Reversal of impairment loss for the cash - MyAssignmenthelp.com

Question: Discuss about the Reversal of impairment loss for the cash. Answer: An asset, as per the AASB 136, is known to be impaired asset of the concerned company if the market price of that particular asset is less than the recorded value of the same in the balance sheet of the company in concern. The written down assets are considered as fixed assets since the span of time of the carrying value of the same is larger for impairment purpose (Linnenluecke et al. 2015). However, when the carrying amount of an asset is greater than the recoverable value of the same, then the asset is considered impaired. It falls, as a responsibility of a company to measure the assets recoverable amount if there exists, any indication of impairment in the asset. For the purpose of the same, assessment needs to be carried out by the company at the end of each period of reporting and the assets recoverable amount needs to be estimated if impairment indication exists for the same (Bond, Govendir and Wells 2016). The company needs to test the intangible assets with indefinite useful life or those tangible assets, which are not available, yet for impairment use, irrespective of the presence of any indication regarding impairment. The company can carry out impairment at any point of time in an accounting year, given that the company does the same consistently at that time of each year. To test the impairment of an asset, several indications can be used (Rennekamp, Rupar and Seybert 2014). Of those, the external sources include (a) The assets market value which has significantly decreased more than what was estimated (b) The return rate or interest rate of the market, which had gone up within a particular period, which is expected to influence the discount rate the company, uses to calculate the asset value (c) The considerable changes taken place which are expected to have negative implications for the company. Further, the internal sources, which provide indications for - (a) Evidences of obs olescence and physical damage of assets which are available (b) The changes having considerably adverse effects on the company: The changes, which adversely affect the company, include the plans for asset disposal before expected life, idle assets, restructuring or discontinuation plans for the operations including the assets (Guthrie and Pang 2013). The assets recoverable amount is usually the higher one among the value in use and the fair value less the cost of disposal. For cash generation also the same theory is applicable. The assets value in use is also estimated through: (a) The possible time variations or the future cash flow variations which are expected to occur (b) Estimations of future flow of cash expected to be generated by the concerned company (c) The cost of uncertainty, which is present inherently in the assets (d) Exogenous factors like liquidity in the market, market participation and future cash flows. The future flow of cash, in its turn includes the following: (a) Cash flows that are to be pair or received for the disposal of assets (b) The cash inflow estimations for those incurred for cash inflow generation from the continuous usage of assets, which can be attributed to the assets on a consistent basis (Ji 2013). The Para 66-108, provides guidelines regarding the identification requirement of the cash generating unit, which includes the asset and the carrying amount determination and also the impairment loss recognition for the CGU and the goodwill. In presence of indication of the impairment of the concerned asset, the individual assets recoverable amount needs to be estimated by the company. In case the estimation of the recoverable amount of the asset becomes impossible, then the company needs to estimate the CGUs recoverable amount (Bond, Govendir and Wells 2016). The smallest asset group, involving the assets and cash flow generation, which is not dependant on the inflows of cash from any other asset or asset groups is known as the CGU. These units need to be recognized from time to time on a continuous basis, for same or similar types of asset in the absence of any justified changes. The CGUs recoverable amount is the higher one among the value in use and the fair value less the cost of disposal. The CGUs carrying amount is determined consistently in the same manner as that of the determination of the amount for the CGU (Morris et al. 2013). While testing the CGU or CGU group for impairment purposes, the loss, which arises out of the impairment, is allocated to the carrying amount of the goodwill first. After the allocation of the loss, the remaining loss is distributed to the other assets, which are present under the CGU, on each assets carrying amount under the CGU, in the pro rata basis. Under this estimation process, however, the assets carrying amount is not decreased under higher between the recoverable amount of the asset and zero. The allocation process for the loss arising out of impairment is same for CGU group and a single CGU. Reversal of the impairment loss for CGU must be allocated to assets under the unit without considering the goodwill on pro-rata basis depended on the carrying amount of the asset. The increase in carrying amount must be treated as the reversal for the impairment losses for each of the assets and are recognized immediately under the profit and loss account (Hull and White 2014). While allocating the reversal of impairment loss for the CGU, the carrying amount of the asset must not increased more than the lower of (i) the recoverable amount, if can be determined and (ii) carrying amount that would have determined after taking into consideration the depreciation or amortization had not been impaired and the impairment loss were not recognized for assets in previous period. Further, the amount involved in reversal of impairment loss shall be allocated for the assets on pro-rata basis to other assets under the unit without considering the goodwill. References 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. Bond, D., Govendir, B. and Wells, P., 2016. An evaluation of asset impairment decisions by Australian firms and whether this was impacted by AASB 136. Guthrie, J. and Pang, T.T., 2013. Disclosure of Goodwill Impairment under AASB 136 from 20052010.Australian Accounting Review,23(3), pp.216-231. Hull, J. and White, A., 2014. Valuing derivatives: Funding value adjustments and fair value.Financial Analysts Journal,70(3), pp.46-56. Ji, K., 2013. Better late than never, the timing of goodwill impairment testing in Australia.Australian Accounting Review,23(4), pp.369-379. Linnenluecke, M.K., Birt, J., Lyon, J. and Sidhu, B.K., 2015. Planetary boundaries: implications for asset impairment.Accounting Finance,55(4), pp.911-929. Morris, R.D., Gray, S.J., Pickering, J. and Aisbitt, S., 2013. Preparers' perceptions of the costs and benefits of IFRS: Evidence from Australia's implementation experience.Accounting Horizons,28(1), pp.143-173. Rennekamp, K., Rupar, K.K. and Seybert, N., 2014. Impaired judgment: The effects of asset impairment reversibility and cognitive dissonance on future investment.The Accounting Review,90(2), pp.739-759.