IAS 36: Recognition And Measurement Of Impairment Loss

Impairment of Assets and IAS 36

Question:

Discuss About The Recognition Measurement Of Impairment?

The word impairment in accounting means a permanent decline in the value of certain asset of a company or a business organization. The decline in the price of an asset is a quite normal feature but is a matter of distress for the management of the organization. The valuation of asset is done on periodical basis and it is usually compared with the price mentioned in the book value. Various times it is observed that the book value of the asset increases with time however the life of assets was actually decreasing.  In general both the values are taken into consideration and they are written off by the organization and this result in the decline of value of asset in the balance sheet of the company (Henderson, Peirson, Herbohn, and Howieson, 2015). A decline in the asset can be estimated when the required amount cannot be recovered from the same asset, this causes a situation of dilemma for the business organization. In this context, the essay aims to explain the IAS 36 accounting standard implemented by IASB for recognizing and measuring the impairment loss arising from individual assets.

The IAS 36 aids the organization in identifying an asset which is damaged and the substitute ways that can be done to incur fewer losses (IAS 36 Impairment of Assets, 2017). The impairment of fixed assets refers to a decline in its fair value due to any type of damage which has to be recorded in the balance sheet and income statement. The IAS 36 standard has been developed for recognizing the losses that arises due to asset impairment. As the process of declining of an asset is quite normal, it is highly essential for the business entities to adopt IAS 36 standard in order to implement accurate accounting approach to identify and measure such loss.

The core idea of IAS36 is that an asset which has declined completely and cannot be used again should not be included in the balance sheet of that company.  The asset is declined when its cost is more than the cost which can be gained through selling the same. When an asset is declined, it is situation of loss for a company, but this process is a continuous aspect so most of the companies cannot avoid the same so it became quite important for business organization to adopt certain measures through which the percentage of their losses can be reduced. In this wake IAS36 provides a ray of hope as it aids the business organization in identifying the asset which have chances to be declined and the ways through which business organization can incur less loss (Impairment accounting – the basics of IAS 36 Impairment of Assets, 2010). IAS36 assess the assets of the companies and suggest timely sell out of the same so that company can earn something which could be greater form the amount of their losses. The key definitions covered under the IAS 36 standard are as follows:

• Impairment Loss: The amount through which the carrying value of an asset exceeds its recoverable amount
• Carrying Amount: The recognition amount of an asset in the balance sheet after deducting the deprecation and all the losses arising from its impairment.
• Recoverable Amount: The difference in amount between the fair value of an asset and its disposal costs.
• Fair Value: The price realized for an asset sale or given for a liability transfer in an ordered transaction between the participants in the market on the date of measurement
• Value in Use: The net value of potential cash inflows that is likely to be generated from an asset

Recognition and Measurement of Impairment Loss

The concept of IAS36 has become quite popular as it implies to all kinds of assets. IAS36 is implied to all the assets which operate in groups or individually. IAS36 concept suggests proper management and analysis of all the assets on periodical basis in order to gain a proper and accurate idea about their impairment. This aids the business organization in planning future course of action through assessing its recoverable amount in advance (Saracino, 2007).

The IASB has mandated the business entities to implement IAS 36 standard for determining the recoverable amount from an impaired asset. The standard has been in use since 1999 in the business entities for ensuring that entity assets are not measured at the value that is larger than its recoverable amount. It is important to note that IAS36 can be applied to various kinds of organization but especially it has been used by the firms which have been listed in the stock exchange. In addition to this, it can also be applied to the firms which maintain their books and balance sheet properly (Alexander and Archer, 2008). IAS36 uses a wide spectrum of information and sources to assess the assets of an organization.

Asset management is an important aspect in any organization and it cannot be ignored, so organization carries assessment of their assets on regular basis, but as the fixed assets of organization have a fixed age of operating, and they will be decline at certain point of time so the implementation of IAS36 becomes important (International Financial Reporting Standards (IFRS) 2014, 2014).  IAS36 aids the organization in deciding when the asset can be sold off so that organization can incur less loss. The decline in the market value of the asset, certain negative changes in the market trend and sudden increase in the market interest rates are certain ways though which organization can conclude that their asset has started to decline.

The value of an asset which is in use is assessed through its expected cash flows in its current condition. The loss occurred through the decline of the asset can be determined immediately by the organization in profit or loss manner. When it comes to unit which is generating cash, then in this situation, the goodwill will be the first in which symptoms of decline will be seen (Dagwell, Wines and Lambert, 2015). The other assets will decline thereafter. The loss in goodwill caused due to decline in the asset is irreversible. While in other aspects it can be reversed immediately. In case of reversal, there is sudden rise in the carrying cost but not above the amount that can be occurred through the decline in the asset.

