Impairment of Assets

ACC514 Topic 7
Learning Objective
Topic 7:
Accounting for impairment of assets

Slides by Miranda Dyason, adapted from Understanding Australian Accounting
Standards instructor resources prepared by Kent Wilson
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ACC514 Topic 7
Learning Objective
Learning Objectives
A
Explain the purpose and components of the impairment test, and when an
impairment test should be undertaken
Perform the impairment test and account for impairment losses for single assets
Perform the impairment test and account for impairment losses for CashGenerating Units (CGUs) with and without goodwill
Explain and account for the reversal of impairment losses
Specify the disclosures required by AASB 136

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ACC514 Topic 7
Learning Objective
Learning Objectives
A

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ACC514 Topic 7
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ACC514 Topic 7
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ACC514 Topic 7
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ACC514 Topic 7
Learning Objective
Introduction to impairment
Entities are required to conduct impairment tests to ensure their assets
are not overstated.
Impairment results when an assets carrying amount is more than its
recoverable amount.
Carrying amount and recoverable amount are defined in AASB 136.6:
Carrying amount: is the amount at which an asset is recognised after deducting any
accumulated depreciation (amortisation) and accumulated impairment losses thereon.
Recoverable amount: of an asset or cash-generating unit is the higher of its fair value
less costs of disposal and its value in use.
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ACC514 Topic 7
Learning Objective
Introduction to impairment
Not all assets are required to be tested for impairment. Notable
exclusions include:
Inventories;
Deferred tax assets;
Cash;
Accounts receivable;
Assets held for resale.
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ACC514 Topic 7
Learning Objective
When to undertake impairment test

At the end of each reporting period, an entity shall assess whether there
is any indication that an asset may be impaired. If any such indication
exists, the asset must be tested for impairment. (AASB 136.9)
The following assets must be tested for impairment annually (AASB
136.10):
Intangibles with indefinite useful lives;

Intangibles not yet available for use;
Goodwill acquired in a business combination.
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ACC514 Topic 7
Learning Objective
Evidence of impairment
Minimum indicators of impairment include (AASB 136.12):
External sources:
Decline in market value;

Adverse changes in entitys environment/ market;
Increases in interest rates;
Market capitalisation.
Internal sources:
Obsolescence or physical damage;
Change in asset use;
An assets economic performance being worse than expected.
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ACC514 Topic 7
Learning Objective
Impairment test
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ACC514 Topic 7
Learning Objective
Fair value less costs to sell and Value in use

Definitions in AASB 136.6:
Fair Value: is the price that would be received to sell an asset or paid to transfer a
liability in an orderly transaction between market participants at the measurement date.
Costs of disposal: are incremental costs directly attributable to the disposal of an

asset or cash-generating unit, excluding finance costs and income tax expense.
Value in use: is the present value of the future cash flows expected to be derived from
an asset or cash-generating unit.
Also refer to AASB 136.28-29 re. Fair value less costs of disposal and
AASB 136.30-57 re. Value in use.
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ACC514 Topic 7
Learning Objective
Impairment loss - individual assets
An impairment loss is recognised when the recoverable amount of an

asset is less than its carrying amount.
Where the asset is accounted for under the cost model, the impairment
loss is recognised immediately in profit or loss.
Where the asset is accounted for under the revaluation model, the
impairment loss is treated as a revaluation decrement.
Any subsequent depreciation/amortisation is based on the new

recoverable amount.
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ACC514 Topic 7
Learning Objective
Cost model example 1
An asset has a carrying amount of $100 (cost of $160 accum

depn of $60) and a recoverable amount of $90.
The journal entry to record the impairment loss would be:
10
Dr Impairment loss
10
Cr
Accum. Depn & impairment losses
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ACC514 Topic 7
Learning Objective
Cost model example 2
An asset has a carrying amount of $100 (cost of $160 accum

depn of $60) and a recoverable amount of $120.
The impairment loss to be recognised in this case would be:
NIL (since the carrying amount is < recoverable amount).
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Revaluation model - example
ACC514 Topic 7
Learning Objective
An asset has a carrying amount of $100 (FV of $120 accum depn of $20) and a
recoverable amount of $90. This asset was previously revalued upwards by $50
(ARS balance = $35; DTL balance = $15).
The journal entries to record the impairment loss would be:
Dr
Dr
Dr
Dr
Dr
Cr
Accumulated depreciation
Cr Asset
20
Loss on revaluation OCI

