Chapter 5 Accounting For Impairment Of Assets (Student Version) Part 2 PDF

CHAPTER 5 (PART 2) Accounting for Impairment of Assets – LKAS 36 Department of Accounting Faculty of Management Studies and Commerce University of Sri Jayewardenepura ACC1370: Financial Accountin...

CHAPTER 5 (PART 2) Accounting for Impairment of Assets – LKAS 36 Department of Accounting Faculty of Management Studies and Commerce University of Sri Jayewardenepura ACC1370: Financial Accounting and Reporting  Learning Objectives At the end of this lesson, you should be able to: Explain the purpose of the impairment test for assets; Assess when to undertake an impairment test; Apply impairment test and account for the impairment loss of an individual asset; Identify a cash-generating unit, and account for the impairment loss of a cash-generating unit; Account for reversals of impairment losses and Provide the disclosure requirements for impairment. ACC1370: Financial Accounting and Reporting Cash-generating Units (CGUs) A CGU is defined as ‘…the smallest identifiable group of assets that generates cash flows that are largely independent of the cash inflows from other assets or groups of assets’ Our focus has been on individual assets, where both the FV-CD and the VIU could be measured - FV-CD can be determined for most assets - But many individual assets do not generate cash inflows in their own right; e.g. a machine in a factory works in conjunction with the rest of the assets in the factory When it is not possible to determine the RA for an individual asset, the entity should Determine the RA of the Cash-generating Unit (CGU) to which the asset belongs The impairment test is applied to the CGU, not the individual asset ACC1370: Financial Accounting and Reporting CGU Example – Discussion (Contd.) Factory, Bank Branch, Sales Outlet ACC1370: Financial Accounting and Reporting Identifying a CGU Key to identification – what is the smallest group of assets? Consider: How does management monitor the entity’s operations? How does management make decisions about continuing or disposing of the entity’s assets and operations? Is there an active market for the output of a group of assets? If the output is used internally, can it be sold outside the entity? CGUs must be identified consistently from period to period ACC1370: Financial Accounting and Reporting Impairment Loss of CGU - In the Absence of Goodwill An impairment loss arises when the CA of the CGU assets > RA Determining the impairment loss Principles for determining RA are the same for CGUs as for individual assets Accounting for the impairment loss The loss is allocated to each asset in the CGU on a pro-rata basis (Based on the CA of each asset / the total CA amount of the CGU assets) Losses are accounted for in the same way as for individual assets discussed earlier The CA of an individual asset cannot be reduced below the highest of: – FV-CD (if determinable); – VIU (if determinable); or – Zero ACC1370: Financial Accounting and Reporting Activity 5 Shalika Printers Ltd has a printing process comprising of four separate but highly interdependent assets. The printing division has a combined carrying amount of Rs. 1,000,000 made up as follows:Asset Type Carrying Amount Patents 100,000 Machines 200,000 Computers 300,000 Buildings 400,000 Total 1,000,000 It was determined that the present value of future cash flows of this CGU is amounted to Rs. 800,000. Alternatively, the fair value less costs of disposal is Rs. 750,000. Explain the accounting treatment for impairment loss in this case. ACC1370: Financial Accounting and Reporting Impairment Loss of CGU - With Goodwill The asset goodwill can only arise in a business combination It cannot be internally generated, revalued or amortised It is subject to annual impairment testing Goodwill is a residual balance, consisting of assets that cannot be individually identified or separately recognised. Therefore, it is not possible to determine a FV-CD for goodwill, or to identify cash flows relating specifically to goodwill When goodwill is recognised in a business combination it must be allocated to one or more CGUs (similar to corporate assets) LKAS 36 requires that goodwill be allocated to the lowest level at which management monitors the goodwill Goodwill ACC1370: can only Financial be tested Accounting andfor impairment at the CGU level Reporting Impairment Loss of CGU - With Goodwill (Contd.) Where a CGU has goodwill allocated to it, the CGU must be tested for impairment at least annually or more frequently, if there is an