The vital objective of the impairment principle acts as an asset might not be considered in the balance sheet rather than the recoverable amount which is increased than the assets fair value deducted from the sell and “value in use” (Bond, Govendir and Wells 2016). An assetcarrying amount is contrasted in comparison to the recoverable amount and the asset is impaired in a situation where the previous is higher than the later. Allocation of all the impairment is carried out in a situation where the impairment loss is relied in profit or loss.
Every asset is focussed on impairment and is tested in case of impairment within which there is an indication that impairment of all the assets are done (Caruso, Ferrari and Pisano2016). Csonversely, there are distinct assets that includes infinite tangible goodwill as well as assets. This is also tested for annual impairment with lack in all the impairment indicators. Recoverable amount computation is carried out at an individual asset level. Conversely, the assets result in the independent cash flows of several assets. In addition, most of the assets are tested for classes of asset impairment mentioned within the form of cash generation units.
Based on “Paragraph 104 of AASB 136”, the “impairment loss recognition” for the “cash generating unit” can be carried out in consideration to the amount recoverable associated with the unit is decreased in contrast to the units carrying amount (Detzen, Stork Genannt Wersborg and Zülch 2016). “Impairment loss” allocation is carried out in for reducing an asset’s “carrying amount” regarding the units in two chronological orders. Firstly, the carrying amount which is related with goodwill and associated with cash generating units might be decreased. Along with that, the pro-rata based on the asset units is focussed on the carrying amount of assets within the carrying units that might get minimized.
Minimization of the carrying amount is required being considered as the impairment losses on the individual assets along with these are needed being realised in compliance with “Paragraph 60 of AASB 136” of “AASB” (Detzen, Wersborg and Zülch 2015). In addition, “Paragraph 105 of AASB 136” indicates that in order to allocate the impairment loss, an organization does not require to minimize carrying amount of the assets that is less than the greater of three anticipated alternatives. These options include “fair value” decreased from disposal expenses, zero as well as “value-in-use”.
The amount of impairment loss which can have been differently allocated within the asset is necessary for being allocated within pro-rata to different individual assets. “Paragraph 106 of AASB 136”indicates that it is not possible every time to anticipate the recoverable amount associated with all the individual asset based on a “cash generating unit”. Due to such cause, this standard needs a random apportionment of impairment loss between the unit assets other than goodwill (Linnenlueckeet al.2015). This is because of the cause that all the assets belong to a “cash-generating unit”. Considering the same, this standard needs a random apportionment regarding impairment loss without the goodwill. This is because of the fact that “cash generating unit” assets that are involved in operating jointly. In addition, “Paragraph 107 of AASB 136”indicates that in a situation that, the “recoverable amount” is related with a particular asset is not assured, it can result in distinct conditions. Initially, an “impairment loss” is deemed to be an asset in a situation that the “carrying amount” is increased (Hellman 2016). This is in comparison to the “fair value” deducted from “disposal cost” along with outcomes regarding the processes of allocation explained in the “Paragraphs 104 and 105 of AASB 136” (AASB 2015). In addition, impairment loss realization is carried out for any asset in a situation where the “cash generating unit” is not impaired. This is implacable at the time an asset fair value deducted from disposal cost is decreased in comparison to an asset carrying amount.
For example, a machine has experienced certain physical damage and it is still in a working situation in case the performance is not that efficient as it used to be before. The “fair value” along with the machine’s “disposal cost” is observed to be lower in contrast to “carrying amount” (Price 2015). Moreover, it do not attain “independent cash flows”. The minor recognizable asset class including machine along with obtaining cash flows other than “cash inflows” from other assets is in alignment with manufacturing within which such machine belongs. The amount that is that is not recoverable is associated with manufacturing line within which is relied on by machines. The associated “recoverable amount” is related with the production line which signifies that such line is not impaired completely.
In this scenario, two dissect assumptions must be carried out. The first assumption is that the budgets or forecast which attained management approval and this indicates absence of management in order for machine replacement. The “recoverable amount” related with machine might not be anticipated (Vanza, Wells and Wright 2018). This is for the reason that the “value-in-use” of machine can be different in contrast to “fair value” decreased from disposal expenses. This can also be different decreased from “disposal costs” as well as this might be made sure for CGU within which the machine is related with. For such cause, there is no realization of “impairment loss” focussed on machine. Considering same, this is important for the organization for depreciation period re-evaluation along with the method of depreciation associated with the machine. This is also recommended to the organization regarding implementation of less depreciation period or rapid depreciation method. This is in order to indicate the existing life related with the machine or the way in which the advantages are estimated to be utilised.
The second assumption is considered to be the budgets or estimations which attained proper management approval indicates its intention in replacing the machine by means of selling the same in the upcoming years. Such “cash inflows” from continuous utilization of the machine till its disposal is indicated to be decreased. In this condition, the “value in use” associated with machine cannot be anticipated as near to the fair value subtracted from “disposal cost”. Therefore, it is not deemed to be ensured that the recoverable amount is linked with machine. For this for the reason that, there is lack of any consideration within “cash generating unit” within which this machine is associated and that remains in production line. Considering that the “fair value” decreased from “disposal cost” of a machine that is decreased in comparison to the “carrying amount” and the “impairment loss” is realised focussed on related machine.
Relied on previous explanation, it might be indicated that at the time of the impairment loss takes place within CGU other than goodwill. Such loss is also apportioned all over the assets in CGU focussed on pro-rata that is linked with the overall “carrying cost” focused on CGU. Finally, the accounting based on losses is accomplished in similar manner of the “individual assets”.
References:
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.
Caruso, G.D., Ferrari, E.R. and Pisano, V., 2016. Earnings management and goodwill impairment: An empirical analysis in the Italian M & A context. Journal of Intellectual Capital, 17(1), pp.120-147.
Detzen, D., Stork GenanntWersborg, T. and Zülch, H., 2016. Impairment of Goodwill and Deferred Taxes Under IFRS. Australian Accounting Review, 26(3), pp.301-311.
Detzen, D., Wersborg, T.S.G. and Zülch, H., 2015. Bleak Weather for Sun-Shine AG: A Case Study of Impairment of Assets. Issues in Accounting Education, 30(2), pp.18-39.
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.
Hellman, N., 2016. Journal of International Accounting, Auditing and Taxation. Journal of International Accounting, Auditing and Taxation, 27, pp.13-25.
Price, J., 2015. The regulator: Understanding impairment. Company Director, 31(7), p.12.
Vanza, S., Wells, P. and Wright, A., 2018. Do asset impairments and the associated disclosures resolve uncertainty about future returns and reduce information asymmetry?. Journal of Contemporary Accounting & Economics, 14(1), pp.22-40
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