Financial Accounting 5 questions
srestasaroj
Topic7Slides-Impairmentofassets.pdf
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Prepared by Miranda Dyason
Workshop 7:
Accounting for impairment of assets
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Perform the impairment test and account for impairment losses for Cash- Generating Units (CGU’s) with and without goodwill;
Perform the impairment test and account for impairment losses for single assets;
Explain and account for the reversal of impairment losses;
A
B
C
D
Learning Outcomes
1
E Specify the disclosures required by AASB 136.
Explain the purpose and components of the impairment test, and when an
impairment test should be undertaken;
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Review question –
impairment testing
2
Loftus et al (Chapter 7):
• Comprehension question 2:
Why is an impairment test considered necessary?
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▸ Entities are required to conduct impairment tests to ensure their assets are not overstated.
▸ Impairment results when an asset’s carrying amount is more than its recoverable amount.
▸ Not all assets are required to be tested for impairment. Notable exclusions include:
• Cash;
• Inventories;
• Accounts receivable;
• Deferred tax assets;
• Assets held for resale.
Introduction to impairment
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What is the difference between impairment losses and
depreciation?
If an asset is overstated, wouldn’t it just mean that we
haven’t been recognising enough depreciation, and should
increase depreciation accordingly?
- What are your thoughts...
4
Discussion question
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To impair or depreciate?
• Depreciation:
– The result of ordinary day to day activities – using the benefits
associated with the asset over its useful life.
– Recognised over time (the asset’s useful life).
• Impairment:
– Is a consequence of a deterioration in the asset’s worth due to
other external/internal factors.
– Recognised immediately.
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When do we need to test
assets for impairment?
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▸ At the end of each reporting period, an entity shall assess whether there is any indication that an asset may be impaired. If any such indication
exists, the asset must be tested for impairment.
▸ The following assets must be tested for impairment annually:
• Intangibles with indefinite useful lives;
• Intangibles not yet available for use;
• Goodwill acquired in a business combination.
When to undertake impairment test
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The reason that annual testing is required: the carrying amount of these
assets is more uncertain than that of other assets.
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What are examples of conditions that might indicate
that an asset's value may have been impaired?
What paragraph in the accounting standard provides
us with guidance in relation to this?
8
Discussion question – Indicators that an asset may be impaired
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If there is an indication that an
asset may be impaired, what
do we need to do next?
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When to undertake an impairment test?
• Assets must be tested for impairment when there is an indication (or
evidence) of impairment (AASB 136.9).
• Also recall that the following assets must be tested annually for
impairment: (AASB 136.10):
• Intangibles with indefinite useful lives,
• Intangibles not yet available for use,
• Goodwill acquired in a business combination.
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The impairment test
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• Recoverable amount (RA) is the higher of its fair value less costs to sell and its
value in use.
• Fair value less costs of disposal is the amount obtainable from the sale of an
asset or CGU in an arm’s length transaction between knowledgeable, willing
parties, less the costs of disposal.
• Costs of disposal are incremental costs directly attributed to the disposal of the
asset or CGU, excluding finance costs and income tax expense.
Key definitions – AASB 136.6
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• Value in use (VIU) is present value of future cash flows expected to be derived
from an asset or CGU.
• Impairment loss is the amount by which the carrying amount of an asset or CGU
exceeds its recoverable amount.
Key definitions – AASB 136.6
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Calculating impairment losses
for individual assets
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Impairment test
▸ There are two possible amounts against which the carrying amount needs to be tested for impairment:
• Fair value less costs to sell (FVLCTS), and
• Value in use (VIU).
▸ It is not always necessary to measure both amounts when testing for impairment. If either one of these two amounts is higher than the carrying
amount, the asset is not impaired.
▸ Therefore, if the FVLCTS > CA there is no need to calculate the VIU of the asset. (The VIU is more difficult to calculate that the FVLCTS).
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After determining the fair value less
costs of disposal (FVLCTS) and value
in use (VIU), what next?
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Determining whether an
impairment loss exists
▸ Recall that the impairment test involves determining whether the carrying amount of an asset exceeds its recoverable amount. If
the CA > RA, an impairment loss must be recognised.
▸ And recall that the recoverable amount of an asset is defined in AASB 136.6 as:
‘the higher of its fair value less costs of disposal and value
in use.’
