Measurement Of Impairment Individual Asset â€Myassignmenthelp.Com

Question: Discuss About The Measurement Of Impairment Individual Asset? Answer: Introducation Assets whether tangible or intangible are the critical resource possessed by an entity in the course of its business. The assets have their own economic value and hence they are required to be accounted for adequately. Considering the need of proper accounting and disclosures of entitys significant assets in the financial reports, Accounting Standard Board has issued certain standards in relation to the accounting treatments to be given in various situations. Asset Impairment is one of those crucial situations which requires appropriate measurement and recognition in the financial statements of the company. Impairment of an asset has been defined in the Australian accounting standard as the situation when carrying value of the asset exceeds the amount that is recoverable from that particular asset. Accounting treatment to be followed in case of impairment of assets is prescribed in the AASB 136 issued by Australian Accounting Standard Board (Bond, Govendir Wells, 2016), (Ji, 2013). Any asset whether it is a tangible asset or an intangible one it may be subjected to impairment depending upon its characteristics. The assets that may be impaired have been commonly identified as plant and machinery, property plant and equipment, goodwill patents and the other intangible assets. An impairment loss on any individual asset must be recognised in the statement of profit and loss immediately as an expense (Amiraslani, Iatridis Pope, 2013). But, if the revaluation reserve is existing for that particular asset, impairment loss must be charged to the revaluation account to an extent revaluation reserve is carrying a credit balance to cover the loss. Any amount of impairment loss exceeding the balance of revaluation reserve must be taken to the profit or loss account (Vanza, Wells Wright, 2011). However, if the asset is not revalued previously the impairment loss on such asset must be directly charged to the profit or loss account. The company must also disclose the fact of asset impairment in the financial reports in accordance with the requirement of the accounting standard. At every year ending the company has to assess as to whether there exists any indication about the asset impairment. There are certain factors which may indicate the impairment of an asset. Such factors are classified under two categories i.e. external and internal factors (Laskaridou Vazakidis, 2013). Following are some of the factors that many cast an indication of impairment: External factors: The market value of the asset is decreased significantly than the expected decline out of due to normal usage or passing of time during the reporting period (Comiskey Mulford, 2010). Adverse technological, economical and legal environmental changes in the market with which asset is associated The rate of interest in the market or rate of investments have been significantly increased and such changes are likely going to negatively influence the discounting rate which is used to determine the value of asset. Internal factors: Obsolescence of asset or the asset is physically damaged. Evidence of the worst present or future economic performance of the asset is available. Significant adverse changes in the ways in which asset is presently used or will be used in future. Such as discontinuation plans of the asset or asset becoming disposable so early than the expected useful life. There must be a critical assessment of the information which indicates the possibility of impairment of an asset. Only after considering the true evidences of impairment indication, the impairment of an asset must be measured and recognised in the financial statements. Once the asset is impaired the carrying amount of the individual asset must be decreased to account for the impairment. The asset is considered to be impaired when its carrying value exceeds the amount recoverable on that asset. Carrying amount is the amount with which the asset is being carried in the financial statements of the company (Sun, Shipan Xia). This amount is calculated by deducting the accumulated depreciation from the historical cost of the asset. Recoverable amount of any asset is the amount which is identified as higher of two values i.e. the value in use and the fair value of asset. Value in use is the sum of estimated future cash flows from the asset. Recoverable amount is identified for every single individual asset in this business until or unless the asset do not generate the inflows of cash which are significantly depending on cash flows of other single or group of assets. If any of these two values exceeds the amount that is recorded in the financial statements then the asset is considered to be impaired (Amiraslani, Iatridis Pope, 2013). Therefore the amount with which the im pairment loss is to be recognised in the financial statement is the difference between the actual carrying value of the asset and the amount that is recoverable therefrom. While recognising the impairment loss if the loss amount exceeds the carrying amount of the asset, the company may create a liability regarding it but this is only possible if there is a requirement of any other standard of accounting. After recognising the loss of impairment, the amortisation cost or the remaining depreciation charges thereon must be allocated to the revised carrying amount on a systematic basis (Trottier, 2013). Therefore it is highly recommended to the companies possessing goodwill or any other intangible assets of like nature, to have an adequate system of impairment check for all the relevant and significant assets at yearly intervals so as to avoid the consequences of sudden decline in the values of the assets. However assets other than the intangible assets are required to checked for impairment only when there indications of impairment. Decline in the market value of the assets than the assets net value after depreciation charges is an important trigger for the Impairment testing. However, it there is any increase in the recoverable amount of an asset more than its net asset value then such an increment must be ignored. Asset Impairment requires immediate recognition as it a material loss in the economic value of the assets. Part B Computation of Impairment Loss of Gali Ltd. Amount. Plant less Accumulated depreciation 4,84,000.00 Equipment 1,11,000.00 Fittings 70,000.00 Inventory 30,000.00 Goodwill 25,000.00 Total 7,20,000.00 B. Recoverable amount (a) Value in Use 6,45,000.00 B. Recoverable amount 6,45,000.00 C. Impairment Loss (A-B) 75,000.00 Allocation of impairment loss Goodwill 25,000.00 Land 18,196.00 Accumulated Impairment Losses 31,804.00 Journal Entries of Impairment Loss for Gali Ltd Impairment Loss A/c Dr ... 75,000.00 To Goodwill A/c 25,000.00 To Equipment A/c 18,196.00 To Accumulated Impairment Losses 31,804.00 Accumulated Impairment Losses A/c Dr 31,804.00 To Profit Loss A/c 31,804.00 References Amiraslani, H., Iatridis, G.E. and Pope, P.F., 2013. Accounting for asset impairment.London: Cass Business School. Bond, D., Govendir, B. and Wells, P., 2016. An evaluation of asset impairments by Australian firms and whether they were impacted by AASB 136.Accounting Finance,56(1), pp.259-288. Comiskey, E.E. and Mulford, C.W., 2010. Goodwill, triggering events, and impairment accounting.Managerial Finance,36(9), pp.746-767. Ji, K., 2013. Better late than never, the timing of goodwill impairment testing in Australia.Australian Accounting Review,23(4), pp.369-379. Laskaridou, E.C. and Vazakidis, A., 2013. Detecting asset impairment management: Some evidence from food and beverage listed companies.Procedia Technology,8, pp.493-497. Sun, Shipan, and Xia Xu. "Study on the Asset Impairment Accounting."International Journal of Business and Management5, no. 6 (2010): 199. Trottier, K., 2013. The effect of reversibility on a manager's decision to record asset impairments.Accounting Perspectives,12(1), pp.1-22. Vanza, S., Wells, P.A. and Wright, A., 2011. Asset impairment and the disclosure of private information.