Measurement Of Impairment Asset Individual -Myassignmenthelp.Com

Question: Discuss About The Measurement Of Impairment Asset Individual? Answer: Introducation The recently experienced economic and financial uncertainties have brought asset impairment to the spotlight. Many companies are now focused on reassessing asset impairment as stipulated by the IAS 36 on Impairment of Assets. An asset is considered to be overvalued if its current value exceeds the amount to be recovered from its sales or use. The IAS 36 standard address when it is necessary to conduct an impairment test, how to conduct it and ways in which impairment losses can be recognized. This paper examines a step by step analysis on how impairment test can be conducted for the first time by the IAS 36 (Brown Tarca, 2005, p. 16). Key principles and requirements for Impairment According to the IAS 36, impairment test should be conducted on both the tangible and intangible assets. Impairment test seeks to ensure that the price of an asset is equivalent to its recoverable value. To fulfill this objective, companies are required to test all their assets for impairment as far as impairment indicators exist. In the same manner, test for impairment should be conducted on a yearly basis for intangible assets and goodwill (AASB, 2009). However, some assets such as inventories, assets generated from construction contracts, deferred tax assets, employee benefit assets, financial assets listed under IAS 39, non-current assets, and investment property are excluded from a test of impairment (Beatty, A Weber, 2006, pp. 257-63). Note: the recoverable value is calculated as the higher of Fair value less disposable cost or Value in use. IAS 36 Recognizing and Measuring an Impairment Loss for an Individual Asset For an individual asset, an impairment loss is realized by the carrying amount is higher than the recoverable amount. The carrying amount refers to the value of an asset less amortization (accumulated depreciation) and accumulated impairment losses if any. The impairment loss is referred to the difference between the two amounts. This type of loss is treated immediately as a profit or loss unless there a revaluation of the same asset under another accounting standard (IAS 16) other than the IAS 36 (Niven, 2011, p. 37). It proves difficult to assess whether or not impairment of an individual asset because the cash inflow from a single asset cannot be independently identified and separated from that of other assets. Therefore, impairment recognition and measurement of assets are done collectively at the Cash-generating unit (CGU) level (Hilton OBrien, 2009, p. 183). The CGU is defined as the recognizable unit of assets that generates largely independent cash inflows from other assets. Notably, the CGU should comprise of consistent assets whose values can be determined from time to time. Recognizing impaired assets At the end of a financial year, a company is required, under IAS 36, to evaluate where there are impairment indicators on its assets. Test of impairment must be conducted on goodwill, intangible asset (not in use) and indefinite life intangible assets regardless of the existence of impairment indicators (Gaffikin, et al., 2003, p. 79). Indicators of impairment can be found from either internal or external sources of information. Internal indicators comprise of obsolete assets or those with physical damages, adverse changes of assets usefulness, the adverse economic performance of assets (Gaffikin, et al., 2003, p. 87). On the other hand, external indicators include declined the marketing value of an asset, adverse changes in the market, legal, a technological or economic environment which the company operates, increase the interest rates and investment rate of return in the market and when a company's market capitalization is lower than its net assets (Beatty, A Weber, 2006, p. 279). Impairment loss: Recognition and measurement The impairment loss occurs when an asset's fair value is higher than its recoverable amount. The amount in excess (impairment loss) should be reduced and treated as an expense. Conversely, when an asset has a revalued amount, then the impairment loss is recognized as the revaluation decrease in the books of accounting (Brown Tarca, 2005, p. 18). Under the CGU, impairment loss is meant to reduce the book value of goodwill existing in the CGU and reconcile the value of individual assets in the CGU. However, the carrying value of any individual assets in the CGU should not go below the highest amount between fair value less disposable cost and fair value less the use value (Leo, et al., 2012, p. 97). Goodwill and impairment of assets Goodwill arises from CGU units that do not generate inflows while the CGU is comprised of assets Goodwill should be tested for impairment on an annual basis irrespective of the existence of impairment indicators. A CGU comprising of goodwill ought to be tested for impairment annually. The carrying value of a CGU containing a goodwill should be compared to its recoverable amount (Mard, et al., 2012, p. 101). Impairment loss reversal After the value of an asset had been previously impaired, an entity may realize that the recoverable amount is higher than an asset's current carrying value. In such a circumstance there would be the need to reverse the previous impairment loss on the said asset. The reversed impaired loss should be treated as shown below; Impairment loss reversal should be immediately treated as income in the comprehensive income statement of that year. In the same manner, the carrying of that asset must be increased to match the value of the new recoverable amount. However, the impairment loss reversal should not exceed the asset's carrying amount if the impairment loss previously excluded has not been recognized. After the reversal, the amortization/ depreciation charge should be adjusted in the future financial period to revise the carrying amount of the asset. However, the impairment loss recognized on a goodwill asset should not be reversed in a subsequent year/ period. The reversal of the carrying amount should be done on the systematic basis over the assets remaining useful life after deducting the residual value (Leo, et al., 2012, p. 115). When reversing an impairment loss for a CGU, the reversal should affect all the assets within the unit by the pro rata of each asset in the unit except for the goodwill asset. References List AASB, 2009. Impairment of asset. [Online] Available at: https://www.aasb.gov.au/admin/file/content105/c9/AASB136_07-04_COMPjun09_01 -10.pdf [Accessed 17 09 2017]. Beatty, A, A. Weber, J., 2006. Accounting discretion in fair value estimates: an examination of SFAS 142 Goodwill impairment. Journal of accounting research, 44(2), pp. 257-288. Brown, P. Tarca, A., 2005. FASB ISSUES STATEMENT ON ASSET IMPAIRMENT. Journal of accountancy, 6(16-18), p. 179. Gaffikin, M., Dagwell, R. Wines, G., 2003. Corporate Accounting in Australia. 1 ed. New York: UNSW Press. Hilton, A. OBrien, P., 2009. Inco Ltd.: Market value, fair value, and management. Journal of accounting research, 47(1), pp. 179-211. Leo, K., Hoggett, J. Sweeting, J., 2012. Company accounting. New York: 9. Mard, M., Hitchner, J. Hyden, S., 2012. Valuation for financial reporting: fair value, business combinations, intangible assets, goodwill, and impairment analysis, New York: CQUniversity library. Niven, D., 2011. asics focus on financial reporting. EBSCOhost, 82(2), pp. 30-66.