Cr Asset
Deferred tax liability
Cr Income tax expense OCI
10
ARS
Income tax expense OCI
Loss on revaluation OCI
3
7
3
20
(120
(120100)
100)
10
(100
(10090)
90)
10
30%
30%tax
taxeffect
effect
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ACC514 Topic 7
Learning Objective
Impairment loss CGUs

As many assets do not independently generate cash flows (meaning that
the value in use cannot be determined), the impairment test may be
conducted on a group of assets, known as a Cash-Generating Unit
(CGU).
The CGU is the smallest identifiable group of assets that generates cash
inflows from continuing use that are largely independent of the cash
inflows from other assets or groups of assets.
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ACC514 Topic 7
Learning Objective
Impairment loss CGUs with no goodwill

Where an impairment loss arises in a CGU with no goodwill, the loss is
allocated across the assets of the CGU on a pro-rata basis based on the
carrying amount of each asset relative to the total carrying amount of the
CGU.
Losses are accounted for in the same way as for individual assets.
The carrying amount of an individual asset within the CGU cannot be
reduced below the highest of:
Fair value less costs to sell (if determinable);

Value in use (if determinable); or
Zero.
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ACC514 Topic 7
Impairment losses and CGUs

no goodwill: example
Learning Objective
A Ltd has identified an impairment loss of $20,000 on one of its CGUs.

The CGU consists of the following assets (stated at current carrying amounts):
Buildings
500,000
Equipment
300,000
Land
250,000
Fittings
150,000
The FVLCTS of the building is $493,000.
Required:
Calculate the allocation of impairment loss against all assets in the CGU, and prepare the
journal entry to record the impairment loss.
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ACC514 Topic 7

Learning Objective
CA
Prorata
Impairment loss
allocated
Adjusted CA
Buildings
500,000
5/12
8,333
491,667
Equipment
300,000
3/12
5,000
295,000
Land
250,000
2.5/12
4,167
245,833
Fittings
150,000
1.5/12
2,500
147,500
1,200,000
20,000
As the FVLCTS of the building is $493,000, the maximum impairment loss that can
be allocated to the building is $7,000. The remaining $1,333 must be allocated
across the other assets in the CGU.
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ACC514 Topic 7
Learning Objective

Adjusted CA
Pro-rata
Impairment
loss allocated
Buildings
Total
impairment loss
allocated
Net CA
7,000
493,000
Equipment
295,000
295000/688333
571
5,571
294,429
Land
245,833
245833/688333
476
4,643
245,357
Fittings
147,500
147500/688333
286
2,786
147,214
1,333
20,000
688,333
From
Fromlast
lastcolumn
columnof
of
previous
slide
previous slide
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ACC514 Topic 7
Answer:
Learning Objective

Dr Impairment loss
20 000
Cr Accum. Impairment losses - Land
Cr Accum. depn and impairment losses - buildings
Cr Accum. depn and impairment losses - equipment
Cr Accum. depn and impairment losses - fittings
643
000
571
786
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ACC514 Topic 7

Learning Objective
How would your answer to the previous activity change if the FVLCTS of the building
was $490,000, and not $493,000?
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ACC514 Topic 7

Learning Objective
CA
Prorata
Impairment loss
allocated
Adjusted CA
Buildings
500,000
5/12
8,333
491,667
Equipment
300,000
3/12
5,000
295,000
Land
250,000
2.5/12
4,167
245,833
Fittings
150,000
1.5/12
2,500
147,500
1,200,000
20,000
As the FVLCTS the building is $490,000, the maximum impairment loss that can be
allocated to the building is $10,000. As the pro-rata calculation above does not
allocate more than $10,000 to the building, no re-allocation is needed, and $8,333 is
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allocated to the building.
ACC514 Topic 7
Answer:
Learning Objective

