from the recoverable amount (Girard, 2014).
If the recoverable amount of an individual asset cannot be determined then the recoverable amount of the whole cash generating unit should be calculated (Parrino, 2013).
Following should be taken into consideration in order to determine the recoverable amount of the asset being tested for impairment:
In order to determine the fair value of the asset to check for its impairment, the company is required to hire a certified valuer. Only such persons can determine the fair value of an asset. The fair value is to be calculated taking into considerations the guidelines laid down for fair value measurements of the assets. While considering the fair value of the asset any costs which might be incurred at the disposal of the asset should be subtracted in to determine the net fair value (Penman, 2012).
Value in use of the assets is one of the most complicated values which are required to be calculated in order to account for impairment. The following should be included while evaluating the value in use of the asset:
The discount rate that is to be chosen for discounting should be a pre tax rate that reflects the time value of money. Such discounting rate should also include the risk factors associated with the asset.
The risk factors included while calculating the cash flows should not be included in the discount rate, or else these factors would be included twice in the calculations. The rate should be equal to the required rate of investors, such that they would require similar returns for any other similar investments (Siciliano, 2015).
The discount rate used for impairment of asset or a cash generating unit may also be the rate that the company is willing to pay in the market for the acquisition of that asset or the cash generating unit. If such market rate is absent, then a clone rate including all the factors important in a rate should be determined (Simpson, 2012).
To sum up the above data we have, impairment loss for an asset or a cash generating unit is the difference between the carrying amount and recoverable amount. Recoverable amount is higher of fair value net of disposal cost or value in use whichever is higher (Skonieczny, 2012).
Therefore, we see that the recoverable amount, fair value of the asset and the value in use, all these value are very important while calculating the impairment loss of an asset. All these values should be calculated with due care. Any mistake sin the calculation of the value will affect the carrying amount of the asset.
The following information has been provided:
|
Item |
Carrying Amount |
|
Factory |
6,36,700 |
|
Patent |
1,46,000 |
|
Building |
92,000 |
|
Inventory |
40,000 |
|
Goodwill |
33,000 |
|
Total CA |
9,47,700 |
The carrying amount of this unit is $848700, and that of the factory is $612679.
The impairment loss for the unit is $99000, out of which the impairment loss alone for the factory is $24021. From the remaining impairment loss, we will first write off the goodwill of $33000. The remaining impairment loss of $41979 (99000-33000-24021) will be distributed among the remaining assets in the ratio of there carrying amount:
|
Particulars |
Carrying Amount |
Ratio |
Impairment Loss |
|
Patent |
146000 |
0.53 |
22,047 |
|
Building |
92000 |
0.33 |
13,892 |
|
Inventory |
40000 |
0.14 |
6,040 |
|
2,78,000 |
41,979 |
In order to record this loss following journals will be passed:
|
Particulars |
Dr Amt |
Cr Amt |
|
Accumulated Impairment account |
99,000.00 |
|
|
To Factory |
24,021.00 |
|
|
To Patent |
22,046.53 |
|
|
To Building |
13,892.33 |
|
|
To Inventory |
6,040.14 |
|
|
To Goodwill |
33,000.00 |
|
|
(Being impairment on assets realised) |
||
|
Impairment loss |
99,000.00 |
|
|
To accumulated impairment Account |
99,000.00 |
|
|
(Being impairment Loss realised) |
Alvarez, F. (2013). Financial statement analysis. Hoboken, N.J.: Wiley.
Australian Accounting Standards Board. (n.d.). Impairment of Assets. Retrieved from www.aasb.gov.au: https://www.aasb.gov.au/admin/file/content105/c9/AASB136_07-04_COMPjun09_01-10.pdf
Elaine, H. (2015). International financial statement analysis. Hoboken: John Wiley & Sons.
Girard, S. L. (2014). Business finance basics. Pompton Plains, NJ: Career Press.
Parrino, R. (2013). Fundamentals of Corporate Finance, 2nd Edition. Milton: John Wiley & Sons.
Penman, S. (2012). Financial statement analysis and security valuation. Boston, Mass.: McGraw-Hill.
Siciliano, G. (2015). Finance for Nonfinancial Managers. New York: McGraw-Hill.
Simpson, M. (2012). Financial accounting. Basingstoke: Macmillan Press.
Skonieczny, M. (2012). The basics of understanding financial statements. Schaumburg, Ill.: Investment Publishing.
Taillard, M. (2013). Corporate finance for dummies. Hoboken, N.J.: Wiley.
Essay Writing Service Features
Our Experience
No matter how complex your assignment is, we can find the right professional for your specific task. Contact Essay is an essay writing company that hires only the smartest minds to help you with your projects. Our expertise allows us to provide students with high-quality academic writing, editing & proofreading services.
Free Features
Free revision policy
$10Free bibliography & reference
$8Free title page
$8Free formatting
$8How Our Essay Writing Service Works
First, you will need to complete an order form. It's not difficult but, in case there is anything you find not to be clear, you may always call us so that we can guide you through it. On the order form, you will need to include some basic information concerning your order: subject, topic, number of pages, etc. We also encourage our clients to upload any relevant information or sources that will help.
Complete the order form
Once we have all the information and instructions that we need, we select the most suitable writer for your assignment. While everything seems to be clear, the writer, who has complete knowledge of the subject, may need clarification from you. It is at that point that you would receive a call or email from us.
Writer’s assignment
As soon as the writer has finished, it will be delivered both to the website and to your email address so that you will not miss it. If your deadline is close at hand, we will place a call to you to make sure that you receive the paper on time.
Completing the order and download