Reversal Of Impairment Loss For Goodwill

Implementation of the Impairment Test

With the ramified economic changes, every organization needs to implement the implement the impairment test to identify the true and faire view of the assets and liabilities recorded in the books of accounts of company. It is analyzed that every company needs to follow the proper impairment test to identify the fair view of the assets and liabilities recorded. As per the AASB 136, impairment test is implemented on periodically basis to revaluate the business assets and liability of company. The Reversal of impairment loss for Goodwill is determined only after computing the carrying value of the assets, recoverable values and impairment loss charged from the cash generating units of the organization.

The impairment loss is charged on the profit and loss account f company as per the accounting standards AASB 136. The impairment loss could be described as amount which could be computed by deducting recognized value of the assets from the carrying value of the assets (AASB 136. 2007).

The impairment loss is recognized and revenue expenditure which is charged from the profit and loss account. As per the international accounting standards, assets should be revalued on periodical basis so that it could showcase the true and fair view of the recorded assets and liabilities in the books of accounts of company (Yoo, Choi, and Pae, 2018). However, before computing the impairment loss, company needs to compute the carrying value of its assets. It could be computed by using the following formula (AASB 136. 2007).

Impai Carrying amount= [higher of fair value-expenses or value in use]

If in case, carrying amount is lower than its recoverable value then the differences will be counted as impairment loss charged from the profit and loss account. Firstly, it will charged from the goodwill and rest impairment loss would be deducted from the cash generating units of the organization (Hu, Percy, and Yao, 2015).

With the changes in time, there might be possible situation when the value of the business increased due to the positive business factors. The reversal of the impairment loss of the cash generating units could be reversed but organization needs to comply with the all the applicable rules and regulations given under IAS 136.  It is analyzed that reversal of the impairment loss for goodwill is done only in certain circumstances.  It is considered that if the recoverable value of the assets exceeds the carrying amount then the company which have recognized impairment loss previously will go for its reversal (Bepari, & Mollik, 2015). It is ideally find when company has created value on its investment and strengthen its overall brand image. This will not only add value the goodwill value but also fictitiously increase the profit and loss. As per the IAS 136, impairment of the assets would require an entity to reversal of the impairment loss except for goodwill for which it has impaired its assets. The impairment loss for goodwill cannot be reversed (Brigham, and Ehrhardt, 2013).

It is analyzed that there are several list of the indicators which could mirror the list of the factors for indenting impairment with main two expectations. First is when the carrying amount of the recorded assets in the reporting financial statement is more than its market capitalization. Second is that when entity changed the estimation of the impairment which it used previously while recording the impairment loss (Dinh,  Kang, Morris, and Schultze, 2018). In simple words, it could be analyzed when there is improvement in the assets opposed to the reversal being the result of the undertaken passage of time.  However, while reversal of the impairment test; company needs to make proper disclosure of the impairment loss which has been reversed in its books of account. There should be complete details of the charging the impairment loss reversal which company needs to disclose in its books of accounts (AASB 136, 2007).

Identification of Impairment and Factors

IAS 136 requires extensive disclosure in respect of the impairment tests be performed and impaired. In case of Reversal of impairment loss for Goodwill, the disclosure is more extensive. However, there are following information should be disclosed in case of reversal of impairment loss for Goodwill in the annual report of company (Zhuang, 2016).

The amount of capital Reversed of impairment loss for Goodwill and added to the particular assets value (Dagwell, Wines, and Lambert, 2011) such as The amount of goodwill, CGU values and reversal value set off with the same, the key assumptions and estimation which have been applied by entity while rreversal of impairment loss for Goodwill (Huikku, Mouritsen, & Silvola, 2017), the impairment calculation and recorded reversal in the cash generating units.  It could be inferred that while reversal of the impairment test; company needs to make proper disclosure of the impairment loss which has been reversed in its books of account so that it could reveals the true and fair view of the recorded assets and liabilities (Drenik,  Pereira,. and Perez, 2018).