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Review Question –
Calculating impairment losses for individual assets
18
Loftus et al (Chapter 7):
• Application and analysis exercise 7.1
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Review Question –
Accounting for an impairment loss for an asset
19
Loftus et al (Chapter 7):
• Comprehension question 7:
How is an impairment loss calculated in relation to a
single asset accounted for?
• Comprehension question 8:
What are the limits to which an asset can be written
down in relation to impairment losses?
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Example – impairment loss for an individual
asset (accounted for under the cost model):
▸ An asset has a carrying amount of $500 (cost of $800 less accumulated depreciation of $300) and a recoverable amount of $450.
▸ The journal entry to record the impairment loss would be:
Dr Impairment loss 50
Cr Accum. dep’n and impairment losses 50
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Review Question –
Calculating impairment losses for individual assets,
and journal entries
21
Loftus et al (Chapter 7):
• Application and analysis exercise 7.2
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Impairment losses – Cash Generating Units
(CGU’s)
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▸ Where the FVLCTS of an asset is less than its CA, it is possible that the asset is impaired. It is therefore necessary to calculate the VIU of an
asset (so that we can determine the asset’s RA, and whether or not it has
been impaired).
▸ .....But it may not be possible to identify an individual asset’s VIU when the asset only has a value due to its relationship with other assets. Eg – a
machine in a factory works in conjunction with the rest of the assets in the
factory.
▸ In such cases the VIU of the asset must be determined in the context of the asset’s cash-generating unit (CGU).
Impairment loss – CGU’s
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Cash-generating units (CGUs) and impairment testing
• In AASB 136.6, a Cash-generating unit (CGU) is defined as:
‘the smallest identifiable group of assets that generates cash
inflows that are largely independent of the cash inflows from
other assets or groups of assets.’
• Note: if the entity has corporate assets (such as a head office) – they
should be allocated across CGUs on a reasonable and consistent basis
if possible.
• Recall that the impairment test involves determining whether the
carrying amount of a cash generating unit exceeds its recoverable
amount. If the CA > RA, an impairment loss must be recognised.
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Activity
• Krisps Chips Ltd owns a chocolate factory, which is considered to be a CGU.
• At 30 June 2016, the carrying amount of all of the assets of the CGU amount
to $15,000,000, the FVLCTS is $14,000,000 and the VIU is $14,200,000.
Required:
Determine the impairment loss for this cash generating unit.
Carrying amount of CGU = $15,000,000
Recoverable amount of CGU (highest of FVLCTS and VIU) = $14,200,000
Carrying amount is overstated, and an impairment loss of $800,000 exists.
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Review Question –
Accounting for an impairment losses for a CGU
26
Loftus et al (Chapter 7):
• Comprehension question 10:
How are impairment losses accounted for in relation to
cash-generating units?
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▸ Where an impairment loss arises in a CGU, AASB 136.104-105 states
that the loss is allocated as follows:
• First, to reduce the carrying amount of the CGU’s goodwill (if any);
• Then, to the other assets of the CGU on a pro rata basis.
▸ In allocating the impairment loss in accordance with the requirements
above, the carrying amount of an individual asset within the CGU cannot
be reduced below the highest of:
• Fair value less costs to sell (if determinable);
• Value in use (if determinable); or
• Zero.
Impairment loss allocations - CGU’s
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Example – impairment loss for a CGU with no
goodwill: Amazed Ltd has identified an impairment loss of $20,000 re. one of its CGUs.
The CGU consists of the following assets (stated at current carrying amounts):
• Inventory 20,000
• Cash 33,000
• Equipment 300,000 (Cost: $400,000 less accum depreciation $100,000)
• Land 100,000
Assets are measured using the cost model. The FVLCTS of the land is $97,000.
Required:
Allocate the impairment loss against the assets of the CGU, and prepare the journal entry
to record the impairment loss. 28
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Answer:
CA Pro-rata Impairment loss
allocated
Adjusted CA
Equipment 300,000 3/4 15,000 285,000
Land 100,000 1/4 5,000 95,000
400,000 20,000
As the FVLCTS of the land is $97,000, the maximum impairment loss that can be allocated to it is $3,000. The remaining $2,000 must be allocated to the equipment (bringing the allocation to equipment to $17,000).
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Cash and inventory cannot be impaired below their current carrying amounts. The $20,000 impairment loss needs to be allocated on a pro-rata basis between equipment and land.
