Week 5 Lesson iii

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Week 5 Lesson (iii)

• CHAPTER 8
• IMPAIRMENT OF ASSETS

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Learning Objectives

• To understand the impairment test for assets
• To state when to undertake an impairment test
• To explain how to collect evidence and determine
  whether an impairment test is necessary
• To explain how to undertake an impairment test
  for an individual asset
• To explain how to calculate value in use
• To recognise and measure an impairment loss for
  an individual asset

3
Learning Objectives

• To explain what a cash-generating unit is, and
  how to identify one
• To account for an impairment loss for a cash
  generating unit not including goodwill
• To account for the impairment of goodwill
• To account for the reversals of impairment losses
• To apply the disclosure requirements of AASB 136/
  IAS 36

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Nature of impairment

• Impairment occurs when the carrying amount of an
  asset is greater than its recoverable amount.
• Recognise impairment loss
• Recoverable amount is the higher of its fair
  value less costs to sell and its value in use
• Fair value less cost to sell amount from sale of
  asset by willing parties at arms length less
  disposal costs
• Costs of disposal are directly attributed to the
  disposal of the asset excluding finance costs and
  income tax expense
• Value in use is present value of future cash
  flows expected from the asset

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Impairment test

• Does not apply to
• Inventories
• Assets arising from construction contracts
• Deferred tax assets
• Assets arising from employee benefits
• Financial assets
• Investment properties measured at fair value
• Biological assets measured at fair value less
  estimated point of sale costs
• Deferred acquisition costs and intangible assets
  relating to insurance contracts
• Non-current assets or disposal groups classified
  as held for sale

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Impairment Loss

• AASB 136/ IAS 36 para. 6
• An impairment loss is the amountby which the
  carrying amount of an asset or a cash-generating
  unit exceeds its recoverable amount
• Cash-generating unit is the smallest
• identifiable group of assets that generates cash
  inflows that are largely independent of cash
  inflows from other assets or groups of assets

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When to undertake an impairment test

• The need for an impairment test can be assessed
  by analysing sources of evidence
• Para. 10 assets for which an impairment test must
  be carried out yearly include
• Intangible assets with indefinite useful lives
• Intangible assets not yet available for use
• Goodwill acquired in a business combination

8
Collecting evidence of impairment-Sources of
information

• External
• market value
• entitys market
• interest rates
• market capitalisation
• Internal
• obsolescence
• changed use within entity
• economic performance of asset

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Impairment test for anindividual asset-Fig 8.1
p306 Ch8

• If either one of fair value less cost to sell or
  value in use is greater than carrying amount, the
  asset is not impaired
• In active markets, determination of fair value
  less costs to sell is probably easier than
  calculating
• If carrying amount exceeds the fair value less
  cost to sell, calculation of value is use is
  necessary

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Calculating value in use AASB 136/ IAS 36 Para. 30

• An estimate of future cash flows entity expects
  to derive from asset
• Expectations about possible variations in amount
  or timing of those future cash flows
• Time value of money, current market risk-free
  rate of interest
• Price for uncertainty inherent in asset
• Other factors such as illiquidity

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Recognition and measurement of an impaired loss
of an individual asset

• Impairment loss is when the recoverable amount of
  an asset is less than it carrying amount.
• Asset must be written down from its carrying
  amount to the recoverable amount
• Using the cost model, recognises a profit or loss
• Impairment loss Dr 10
• Accumulated depreciation
• and impairment losses Cr 10
• (Being impairment loss on asset)
• Revaluation model treated as revaluation
  decrement-(Examples are found on pg 6 of handout)
  If the revalued asset had a previous revaluation
  increment of 20, given a carrying amount of 100
  and a deferred tax liability ( tax rate of 30)
  of 6, then the entry to write the asset down to
  a recoverable amount of 90 requires an
  adjustment directly against the revaluation
  reserve
• Acc depn Dr 20
• Asset Revaluation Reserve Dr 7
• DTL 0.3 (100-90) Dr 3
• Asset Cr
  30
• (Being write down of asset to recoverable amount)

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Cash generating units-not including goodwill

• Para.6 AASB 136/ IAS 36, it is the smallest
  identifiable groups of assets that generates cash
  inflows from continuing use that are largely
  independent of the cash inflows from other assets
  or groups of assets

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Impairment loss for a cash-generating (not
including goodwill)

• Allocated to reduce carrying amount of the assets
  of the unit by allocating impairment loss on a
  pro rata basis, based on carrying amount of each
  asset in the unit.
• Carrying amount should not be reduced below
  highest of
• Its fair value less costs to sell
• Its value in use
• zero

