Planet Boundaries Implications Impairment: An Appraisal Of IAS 36 Impairment Of Assets

Reviewing Impairment of Assets

Discuss About The Planet Boundaries Implications Impairment?

According to “IAS 36 Impairment of Assets”, it is assured that an asset is not brought on the balance sheet statement at a value, which is greater compared to the recoverable amount of the stated asset. This essay aims to focus on appraising the situations in which there is occurrence of impairment loss along with explaining the time the organisation needs to perform the impairment review of assets. As commented by Baboukardos and Rimmel (2014), impairment is expected to happen at the time the carrying amount is greater in contrast to recoverable amount. The recoverable amount includes the net sales price of the asset, value in use and fair value in compliance with IFRS 13.

After the end of each reporting year, an organisation needs to assess whether any indication of impairment is inherent or not. In case, there is an indication of impairment, it is necessary to compute the recoverable amount of the asset (Damian et al. 2014). The realisation of impairment loss is inherent, in which the recoverable amount is lower in contrast to the carrying amount. It needs to be realised immediately as expenditure, unless it associates with a re-valued asset, in which the impairment loss is considered as revaluation decrease. For goodwill, the cash-generating unit to which goodwill has been apportioned needs to be tested for annual impairment by contrasting the unit’s carrying amount along with its recoverable amount. In either situation, if the recoverable amount of the unit is below its carrying amount, the organisation needs to realise impairment loss. In the past, IFRS needs realisation of goodwill subject to amortisation over the useful lifetime (Guthrie and Pang 2013).

The impairment indicators are developed in IAS 36 with an intention of minimising the subjectiveness of the decision, which was the case in the past. The unfavourable changes in markets, economy, technology and law could have adverse effect on the asset values of the organisation (Huian 2013). The impairment indicators could be because of external or internal sources. The asset’s market value might reduce due to usage or the time passage. The other external indicators of a fall in value could be the outcome of important market, technological, economic or legal changes that happen and this would have unfavourable impact on the asset or organisation. The interest rates in the market might have an effect on the rate of discount utilised in computing the value in use related to an asset and therefore, there is decrease in recoverable amount. The internal indicators related to review of impairment could be the outcome of physically damaged or obsolete assets, or if an asset is portion of restructure or it is held for sale or in which there is poor economic performance of the asset in contrast to the expected performance (Huikku, Mouritsen and Silvola 2017).

Impairment Indicators

Despite the objectivity of the set standard, it could be complex to ascertain the value measurement attributable to assess the options related to impairment. The measurement and timings related to write-downs of assets depend heavily on estimates. Certain characteristics of testing related to impairment and process of measurement make implementation a serious problem (Ji 2013). There are many triggering events of indicating impairment and these vary greatly in terms of severity and significance. The various models of valuation are utilised and the conformity is less in the discount rate selection. However, there is a variation in nature, which continues to occur between fair values disclosed on the part of the management. In addition, IAS 36 intends to enhance transparency along with minimising the accounting subjectivity associated with impairments (Linnenluecke et al. 2015). The exercise for ascertaining whether there is an impairment of asset and the amount remains at the discretion of the management. This standard now aims to address such discretion by needing yearly impairment or reviews of impairment to be conducted whenever there is impairment indication.

Even though there is a discretionary element afforded to the impairment computations and therefore, the incentives of the management in managing earnings could play a role in the decisions of impairment. These projections might be handled for altering or avoiding impairments (Sapkauskiene, Leitoniene and Vainiusiene 2016). This would minimise the comparability across the organisations. For instance, loss related to impairment of goodwill is projected in most cases from the projections of the management of future cash inflows. This could pose serious problems for the investors, as they are not able to vision such potential manipulations.

The analysts and investors have the alternative to adjust or ignore the reported accounting numbers. Hence, it reduces the certainty of the reporting behaviour in misleading users or minimising relevance and reliability. Along with this, the financial statements vary from the management accountants used on the part of an organisation and the impact of impairment broadens the existing gap between the accounts of management information used on the part of the board and the audited financial statements.

The manipulation of earnings is an issue; however, the judgemental approach to indicate and compute impairment is provided. The managers often receive an economic incentive in manipulating earnings for enhancing their cash compensation. In this case, IAS 36 permits for a judgemental element in the computation of impairments. IAS 36 allows an impairment loss on a fixed asset to be reversed, if the marketing value associated with the asset is recovered. This has direct effect on the impairment practices, in which reversibility has positive impact on the decision of the managers in recording impairment of assets. The permission of reversals increases significantly the probability that a manager would record the impairment. Hence, it highlights the discretion that management could withhold towards the impairment treatment. Thus, it could be concluded that managerial self-interests and concerns pertaining to earnings management seem to motivate many decisions of impairment. In addition, it has been found out that goodwill needs to be assessed yearly for impairment, while the other potentially impaired assets are reviewed for impairment in detail, if there is any sign of impairment.

Particulars	Amount (in $)
Assets’ carrying amount (A)	5,19,000
Value in use of the division (B)	4,65,000
Fair value of the assets ( C)	3,35,885
Actual or real asset values (D) [Greater of (B) and (C)]	4,65,000
Loss from Impairment  (E) (A) – (D)]	54,000
Goodwill on acquisition of competing organisations (F)	–
Impairment loss from subtraction of goodwill (E) – (F)	54,000

Apportionment of Impairment Loss
Particulars	Amount (in $)	Percentage	Impairment (in $)
Patent	3,49,000	67%	36,312
Equipment	80,000	15%	8,324
Fittings	50,000	10%	5,202
Inventory	22,000	4%	2,289
Goodwill	18,000	3%	1,873
Total Amount of Assets	5,19,000	100%	54,000

In the books of Gali Limited
Journal Entry as on 30 June 2015
		Debit	Credit
Date	Particulars	Amount (in $)	Amount (in $)
30-Jun-15	Impairment Loss Account……….Dr	54,000
	To Goodwill Account		1,873
	To Patent Account		36,312
	To Equipment Account		8,324
	To Fittings Account		5,202
	To Inventory Account		2,289
	(Net assets, liabilities and goodwill impaired depending on the amount of recovery)
30-Jun-15	Income Statement Account………………..Dr	54,000
	To Impairment Loss Account		54,000
	( Value of impairment loss reallocated to the income statement)

References:

Baboukardos, D. and Rimmel, G., 2014, March. Goodwill under IFRS: Relevance and disclosures in an unfavorable environment. In Accounting Forum (Vol. 38, No. 1, pp. 1-17). Elsevier.

Damian, M.I., Manoiu, S.M., Bonaci, C.G. and Strouhal, J., 2014. Bearer plants: Stakeholders’ view. Accounting and Management Information Systems, 13(4), p.719.

Guthrie, J. and Pang, T.T., 2013. Disclosure of Goodwill Impairment under AASB 136 from 2005–2010. Australian Accounting Review, 23(3), pp.216-231.

Huian, M., 2013. Stakeholder’s participation in the development of the new accounting rules regarding the impairment of financial assets. Business Management Dynamics, 2(9), pp.23-35.

Huikku, J., Mouritsen, J. and Silvola, H., 2017. Relative reliability and the recognisable firm: Calculating goodwill impairment value. Accounting, Organizations and Society, 56, pp.68-83.

Ji, K., 2013. Better late than never, the timing of goodwill impairment testing in Australia. Australian Accounting Review, 23(4), pp.369-379.

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.

Sapkauskiene, A., Leitoniene, S. and Vainiusiene, E., 2016. Disclosure of Goodwill Impairment in the Baltic States. Engineering Economics, 27(4), pp.417-429.