Recognision And Measurment Of An Impairment Loss For An Individual Asset And Journal Entries For Impairment Loss Occurring At 30 June 2015

Identification of Impaired Assets and Losses

An entity requires assessing their assets that are impaired or not and for this purpose an entity requires a standard that can be used to do the same. To gain information, a business organization considers various means. In order to have a proper understanding, it uses its external and internal sources to get an idea about the performance of their assets.  IAS36 impairment of assets is a standard that is quite commonly used by the entities for the assessment of their assets (Impairment accounting – the basics of IAS 36 Impairment of Assets, 2008). IAS36 is a measure that helps firms in determining the assets that are impaired and cannot earn back recoverable amount. IAS36 assist the firms in categorizing their assets which are not performing and what alternative measures can be used for the same to incur less losses.

The application of IAS 36 is quite wide.  Due to the recent economic uncertainty the subject of impairment has came to spotlight.  After which various entities has decided to reassess their impairment testing models and processes (Dagwell, Wines and Lambert, 2015). The essay portrays the importance of identifying assets that are impaired and cannot be used further. The subject matter of the essay deals with the significance of measures which helps in identifying the assets that are impaired. In the essay IAS36, a widely accepted and popular method is discussed.  

Identification of Impaired Assets and Losses

IAS 36 impairment of assets ensures that an entity’s assets are not carried for more than their recoverable amount which means that the higher the fair value and less cost of disposal of the asset. The assets that have impaired burdens the organization with huge amount of cost and expenses, in such a scenario when innovation and technology has reached its peak, assets are becoming obsolete quite rapidly. In such a scenario, IAS36 provides a reliable platform to identify the assets which are becoming impaired (IAS 36 — Impairment of Assets, 2017). Organization in general assesses their assets on periodic bases. The managers are aware of the assets and about their working life that are being used in the organization. Hence in order to maintain the losses, organization requires keeping an eye on their assets. IAS36 is a quite famous method that is being used by various organizations (Impairment of Assets, 2007). This method is applicable to every kind of assets irrelevant of their nature. It helps the organization to maintain assets that can be recovered at the position of no loss and no gain.

Objective

IAS 36 is a measure or standard that is used by various firms to assess their impaired losses.  It is also important to know that how and where this standard is applied. IAS36 is a method that can be applied to various assets and is in being used by firms from several years. It provides accurate data about the asset and organizations plan out their strategies for the asset on the same way (Henderson, Peirson, Herbohn and Howieson, 2015). In general IAS36 is a method that can be applied to any firm, but specifically a firm which is listed in the stock exchange or that which maintains a proper balance sheet can gain benefit from the method.  The method IAS36 helps in assessing various kinds of assets of the organization on time to time basis (IAS 36 — Impairment of Assets, 2017).

Assets play an important role in increasing the goodwill of an organization. However they have a fixed working life after which they become obsolete. In today’s dynamic environment, the assets of a firm are becoming obsolete very quickly, in such a situation an origination is required to manage its assets in such a way that it generates less losses (Alexander and Archer, 2008).  The method IAS36 is widely because assesses the assets of the organization on the basis of external and internal indicators.  It is significant for an organization to recover its losses from the assets that has become obsolete. To maintain goodwill in the market organizations carries on asset assessment, in addition to this it also helps it to remain up to date with the market changes. A proper order to conduct asset assessment is annually, however due to changing scenario, organizations have started to do this periodically such as quarterly.

An asset is impaired when its carrying amount exceeds its recoverable amount.  At the end of each reporting period an entity is required to assess whether there is any indication that the asset is impaired (Henderson, Peirson, Herbohn and Howieson, 2015). The standard IAS 36 has a list of internal and external indicators related to impairment of asset.  If here is any indication that the asset is impaired then the asset’s recoverable amount is required to be calculated. The recoverable amounts of the certain intangible assets are measured annually, this involves, an intangible asset with an indefinite useful life, an intangible asset not yet available for use and goodwill acquired in a business combination (Alexander and Archer, 2008).

Application of IAS 36

An organization uses various methods to identify assets that have been impaired. However, the most efficient way is to gather information from sources which can be external or internal (International Financial Reporting Standards (IFRS) 2014, 2014). The following discusses the ways through which an organization can identify its assets is losing value:

• The best way to identify that the assets have become obsolete is decline in its market value. This will make the firm realize that the assets should be sold down.
• The market changes are also an indicator that helps firms to plan different strategies. A negative change in the market trends helps the managers to make new policies and plan things accordingly.
• Increase in market interest rates also act as an indicator that helps the firm in planning alternative ways.

Apart from the external sources there are certain internal sources that indicate that the asset has impaired. This may include:

• Any kind of physical damage to an asset can make the asset obsolete
• Physical damage or obsolescence of the asset
• Asset is not in use and is held for disposal
• Worse economic performance
• Dividend exceeds the total comprehensive income

When an asset become obsolete it becomes quite important for the organization to sell down it so that it can cover its losses. In addition to this when a firm makes a decision to sell down its assets it become quite important for the managers to determine cash inflows and their judicial utilization (Dagwell, Wines and Lambert, 2015).The assessment of cash inflow should be done on the basis of present scenario so that it will generate more returns for the organization.

Conclusion 

Essay deals with the impairment of assets, their recognition and measures for the same. An entity is required to assess their assets periodically in order to gain an idea about the impaired assets. Assets are treasure for an organization, so every form tries to maintain them with utmost care. However the lives of assets are quite limited so it is significant for a firm to consider that before an asset became obsolete it should sold the same so that firm can maintain the position of no gain and no loss. The standard that is widely used in this aspect is IAS 36 impairment of assets.  This measure helps the firm to perform their assessment efficiently.  The role of external and internal sources is quite important in this regard. These sources aid the entity in assessing their assets. IAS 36 applies to all the assets of the entity are a quite reliable measure that is used by the entity. An entity should try its best to generate as much recoverable amount from the asset so that it can maintain its equilibrium.  In this regard a cash flow prediction also plays an important role, it should be done diligently and while projecting cash flow entity should view their recent budget and market predictions.

According to the given information:

Total impairment loss to the CGU (Fine China) of the Gali Limited

= Carrying Amount Less Value in use

= $634000-$568000

= $66000

This impairment has to be divided by the properties of CGU division on priority but the reputation and name of the firm requires being impaired completely following with remaining assets on pro rata basis. Inventory is current asset and it is not required to be impaired.

In this case, the value of the plant that has been obtained is more than the amount. Therefore, we have to make necessary adjustment to the adjusted carrying value of plant and reallocate the impairment loss again.

As the case, value of asset at the time of clearance is 409017 which is more than the cost of impairment that can be allocated to the plant is 425000-409017= 15983. The remaining amount 15982.81 will be provided to the other assets of the organization (Except Goodwill) on pro rata basis.

Impairment Loss Dr 66000.00

Acc. Goodwill 22000.00

Acc. Depr. & Impairment Losses – Equipment 17160.41

Acc. Depr. & Impairment Losses – Plant 15983.00

Acc. Depr. & Impairment Losses – Fittings 10856.59

References

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

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

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

IAS 36. 2017. Impairment of Assets. [Online]. Available at: https://www.iasplus.com/en/standards/ias/ias36 [Accessed on: 5 September, 2017].

Impairment accounting – the basics of IAS 36 Impairment of Assets. 2008. International Financial Reporting Standards update. [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 [Accessed on: 5 September, 2017].

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].

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