Impairment Loss Assets is AASB 136

Question: Discuss about the Report for Impairment Loss for Assets is AASB 136. Answer: The standard which describes the impairment of assets is AASB 136 as per the Australian Accounting Standards which is similar to the International Accounting Standard, IAS 36. The main objective of this standard is to enable corporates with prescribed methodologies to conduct a test with regards impairment of its assets thus ensures that the assets are not being recorded at greater than its recoverable value. If an asset is recognized at a value which is greater than the actual recoverable amount then the difference of the carrying and the recoverable amount is termed as impairment loss. The said standard also mentions about the various circumstances in which the impairment loss is to be reversed by the corporation and the requisite disclosures to be made (Australian Accounting Standards Board, 2009). The said standard is applicable to all types of assets which are disclosed in the balance sheet of the company but for the below mentioned category of assets simply because the separate standards spelt out for these assets contains provisions for their recognition and measurement.. They are as follows: Stock (raw materials, finished goods and WIP) (AASB 102) Assets that are constructed (AASB 111) Deferred tax assets (AASB 112) Employee Benefits (AASB 119) Financial Assets covered under standard AASB 139 Properties held as investments and agricultural properties which are held at its fair value (AASB 140 and AASB 141) Assets arising out of discontinued operations of the entity or are held for disposal (AASB 5) Therefore whenever a company identifies situations which incline towards the fact that the value of its assets are diminishing, it is then that the company records the impairment loss (Carrying Amount Recoverable Amount) as in its profit and loss statement and deducts the amount from the respective asset as accumulated impairment. Thus until and unless the company faces such factors which prompts it to impair its assets, impairment does not take place. Factors may be internal as well as external in nature. Factors such as a negative change in the market interest rates, instability in political, economic and legal system, the haulage amount of total assets of the corporation is greater than market capitalisation or declination of the market value of an asset significantly are external factors. Whereas internal factors comprises of situations such as a possible obsolescence, significant restructuring or any indication which reflects that the performance of the entity has deteriorated. So as to enable to know the amount by which an asset has been impaired it is very important to understand certain terms. Carrying Amount: The value at which an asset is presently recorded in the balance sheet of the company before impairment is known as its carrying amount. Recoverable Amount: The higher of an assets or Cash Generating Units fair value less cost of sale and value in use is termed as recoverable amount. Cash Generating Unit: It is a unit of a company that comprises of a number of assets which are independent of generating revenue. The CGU comes into picture when the impairment of individual asset is not possible to do. In such scenario one has to conduct the impairment of the CGU to which the asset belongs. Value in Use: The NPV of the cash flows that is likely to be generated from the asset is coined as value in use (Bond et.al. 2016). For example if there are indications of impairment of an asset , say plant and machinery, then the recoverable amount is first and foremost calculated. The fair value less its selling expenses and the NPV of its future cash flow whichever is higher. Then the difference between the two i.e. CA- RA is termed as impairment loss and is recorded as an operational expense in the profit and loss account. The amount is deducted from Plant and machinery mentioned in the balance sheet. It is equally true that if an asset is subject to impairment, the same is also subject to such reversal also. It is applicable for the individual asset as well as the CGU. Goodwill is not a part of the said reversal as per the standard. Thus at the end of each accounting period a test is conducted to check if the impaired assets no longer required to be stated at such a devalued amount. If the situation is so then the amount is written back but only to the scope the carrying amount of the asset would have been had it not been subjected to impairment (Henderson et.al. 2014). The standard further requires the entities to report about such impairment in there notes to accounts as well. Disclosures which are mandatory as per AASB 136 are as under: Every company which ha impaired its assets or a CGU shall disclose the following: The amount by which the asset is impaired or reversed and recorded in the income statement of that reporting phase and the line item(s) which is a part of the statement of comprehensive income in which such impairment is also recorded. The amount of impairment loss on the revalued assets which has been recorded in the other comprehensive income The amount of impairment loss reversed on revalued assets and recorded in the other comprehensive income (Buschhuter, Striegel, 2011). If an entity does segmental reporting as per AASB 8, then it has to disclose the amount of impairment loss or reversal which has been recorded in the income statement and the other comprehensive income For any significant impairment loss or reversal the entity will have to disclose the circumstances which led to such impairment, the amount, nature of the said asset, full description of the cash generating unit being impaired. Lastly impairment with regards goodwill is to be disclosed separately (Dagwell et.al. 2012). Thus on a concluding note, it is very apparent that the said standard is of utmost importance as it enables the entity to reveal the actual position of its assets. This in turn reflects the liquidity position and the ability of the entity to pay off its debts. Its importance is all the more perceived after the various economic crisis that has occurred in the past due to incorrect reporting of the assets of the company. Thus AASB 136 is prescribed to ensure that the balance sheet portrays a correct picture of the position of the entity rather than a rosy one. References: Australian Accounting Standards Board, (2009), Impairment of Assets- AASB 136, Available at https://www.aasb.gov.au/admin/file/content105/c9/AASB136_07-04_COMPjun09_01-10.pdf (Accessed 17th September 2016) Bond, D., Govendir, B., Wells, P., (2016), An evaluation of asset impairment decision by Australian firms and whether this was impacted by AASB 136, Available at https://www.uts.edu.au/sites/default/files/ACCDG_Aut15Sem_D.Bond_.pdf (Accessed 17th September 2016) Buschhuter, M., Striegel, A., (2011), IAS36- Impairment of Assets, Gabler: USA Dagwell, R., Wines, G., Lambert, C., (2012), Corporate Accounting in Australia, Pearson: Australia Henderson, S., Peirson, G., Herbohn, K., Howieson, B., (2014), Issues in Financial Accounting, Pearson: Australia