IAS 36 Implementation

The decline in the value and age of an asset is a continuous and natural process which cannot be avoided. Every organization faces the same problem of decline in asset which also shows loss in their balance sheet. This directly and indirectly has a bad impact on the goodwill of the organization (Kolitz, Quinn and McAllister, 2009).  The adoption of IAS36 standard helps the firms to assess their asset and assessing their recoverable amount in advance for minimizing the impairment losses arising from them in the coming period of time.

According to the information given in accounting standard related to the impairment of assets, impairment of loss is calculated using the following formula:

Impairment Loss for any Asset: Carrying amount of particular asset less Value in Use

There are defined manner to calculate the value in use. In the recent case of CGU (Fine China) of Gali Limited the Value in use has been given. Therefore the impairment loss can be calculated as Carrying value of total assets in CGU less value in less of total assets in CGU. Here the value in use is give as $23000 and carrying value come out to be $26000. After simple calculation the impairment loss comes to be $3000.

The above calculated impairment loss has to be allocated to each asset on the pro rata basis of their carrying value of assets. The assets of the CGU also consists of goodwill that has to first allocated full and after that other assets has been allocated using their carrying value of assets. In question the value of total assets also includes inventory that has not to be included for impairment loss as it is current asset which is measured at fair market value or cost whichever is less (Impairment of Assets, 2007).

In the below table impairment loss is divided to goodwill first and remaining impairment loss has been divided on pro rata basis to plant, equipment and fittings. Adjustment carrying amount has been calculated which will be again check for impairment so that assets are shown at their fair value on the recoding date (Impairment of Assets, 2007).

Assets	Carrying Amount	Pro Rata	Impairment Loss	Adj. CA
Goodwill	1000		1000	0
Plant	17000	17/24*2000	1416.67	15583.33
Equipment	4000	4/24*2000	333.33	3666.67
Fittings	3000	3/24*2000	250.00	2750.00
	24000		3000	22000

The above table calculates the adjusted carrying value of each fixed assets. Now it has to be test again for any change due to the fair value of any asset. In this question fair market value of plant is given as $16292.00 that is more than its adjusted carrying value. So to record the plant at fair market value less disposal and also to divide complete impairment loss it is essential to reallocate the impairment loss to remaining assets like equipments and fittings to calculate the new adjusted carrying value. The remaining impairment loss left after adjusting the carrying value of plant is $16292-$15583.33 = $708.67. The new adjusted carrying value of all the assets fixed assets are calculated in below table (Impairment of Assets, 2007).

Assets	Carrying Amount	Pro Rata	Impairment Loss	Adj. CA
Plant				16292.00
Equipment	3666.67	3666.67/6416.67 *708.67	404.95	3261.71
Fittings	2750.00	2750/6416.67 * 708.67	303.71	2446.29
	6416.67		708.67	22000.00

Calculation of total Impairment
Assets	Carrying Amount	Impairment Loss	Adj. CA
Goodwill	$                  1,000.00	$                           1,000.00	$                              –
Plant	$                17,000.00	$                               708.00	$              16,292.00
Equipment	$                  4,000.00	$                               738.29	$                 3,261.71
Fittings	$                  3,000.00	$                               553.71	$                 2,446.29
	$                25,000.00		$              22,000.00

Journal Entries to record the above impairment loss to each asset is given below:

Impairment of Assets (Loss) Account Dr $ 3000.00

To Accumulated Goodwill Account 0

To Accumulated Depreciation and Impairment Loss plant account $16292.00

To Accumulated Depreciation and Impairment Loss equipment account $3261.71

To Accumulated Depreciation and Impairment Loss fittings account $2446.29

References

Henderson, S., Peirson, G, Herbohn, K and Howieson, B. 2015. Issues in Financial Accounting. Pearson Higher Education AU.

IAS 36 Impairment of Assets. 2017. [Online] Available at: https://www.ifrs.org/issued-standards/list-of-standards/ias-36-impairment-of-assets/

Impairment accounting – the basics of IAS 36 Impairment of Assets. 2010. [Online] Available at: https://www.ey.com/Publication/vwLUAssets/Impairment_accounting_the_basics_of_IAS_36_Impairment_of_Assets/$FILE/Impairment_accounting_IAS_36.pdf

Saracino, P. 2007. Cash accounting system according to IAS/IFRS. Giuffrè Editore.

Alexander, D. and Archer, S. 2008. International Accounting/Financial Reporting Standards Guide 2009. CCH.

International Financial Reporting Standards (IFRS) 2014. 2014.  John Wiley & Sons.

Dagwell, R, Wines, G. and Lambert, C. 2015. Corporate Accounting in Australia. Pearson.

 Kolitz, D.L., Quinn, A.B. and McAllister, G. 2009. Concepts-Based Introduction to Financial Accounting. Juta and Company Ltd.

Impairment of Assets. 2007. Compiled Accounting Standard. [Online]. Available at: https://www.aasb.gov.au/admin/file/content105/c9/AASB136_07-04_COMPapr07_07-07.pdf [Accessed on: 5 September, 2017].