Dr Impairment loss
20 000
Cr Accum. Impairment losses - Land
Cr Accum. depn and impairment losses - fittings
167
333
000
500
25 / 35
ACC514 Topic 7
Learning Objective
Impairment loss CGUs with goodwill
Where an impairment loss arises in a CGU with goodwill, the loss is

allocated as follows:
To reduce the carrying amount of the CGUs goodwill to zero;

To the other assets of the CGU on a pro rata basis.
The carrying amount of an individual asset within the CGU cannot be

reduced below the highest of:
Fair value less costs to sell (if determinable);

Value in use (if determinable); or
Zero.
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ACC514 Topic 7

with goodwill: example
Learning Objective
A Ltd has identified an impairment loss of $300,000 on one of its CGUs.

The CGU consists of the following assets (stated at current carrying amounts):
Buildings
500,000
Equipment
300,000
Land
250,000
Goodwill
150,000
Required:
Calculate the allocation of impairment loss against all assets in the CGU, and prepare the
journal entry to record the impairment loss.
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ACC514 Topic 7

with goodwill: example
CA
Pro-rata
Learning Objective
Impairment loss
allocated
Adjusted CA
150,000*
Goodwill
150,000
Buildings
500,000
500/1050
71,429**
428,571
Equipment
300,000
300/1050
42,857
257,143
Land
250,000
250/1050
35,714
214,286
1,050,000
300,000
* *Remaining
Remainingimpairment
impairmentloss
lossstill
stillto
tobe
beallocated
allocated==$150,000
$150,000
****500/1,050
500/1,050xx$150,000
$150,000==71,429
71,429
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ACC514 Topic 7
Answer:
Learning Objective

Dr Impairment loss
300 000
Cr Accum. impairment losses - goodwill
150
000
71
42
Cr Accum. impairment losses - Land
35
429
857
714
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ACC514 Topic 7
Learning Objective
Reversal of impairment losses
Recognised losses are reassessed annually.
Indicators for reversals of impairment losses are the same as those

used for initially recognising a loss.
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.
Previously recognised impairment losses in relation to individual assets

are able to be reversed. The new carrying cannot be higher than the
carrying amount that would have been determined had no impairment
loss been previously recognised.
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ACC514 Topic 7
Learning Objective
Reversal of an impairment loss

individual assets
Cost model
The journal entry to record the reversal of the impairment loss
would be:
Dr Accum depn & impairment losses
Cr Income - impairment loss reversal
xx
xx
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ACC514 Topic 7
Learning Objective
Example reversal of impairment loss for plant &

equipment
At 30 June 2014, Super Ltd reported plant and equipment with a carrying amount of
$400,000 (cost $500,000 less accumulated depreciation of $100,000).
At 30 June 2014, the recoverable amount of the plant and equipment was $380,000.
For the period ending 30 June 2015, the depreciation charge on plant and equipment
was $38,000. If the plant and equipment had not been impaired the charge would have
been $50,000.
At 30 June 2015, the recoverable amount of the plant and equipment was calculated to
be $352,000. As a result, Super Ltd recognised a reversal of the previous years
impairment loss.
Required:
Prepare the journal entries relating to impairment at 30 June 2014 and 2015.
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ACC514 Topic 7
Learning Objective
Answer:
At 30 June 2014:
Impairment loss = $400,000 - $380,000
= $20,000
Journal entry to record impairment loss:
DR Impairment loss
$20,000
CR Accum depn & impairment losses plant & equipment
$20,000
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ACC514 Topic 7
Answer:
Learning Objective
At 30 June 2015:
Carrying amount of plant and equipment = $380,000 - $38,000

= $342,000
Carrying amount of plant and equipment if no impairment loss had been

previously recognised = $500,000 - $100,000 - $50,000
= $350,000
The new carrying cannot be higher than the carrying amount that would have
been determined had no impairment loss been previously recognised. Therefore,
only $8,000 can be reversed.
Journal entry to record impairment loss reversal:

DR Accum depn & impairment losses plant & equipment $8,000
CR Income impairment loss reversal
$8,000
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ACC514 Topic 7
Learning Objective
Reversal of impairment losses

Impairment losses relating to goodwill cannot be reversed.
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 for individual assets.
When allocating the reversal to assets of the CGU, the carrying amount
of any asset within the CGU cannot be increased above the lower of:
Its recoverable amount (if determinable); and

The carrying amount that would have been determined (net of amortisation
or depreciation) had no impairment loss been recognised for the asset in
prior periods.
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ACC514 Topic 7
Learning Objective
Key disclosures
An entity shall disclose the following for each class of assets (AASB 136
paragraph 126):
(a) the amount of impairment losses recognised in profit or loss during the period and the
line item(s) of the statement of comprehensive income in which those impairment
losses are included;
(b) the amount of reversals of impairment losses recognised in profit or loss during the
period and the line item(s) of the statement of comprehensive income in which those
impairment losses are reversed;
(c) the amount of impairment losses on revalued assets recognised in other
comprehensive income during the period; and
(d) the amount of reversals of impairment losses on revalued assets recognised in other
comprehensive income during the period.
Other disclosures: AASB 136 paragraphs 129 135.

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Impairment of Assets

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ACC514 Topic 7

Accounting for impairment of assets

Explain and account for the reversal of impairment losses

Specify the disclosures required by AASB 136

Explain and account for the reversal of impairment losses

Specify the disclosures required by AASB 136

Explain and account for the reversal of impairment losses

Specify the disclosures required by AASB 136

Explain and account for the reversal of impairment losses

Specify the disclosures required by AASB 136

Explain and account for the reversal of impairment losses

Specify the disclosures required by AASB 136

When to undertake impairment test

Intangibles with indefinite useful lives;

Decline in market value;

Fair value less costs to sell and Value in use

Costs of disposal: are incremental costs directly attributable to the disposal of an

Impairment loss - individual assets

An impairment loss is recognised when the recoverable amount of an

Any subsequent depreciation/amortisation is based on the new

Cost model example 1

An asset has a carrying amount of $100 (cost of $160 accum

Cost model example 2

An asset has a carrying amount of $100 (cost of $160 accum

Revaluation model - example

Loss on revaluation OCI

Impairment loss CGUs

Impairment loss CGUs with no goodwill

Fair value less costs to sell (if determinable);

Impairment losses and CGUs

A Ltd has identified an impairment loss of $20,000 on one of its CGUs.

Impairment losses and CGUs

Impairment losses and CGUs

The journal entry to record the impairment loss would be:

Cr Accum. Impairment losses - Land

Cr Accum. depn and impairment losses - buildings

Cr Accum. depn and impairment losses - equipment

Cr Accum. depn and impairment losses - fittings

Impairment losses and CGUs

Impairment losses and CGUs

The journal entry to record the impairment loss would be:

Cr Accum. Impairment losses - Land

Cr Accum. depn and impairment losses - buildings

Cr Accum. depn and impairment losses - equipment

Cr Accum. depn and impairment losses - fittings

Impairment loss CGUs with goodwill

Where an impairment loss arises in a CGU with goodwill, the loss is

To reduce the carrying amount of the CGUs goodwill to zero;

The carrying amount of an individual asset within the CGU cannot be

Fair value less costs to sell (if determinable);

Impairment losses and CGUs

A Ltd has identified an impairment loss of $300,000 on one of its CGUs.

Impairment losses and CGUs

The journal entry to record the impairment loss would be:

Cr Accum. impairment losses - goodwill

Cr Accum. depn and impairment losses - equipment

Cr Accum. impairment losses - Land

Reversal of impairment losses

Recognised losses are reassessed annually.

Indicators for reversals of impairment losses are the same as those

Ability to recognise a reversal of an impairment loss and the accounting

Previously recognised impairment losses in relation to individual assets

Reversal of an impairment loss

Example reversal of impairment loss for plant &