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Answer:
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▸ The journal entry to record the impairment loss would be:
Dr Impairment loss 20 000
Cr Accum. impairment losses - land 3 000
Cr Accum. dep’n and impairment losses - equipment 17 000
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Amazed Ltd has identified an impairment loss of $40,000 on one of its CGUs.
The CGU consists of the following assets (stated at current carrying amounts):
• Buildings 500,000
• Equipment 300,000
• Land 250,000
• Goodwill 50,000
Assets are measured using the cost model. The FVLCTS of the building is $495,000.
Required: Allocate the impairment loss against the assets of the CGU, and prepare the journal entry
to record the impairment loss.
Example – impairment loss for a CGU with
goodwill:
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Answer:
CA Pro-rata Impairment loss
allocated
Adjusted CA
Goodwill 50,000 40,000 10,000
Buildings 500,000 0 500,000
Equipment 300,000 0 300,000
Land 250,000 0 250,000
1,050,000 40,000
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Answer:
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▸ The journal entry to record the impairment loss would be:
Dr Impairment loss 40 000
Cr Accum. impairment losses - goodwill 40 000
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Amazed Ltd has identified an impairment loss of $60,000 on one of its CGUs.
The CGU consists of the following assets (stated at current carrying amounts):
• Buildings 500,000
• Equipment 300,000
• Land 250,000
• Goodwill 50,000
Assets are measured using the cost model. The FVLCTS of the building is $495,000.
Required: Allocate the impairment loss against the assets of the CGU, and prepare the journal entry
to record the impairment loss.
Example – impairment loss for a CGU with
goodwill:
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Answer:
CA Pro-rata Impairment loss
allocated
Adjusted CA
Goodwill 50,000 50,000 0
Building 500,000 500/1,050 4,762 495,238
Equipment 300,000 300/1,050 2,857 297,143
Land 250,000 250/1,050 2,381 247,619
1,050,000 60,000
As the FVLCTS of the building is $495,000 (which is less than the adjusted carrying amount calculated above), none of the impairment loss is required to be reallocated to other assets of the CGU.
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Answer:
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▸ The journal entry to record the impairment loss would be:
Dr Impairment loss 60 000
Cr Accum. impairment losses - goodwill 50 000
Cr Accum. dep’n and impairment losses - buildings 4 762
Cr Accum. dep’n and impairment losses - equipment 2 857
Cr Accum. Impairment losses - land 2 381
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Amazed Ltd has identified an impairment loss of $60,000 on one of its CGUs.
The CGU consists of the following assets (stated at current carrying amounts):
• Building 500,000
• Equipment 300,000
• Land 250,000
• Goodwill 50,000
Assets are measured using the cost model. The FVLCTS of the building is $497,000.
Required: Allocate the impairment loss against the assets of the CGU, and prepare the journal entry
to record the impairment loss.
Example – impairment loss for a CGU with
goodwill:
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Answer:
CA Pro-rata Impairment loss
allocated
Adjusted CA
Goodwill 50,000 50,000 0
Building 500,000 500/1,050 4,762 495,238
Equipment 300,000 300/1,050 2,857 297,143
Land 250,000 250/1,050 2,381 247,619
1,050,000 60,000
As the FVLCTS of the building is $497,000 (which is more than the adjusted carrying amount calculated above), $1,762 of the impairment loss is required to be reallocated to other assets of the CGU.
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Answer:
Adjusted CA Pro-rata Impairment loss
allocated
Total
impairment
loss allocated
Goodwill 50,000
Building 3,000
Equipment 297,143 297,143 / 544,762 961 3,818
Land 247,619 247,619 / 544,762 801 3,182
544,762 1,762 60,000
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Answer:
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▸ The journal entry to record the impairment loss would be:
Dr Impairment loss 60 000
Cr Accum. impairment losses - goodwill 50 000
Cr Accum. dep’n and impairment losses - buildings 3 000
Cr Accum. dep’n and impairment losses - equipment 3 818
Cr Accum. Impairment losses - land 3 182
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Review Question –
Impairment loss of a CGU
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Loftus et al (Chapter 7):
• Application and analysis exercise 7.9, 7.10
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Review Question –
Impairment loss of a CGU – with Corporate Assets
42
Loftus et al (Chapter 7):
• Application and analysis exercise 7.15
Hint: refer to page 190-191 of your
text re what to do when there are
corporate assets.
