Recognition And Measurement Of An Impairment †Free Samples

Question: Discuss about the Recognition And Measurement Of An Impairment Loss For An Individual Asset. Answer: Introduction The recognition and measurement of impairment loss for an individual asset is governed by Accounting Standard AASB 136 Impairment of Assets. The objective is to ensure that the entity is not carrying forward its assets at a value greater than its market value. Generally impairment loss on assets is recognized at the end of a financial year or on the occurrence of uncertain events. Impairment loss is recognized and measured on all assets except inventories, deferred tax assets, assets arising from construction contracts, assets arising from employee benefits, etc. Recognizing An Asset That May Be Impaired: An impairment loss on any asset is recognized when its recoverable amount is less than its carrying amount (Para 59, AASB 136 compiled). Impairment loss is generally recognized in the profit and loss account. However, if impairment of an asset is done which was revalued earlier then the impairment loss is directly adjusted against the revaluation reserve (Para 61, AASB 136 compiled). There are both external and internal factors which causes for recognition of impairment loss on an individual asset. Some of these factors are (Para 12, AASB 136 compiled): There is an unexpected fall in the market value of an asset. Any economical, technology, market or political change has taken place which would affect the organisation adversely. For eg: A company bought a machine one year back at $ 1,00,000. Currently a new machine emerged in the market with latest technology and would perform the same work with less power consumption and also has a greater useful life. So the machine owned by the company would fetch a very low value in the market due to technological advancement. Therefore an impairment loss is to be recognized. An increase in market interest rate would cause a reduction of the value in use of the asset, and hence requirement of recognition loss will arise. Certain evidence comes to the knowledge of management regarding obsolescence or physical damage of an asset. For eg: Due to processing of defective units certain parts of the machine got damaged before its expected life. Discontinuation of operations, sudden shutdown of the entity or reassessing the useful life of an asset. For eg: Previously accounting was being done assessing indefinite useful life of an asset, however later it was discovered that the asset is not having a useful life greater that ten years. Therefore, an impairment loss is to be recognized based on this change. Certain circumstances are observed indicating that the economic performance of the asset will be worse. For eg: After installation of the asset it was later discovered through an internal report that the net cash flows that the asset will generate is 30% less than budgeted. Measurement Of Impairment Loss: For measurement of impairment loss on any asset we are required to calculate its recoverable value i.e. Fair Value of the asset less costs directly attributable to such sell. Value in use of the asset. Any difference between higher of the above recoverable value and the book value as per the books of accounts is recognized as impairment loss. Fair Value Less Costs To Sell: Fair value of an asset is determined on the basis of arms length transaction entered into by a binding sale agreement. Any functional differences are adjusted in the arms length price to determine the fair market value less costs to sell (Para 25, AASB 136 compiled). In case there is no such contracted transaction but the assets are easily sold and purchased in an active market then such market price will be deemed to be the fair market value. Any costs related to disposal should be adjusted against such market price (Para 26, AASB 136 compiled). Sometimes it may be that there is no contract between two parties for purchase or sell of an asset and also there is no active market for such product then the management can determine the fair value on the basis of best information available to him. Costs which are directly attributable to sale and have been paid are adjusted against the fair value of the asset. Basically all costs incurred for bringing the asset in condition for sale is reduced against the fair market value. Value In Use: Value in use is determined on the basis of the expected cash flows that an entity will generate during the useful life of an asset. It focuses on estimating the future cash flows and discounting it at an appropriate required rate of return. The cash flows should be based on reasonable and supportable assumption and should be reviewed periodically. The cash flows should be estimated covering all foreseeable economic conditions. The cash flows should be based on present capacity of the entity and any future plans of restructuring will have no significance. The discounting rate of return used to determine the value in use of an individual asset shall be a pre tax rate and should consider time value of money. The rate of return should be a summation of the return required by investor from any other risk free investment and risk premium attached with investment made in such asset. The entity may use asset specific rate of return also if such rate is available in the market. Impairment Test For Intangible Assets(Para 24, AASB 136 Compiled): As discussed impairment loss is recognized only when an assets recoverable amount exceeds its carrying amount. An impairment test is to be performed annually in respect of intangible assets having indefinite useful life. The impairment test is required to be performed at the same time every year. These tests are required to be performed more frequently if the changes in events or circumstances suggest impairment of an asset. The entity may also use previous years impairment calculation if following conditions are satisfied: Where the recoverable amount calculated in previous year was greater than carrying amount by a substantial margin. Likelihood of calculated recoverable amount to be greater than carrying amount. The assets and liabilities in the cash generating units remain same. References IAS 36 Impairment of Assets. Iasplus.com. N.p., 2017. Web. 24 May 2017. Bond, David, Brett Gavinder, and Peter Wells. 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