Conclusion

After analysing all the information about Reversal of impairment loss for Goodwill, it could be inferred that a company could never do Reversal of impairment loss for Goodwill. It is analyzed that if the Reversal of impairment loss for other cash generating units is given then it could be possible. In addition to this, in case of Reversal of impairment loss for cash generating units is done then it would be done in different aspects such as when the estimation is manipulated and second is related to when the recognized value of the impairment assets is increased through the time. Now in the end, after analyzing the case, it could be inferred that key entity should make the proper key disclosure in its books of accounts as per the IAS 136 to make business more transparent to its stakeholders

Gali Ltd has determined that its fine china division is a CGU

Asset                                             Carrying Amount

Land 997700

Patent 229000

Building 144000

Inventory 62000

Goodwill 51000

$ 1 483700

Note:- All the impairment loss would allocated to individual assets in different proportion to the carrying amount. Firstly, impairment loss would be writing off from the goodwill and then will be deducted from the other cash generating units.

Carrying amount of assets = $1483700

Recoverable amount = $1330700

Impairment loss = $113000

Firstly impairment loss would be deducted from the Goodwill= 113000-51000= $62000

	Carrying	Proportion	Allocation	Net Carrying
		Amount		of Loss (62000	Amount
	Land	$997700	997/143.2(69%)	43201	956498
	Patent	229000	229/143.2 (16%)	9896.1	21903.6
	Building	144000	144/143.2(10%)	6222.9	137777.1
	Inventory	62000	62/143.2 (4.3%)	2679.3	59321
		$1432700		62000	1372700

It is assumed that inventory is carried at lower cost and net realisable value of impairment loss but still would be taken for the inventory loss.

It is analyzed that fair value of the cost of land is $960579 and it cannot be reduced below this.  The fair value less therefore, the maximum impairment loss allocable to land would be $ 37121.

The extra $ 6080.645 would be allocated to other assets.

Carrying

Proportion

Allocation

Net Carrying

Impairment loss Dr 113000

Goodwill account Cr $ 51000

Land Cr $ 37121

Patent (9896+3201.075) Cr $ 13097

Building (6222+2012.9) Cr $ 8234.9

Inventory Cr $866.66

(Allocation of impairment loss)

References

AASB 136. (2007). Impairment of Assets. [Online]. Available at: https://www.aasb.gov.au/admin/file/content105/c9/AASB136_07-04_COMPapr07_07-07.pdf [Accessed on: 20 January 2018].

Bepari, M. K., and Mollik, A. T. (2015). Effect of audit quality and accounting and finance backgrounds of audit committee members on firms’ compliance with IFRS for goodwill impairment testing. Journal of Applied Accounting Research, 16(2), 196-220.

Brigham, E.F. and Ehrhardt, M.C., (2013). Financial management: Theory & practice. 4^th ed, USA: Engage Learning.

Dagwell, R., Wines, G., and Lambert, C. (2011). Corporate accounting in Australia. 2^nd, Australia: Pearson Higher Education AU.

Dinh, T., Kang, H., Morris, R.D. and Schultze, W., (2018). Evolution of intangible asset accounting: Evidence from Australia. Journal of International Financial Management & Accounting. 66(1), pp.29-44

Drenik, A., Pereira, G. and Perez, D.J.,(2018). Wealth Redistribution after Exchange Rate Devaluations. In AEA Papers and Proceedings 108(3), pp. 552-56.

Hu, F., Percy, M. and Yao, D., (2015). Asset revaluations and earnings management: Evidence from Australian companies. Corporate Ownership and Control, 13(1), pp.930-939.

Huikku, J., Mouritsen, J., and Silvola, H. (2017). Relative reliability and the recognizable firm: Calculating goodwill impairment value. Accounting, Organizations and Society, 56, 68-83.

Yoo, C.Y., Choi, T.H. and Pae, J.,( 2018). Demand for fair value accounting: The case of the asset revaluation boom in Korea during the global financial crisis. Journal of Business Finance & Accounting, 45(1-2), pp.92-114.

Zhuang, Z., (2016). Discussion of ‘An evaluation of asset impairments by Australian firms and whether they were impacted by AASB 136’. Accounting & Finance, 56(1), pp.289-294.