Impairment loss for Cash generating units excluding Goodwill

Impairment loss for Cash generating units excluding Goodwill

AASB 136 Impairment of Assets, as amended from time to time, has been promulgated by the Australian Accounting Standards Board and are applicable to those entities which are required to formulate financial reports in conformance with Part 2M.3 of the Corporations Act (Mills & Woodford, 2015). The applicability of this standard is to financial reports that are formulated for the general purpose.  
The assets to which AASB 136 applies and does not apply are listed below:
                                                     
The objective of AASB 136 is to ensure that assets which are determined to be under its scope are not carried at an amount exceeding their recoverable amount. If an asset’s carrying amount is greater than the amount recoverable from its use or sale, it is said to be carried at more than its recoverable amount, and is considered as having been impaired, thereby necessitating recognition of an impairment loss, which could also be reversed. AASB 136 also prescribes disclosures required (Loftus et al, 2012).
Whether or not impairment of any asset has occurred during a period is guided, at minimum, by:

External sources of information:

  1. The carrying amount of the total asset of the entity should be higher than its market capitalization.
  2. The passage of time or normal use of the asset has led to a greater-than-expected decline in the asset’s market value.
  3. The market in which the entity is operating or the asset is present has experienced, or will experience, significant changes affecting the entity adversely (Henderson et al, 2014). The key market forces are important elements to consider. The changes in terms of technology, economy, or changes in the policies or legal terms impact entity heavily. 
  4. If the market interest rates changes, that is, if it increases then the asset’s recoverable amount is likely to decrease materially as the discount rate that is used for the computation of the ‘value in use’ will be impacted (Best et al, 2014).

Internal sources of information:

  1. The asset’s obsolescence or physical damage is evident.
  2. The way in which the asset is being used or will be used in the future, has experienced, or will experience in near future, significant changes affecting the entity adversely. 
If, and only if, the recoverable amount is exceeded by the carrying amount of unit then there be recognition of impairment loss, which will be allocated exactly in the sequence below for the reduction of the carrying amounts of the unit’s assets (Marsden, 2010). 
  • .Carrying amount of the allocated goodwill should be reduced.
  • .Prorate the impairment loss to other assets based on their carrying amounts within the unit.
In allocating the loss, the carrying amount of an asset must not be reduced below the value that happens to be the highest among the below three::
  • Fair value (excluding costs to sell)
  • Value in use, and
  • Zero
After the said allocation, a liability should be recognised for any balance impairment loss amount for a unit if, and only if, another Standard so requires.
For each asset class, the entity must disclose:
  1. The amount of impairment losses recognised, along with the line items where included, in the income statement.
  2. The amount of impairment loss reversals recognised, along with the line items where included, in the income statement.
  3. Also, the amount on revalued assets and loss reversals on revalued assets recognised directly in equity.
There are several practical issues that should be considered in this case. The orientation towards testing the impairment is time dependent and requires that the indicators leading to the impairment are identified early on (Dagwell et al, 2012). Moreover, reassessment of cash flows becomes a necessity along with knowing the rate of discounts. 
It is recommended that the companies should make good future plans. If the market cap seems to be going down in comparison to the NAV, then this can be one of the triggers to impairment. A VIU test should be conducted where it may be identified that the projections related to the cash flow projections are not as per the expectation. This is where the causes should be identified by the companies. 

References:

Loftus, J., Leo, K., Picker, R., Wise, V., & Clark, K., (2012), Understanding Australian Accounting Standards, John Wiley & Sons: Australia
Henderson, S., Peirson, G., Herbohn, K., & Howieson, B., (2014), Issues in Financial Accounting, Pearson: Australia
Dagwell, R., Wines, G., & Lambert, C., (2012), Corporate Accounting in Australia, Pearson: Australia
Mills, A., & Woodford, W., (2015), Company Accounting, Pearson: Australia
Marsden, S., (2010), Australian Master Bookkeeper’s Guide, CCH Australia Limited: Australia
Best, P., Fraser, D., Tan, R., Willett, R., Horngren, C., Harrison, W., & Oliver, M., (2012), Financial Accounting, Pearson: Australia

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