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Subsequent reversals of impairment losses
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Review Question –
Reversing prior impairment losses
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Loftus et al (Chapter 7):
• Comprehension question 16:
What are the steps involved in reversing an
impairment loss?
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▸ Recognised impairment losses are reassessed annually.
▸ Indicators for reversals of impairment losses are the same as those
used for initially recognising a loss.
▸ Ability to recognise a reversal of an impairment loss and the accounting
for that reversal is dependent on whether the reversal relates to an
individual asset, a CGU, or goodwill.
▸ Previously recognised impairment losses in relation to individual
assets are able to be reversed. The new carrying cannot be higher than
the carrying amount that would have been determined had no
impairment loss been previously recognised.
Reversal of impairment losses
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Reversing impairment losses for individual assets
Cost model:
▸ The journal entry to record the reversal of the impairment loss would be:
Dr Accum dep’n & impairment losses $... Cr Income - impairment loss reversal $...
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Example – impairment loss for an individual
asset (accounted for under the cost model)
and subsequent reversal of impairment loss:
▸ An item of plant has a carrying amount of $500 (cost of $800 less accumulated depreciation of $300) and a recoverable amount of $420 on
30 June 2016.
▸ The journal entry to record the impairment loss would be:
Dr Impairment loss 80
Cr Accum. dep’n and impairment losses - plant 80
▸ After recognising the impairment loss of $80 at 30 June 2016, depreciation is adjusted from $100 to $84 p.a. from 1 July 2016.
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Continued...
▸ At 30 June 2017, the recoverable amount of the plant was calculated to be $410.
▸ Before considering the above, the carrying amount of the plant at 30 June 2017 would be:
Cost $800
Less: accum. dep’n and impairment losses ($464) ($300 + $80 + $84)
$336
▸ So if the recoverable amount of the plant is $410, and the carrying amount before reversing any impairment loss is $336, can we simply recognise an impairment
loss reversal of $74, and increase the plant’s carrying amount to $410?
No. Before recognising any impairment loss reversals, we need to make sure that the
new carrying is not higher than the carrying amount that would have been determined
had no impairment loss been previously recognised.
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Continued...
▸ If the plant had not been impaired in 2016, its carrying amount at 30 June 2017 would be:
Cost $800
Less: accum. dep’n and impairment losses ($400)
$400
▸ This means that the maximum impairment loss reversal that we can recognise for the plant is $64 ($400 - $336). So we can’t increase the asset up to $410, we can only
increase it up to $400.
▸ The journal entry to record this impairment loss reversal would be:
DR Accum dep’n & impairment losses – plant $64
CR Income – impairment loss reversal $64
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Review Question –
Impairment loss and reversal for an individual asset
50
Loftus et al (Chapter 7):
• Application and analysis exercise 7.6
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▸ Impairment losses relating to goodwill cannot be reversed.
▸ The reversal of any impairment loss relating to a CGU is allocated across the assets of the CGU (excluding goodwill) on a pro rata basis.
▸ The reversals for specific assets will be accounted for in the same way as outlined for individual assets.
▸ When allocating the reversal to assets of the CGU, the carrying amount of any asset within the CGU cannot be increased above the lower of:
• Its recoverable amount (if determinable); and
• The carrying amount that would have been determined (net of amortisation or
depreciation) had no impairment loss been recognised for the asset in prior periods.
▸ Any excess from the above situation is allocated across the remaining assets in the CGU on a pro rata basis.
Reversing impairment losses for CGUs
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Review Question –
Impairment loss of a CGU, and subsequent reversal
of impairment loss
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Loftus et al (Chapter 7):
• Application and analysis exercise 7.12, 7.16
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▸ Understand what you are required to do – for example: conduct impairment testing, account for impairment losses or reversal of impairment losses.
▸ Understand what’s involved in the scenario presented – for example, are you accounting for:
• Impairment for a single asset?
o Is the asset measured using the cost or revaluation model?
• Impairment for a cash generating unit?
o Does the cash generating unit have any goodwill?
o Are there assets that impairment losses should not be allocated to?
o Do we have FVLCTS or VIU details for any of the CGU’s assets?
• Reversal of prior impairment losses?
How to approach activities re
accounting for impairment?
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