Same Ratio Of Allocation Of Impairment Loss -Myassignmenthelp.Com

Question: Discuss About The Same Ratio Of Allocation Of Impairment Loss? Answer: Introducation Accounting of Impairment of assets come under the purview of Accounting Standard 136 (AASB 136). This accounting standard made under section 334 of the corporations Act 2001. AASB 136 recognises and measures the impairment loss of non-financial assets those not covered under in any AASBs. Further this standard will also specify the methods of performing impairment tests, timings of conducting indication test as well as combination of assets under tests. Further AASB 136 also prescribes the method of reporting losses of impairment in financial reports, reversal conditions of impairment losses and last but not the least disclosure methods and the requirements (AASB-136, 2007). The main purpose of this standard is to assure that entities cannot carry assets more than the recoverable amount. Entities are required to impaired assets and charge impairment loss in the books of accounts. It includes an exception which states that if the carrying amount is more than the amount to get recovered through use or sale of asset, then in that case entities can carry assets more than the recoverable amount in their books (Paragraph 1). This standard is applicable to those entities which prepares books of accounts in accordance with Corporation Act 2001 (AASB-136, 2007). This standard applicable to non-financial assets such as buildings, furniture, fixtures, subsidiaries, associates, joint ventures, equipment, goodwill, machineries etc. (AASB-136, 2007). Further Paragraph 2 of AASB 136 states that the applicability of this standard does not extend to book impairment loss of inventories, construction contracts assets, deferred tax assets, investment property valuing under AASB 140 and other assets which cover its valuation under AASB 119, AASB 139, AASB 5 and AASB 141 etc. (AASB-136, 2007). According to paragraph 9 of AASB 136, every entity shall assess at each reporting date the indication of asset impairment and that indication can be gathered either through outer sources or inner sources of information. If any sort of indication exists, the recoverable amount will be estimated by the entity for that particular asset. Apart from indication, entities can also test for impairment to those intangible assets having infinite life plus those which are not available for use and for goodwill also on a yearly basis by comparing recoverable amount with the carrying amount (AASB-136, 2007). Now the calculation of recoverable amount is stated in paragraph 19-57 of AASB 136 which states that recoverable amount of asset or cash generating unit is higher of the two: fair value minus cost to sell and the value in use (AASB-136, 2007). Paragraph 25-29 of AASB 136 describes Fair value minus cost to sell. It means the value obtainable at the arms length price at the time of sale of cash generating units or assets minus disposal costs if any (AASB-136, 2007). Value in use means proposed Present value of cash flows derived from cash generating units or assets. If in case any amount (that is either value in use or fair value less cost to sell) is higher than carrying amount of assets or cash generating units then the other amount does not need to calculate because assets or cash generating units does not gets impaired. If it is not possible to estimate recoverable amount, then in such circumstances AASB 136 requires the arbitrary allocation of impairment losses to the assets or cash generating units excluding goodwill (AASB-136, 2007). After the above estimation, asset is impaired and the impairment loss is computed. The formula for Impairment loss = carrying amount less recoverable amount (AASB-136, 2007) Carrying amount means the net amount of assets or cash generating units after deduction of accumulated depreciation and accumulated impairment loss amount. According to Paragraph 59-64 of AASB 136, measurement and the recognition of impairment loss for individual assets is stated whereas under paragraph 65-108 of AASB 136, measurement and the recognition of impairment loss for the cash generating units or goodwill it is described (AASB-136, 2007). Paragraph 60 of AASB 136 Impairment loss must be recognised instantly in the statement of profit and loss account for non-revalued assets (AASB-136, 2007). After the recognition of impairment loss, the depreciation amount will be modified as per the revised carrying amount of assets. Cash Generating Units According to Paragraph 6 of AASB 136, Cash generating unit means group of assets that produces cash inflows which are not related to the cash inflows of other assets. Cash generating units must be regularly identified for the same assets unless otherwise specified. If after conducting test indication of impairment, recoverable amount shall be computed for the cash generating units only if recoverable amount of individual assets cannot be estimated. Recoverable amount for cash generating units shall be calculated same as per the calculation of individual assets. Paragraph 104 of AASB 136 describes the impairment loss for a cash generating units. As discussed above, impairment loss of cash generating units shall be recognised only when carrying amount of group of assets are more than recoverable amount of group of assets (AASB-136, 2007). For cash generating units, amount of impairment loss shall be apportioned in the following order to reduce the carrying amount: Firstly, reduce the goodwill carrying amount which was earlier allocated to the cash generating units, and Secondly, reduce the carrying amount of other assets in a group on the basis of pro-rata. Reversal of an impairment loss for a Cash generating units is described under Paragraph 122-123 of AASB 136. Reversal amount of impairment loss shall be apportioned in the same ratio of allocation of impairment loss (AASB-136, 2007). Disclosure requirements of this standard: This standard discloses following items: Amount of impairment loss Reversal of Amount of impairment losss References AASB 136. (2007). Impairment of assets. retrieved on 18 September 2017 from https://www.aasb.gov.au/admin/file/content105/c9/AASB136_07-04_COMPapr07_07-07.pdf.