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Cash-generating units and goodwill

• Goodwill is recognised only when acquired as part
  of a business combination
• Cash-generating units that have goodwill must be
  tested for impairment yearly
• If recoverable amount exceeds carrying amount,
  there is no impairment loss
• There is no impairment of goodwill, the goodwill
  balance remains unadjusted

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Cash-generating units and goodwill

• Goodwill is protected or cushioned against
  impairment by
• Internally generated goodwill
• Unrecognised identifiable net assets
• Excess value over carrying amount of recognised
  assets

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When carrying amount exceeds recoverable amount

• Impairment loss must be allocated to reduce
  carrying amount of assets of the unit, or group
  of units
• First to reduce the carrying amount of any
  goodwill allocated to the cash-generating unit
• Then to the other assets of the unit pro rata on
  the basis of the carrying amount of each asset in
  the unit

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Reversal of an impairment loss

• Para. 110 AASB 136/IAS 36 requires an entity to
  assess at each reporting date whether an
  impairment loss recognised previously may not
  exist or may have decreased
• An entity needs to look at internal and external
  evidence for a reversal of a previous loss

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Individual Asset-reversal of impairment loss

• Reversal of previous impairment loss requires
  adjusting the carrying amount of the asset to
  recoverable amount
• Para.117 carrying amount cannotbe increased to
  an amount in excess of the carrying amount had no
  impairment loss been recognised

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Cash-generating unit-reversal of impairment loss

• Reversal is allocated pro rata to the assets of
  the unit (except for goodwill) with the carrying
  amount of those assets
• Para. 124 AASB 136/ IAS 36 impairment loss for
  goodwill is not to be reversed in a later period

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Disclosure Para. 126

• The amount of impairment losses recognised in
  profit or loss during the period and line on
  income statement
• The amount of reversals of impairment losses
  recognised in profit or loss during the period
  and line on income statement
• The amount of impairment losses on revalued
  assets recognised directly in equity during the
  period
• The amount of reversals of impairment losses on
  revalued assets recognised directly in equity
  during the period

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REFERENCES

• Refer to http//www.aasb.com.au in relation to
  AASB 116, AASB 138 and AASB 136 for week 5
  lessons that covers chapters 5, 6 and 8.
• Refer to its IAS equivalents from International
  Financial Reporting Standards(IFRSs)-www.iasb.org
• Refer to Http//www.gaap.com.au for updates

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Main changes AASB 136/IAS36

• There is now an explicit requirements that, when
  determining future cash flows in relation to the
  value in use of an asset, such cash flows must be
  determined on a present-value basis (i.e. the
  cash flows must be discounted).Discounting was
  previously allowed in Australia but was not
  mandated.
• It is now made explicit that when a revalued
  asset is disposed of any revaluation increment in
  relation to the disposed of asset must be
  transferred to retained earnings. While this was
  allowed previously in Australia, it was not
  mandated
• Asset revaluation reserve is now referred to as
  revaluation reserve

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Demo ABC-XYZ Ltd

• 1/1/05 ABC Ltd acquired all assets liabilities
  of XYZ Ltd. ABC Ltd paid 2m for the net assets
  of XYZ Ltd and calculated it had acquired
  goodwill of 240000.
• At 31/12/07, the carrying amounts of the Toy Doll
  division as follows
• Factory 250000
• Fittings 150000
• Brand- Froggy 50000
• Goodwill 50000
• Due to declining interest in toy dolls, mgt
  measured value in use
• of Toy Doll Division at 31/12/07 and determining
  it to be 423000.
• Required
• Prepare the journal entries to account for
  impairment loss at
• 31/12/07

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Soln EX 2The carrying amount of the Toy Doll
Division is (2500001500005000050000)500000.
If the value in use is 423000, hence an
impairment loss of (500000-423000)77000. (ii)
The impairment loss is firstly used to write off
the goodwill of 50000. The balance
(77000-50000)27000 is allocated across all
other assets

• Carrying amount Proportion Allocation
  of loss Net carry amt
• (a) (b
  a/450000) (cb) 27000 (da
  c)
• 
  
  
• Factory 250000 25/45
  15000 235000
• Fittings 150000 15/45
  9000 141000
• Brand 50000 5/45
  3000 47000
• 450000
  27000
• The journal entry to record impairment loss is
• Impairment loss
  Dr 77000
• Acc Depn Impairment loss-Factory Cr
  15000
• Fittings
  Cr
  9000
• Acc Depn amortisation
• Impairment loss- Brand
  Cr 3000
• Goodwill
  Cr
  50000
• ( Allocation of impairment losses)