indication that the CGU may be impaired Where RA > CA = no impairment; goodwill remains unadjusted Where CA > RA = impairment loss When an impairment loss arises in a CGU with goodwill the following allocation rules apply: – To reduce the carrying amount of the CGU’s goodwill (to zero if necessary) – To the other assets of the CGU on a pro-rata basis (on the same basis as discussed earlier) ACC1370: Financial Accounting and Reporting  Activity 6 There was an explosion in a factory. The carrying amounts of its assets were as follows: Rs.’000 Goodwill 100 Patents 200 Machines 300 Computers 500 Buildings 1,500 2,600 The factory operates as a cash-generating unit. An impairment review reveals the factory has a fair value less cost of disposal of Rs. 1.2m and value in use of Rs. 1.95m. Half of the machines have been blown to pieces, but the other half can be sold for at least their carrying amount. The patents have been superseded and are now considered worthless. Required: Determine the impairment losses of individual assets. ACC1370: Financial Accounting and Reporting  Reversal of Impairment Loss ACC1370: Financial Accounting and Reporting Reversal of an Impairment Loss Recognised losses are reassessed annually Are there indicators the previous loss does not exist or has decreased? Indicators are the same as those used for initially recognising a loss; e.g. Improvement in the economy or product markets Interest rates have decreased A review of the indicators might result in: Changes to depreciation parameters (e.g. useful life) instead of a reversal IF there is a change in the estimates, a reversal of impairment is possible Ability to recognise a reversal of an impairment loss and the accounting for that reversal is dependent on whether the reversal relates to an individual asset, a CGU, or goodwill ACC1370: Financial Accounting and Reporting Reversal of an Impairment Loss - Individual Assets Cost Model Previously recognised impairment losses in relation to individual assets can be reversed (up to the recoverable amount) One limitation The new CA cannot be higher than the CA that would have been determined had no impairment loss been previously recognised i.e., for depreciable assets, the impact of depreciation needs to be considered The journal entry to record the reversal of the impairment loss would be: Dr Accumulated depreciation & impairment losses xx Cr Income (impairment loss reversal) xx Don’t Don’tforget forgetto toreassess reassessthe thedepreciation depreciationparameters parametersafter afterthe thereversal reversal ACC1370: Financial Accounting and Reporting Reversal of an Impairment Loss - Individual Assets Revaluation Model Where the impairment loss was taken to the P&L the journal entry would be the same as that shown above under the cost model Where the impairment loss was taken against the asset revaluation surplus, the journal entry to record the reversal of the impairment loss would be: Dr Asset xx Cr Asset revaluation surplus xx ACC1370: Financial Accounting and Reporting Reversal of an Impairment Loss - CGUs The reversal of any impairment loss relating to a CGU is allocated across the assets of the CGU (excluding goodwill) on a pro-rata basis The reversals for specific assets will be accounted for in the same way as outlined above for individual assets The CA of an asset cannot be increased above the lower of: – its RA (if determinable) – the CA that would have been determined had no impairment loss been recognised in prior periods Any excess from the above situation is allocated across the remaining assets in the CGU on a pro-rata basis ACC1370: Financial Accounting and Reporting Reversal of an Impairment Loss - Goodwill LKAS 36 (paragraph 124) An impairment loss recognised for goodwill is not to be reversed in a later period If reassessed estimates indicate RA of a CGU is > CA, impairment reversals are required Except for goodwill ACC1370: Financial Accounting and Reporting Disclosures Key disclosures include: The amount of impairment losses (and reversals of losses ) recognised in P&L during the period* The amount of impairment losses on revalued assets (and reversals of losses) recognised in OCI during the period* **In Inrelation relationto tothese, these,the theentity entitymust mustidentify identifythe theline lineitem itemin inthe theStatement Statementof ofP&L P&L/ /OCI OCIin inwhich whichthey they are areincluded included ACC1370: Financial Accounting and Reporting  THAN K YOU! ACC1370: ACC1370: Financial Financial Accounting Accounting and and Reporting Reporting