The Reversal Of Impairment Loss Of Goodwill - Myassignmenthelp.Com

Question: Discuss aboutThe Reversal Of Impairment Loss Of Goodwill. Answer: Impairment refers to an accounting principle which is associated with permanent reduction in the value of the assets of the company which are generally fixed assets. The testing of the impairment of assets the profits, cash flows and other benefits which are associated with the specific assets. If the book value of the assets exceeds the benefits associated with the assets than such a difference is written off and the assets value is decreases in the balance sheet (Capalbo 2013). The impairment of assets is only done when the difference between the fair value and carrying amount is deemed to be unrecoverable. The calculation of impairment of assets is covered by AASB 136 which is a standard issued on impairment of assets by the Australian Accounting Standard Board (Aasb.gov.au. 2018). Goodwill refers to the payment which the company incurs in order to get certain economic benefits in future. In some sense it also refers to the good reputation of the company among the general public. This is considered to be an intangible asset of the company and the same is also subjected to impairment principles (AbuGhazaleh, Al-Hares and Haddad 2012). The calculations of impairment of goodwill is done by allocating the goodwill to a cash generating unit which is of the lowest level. As per AASB 136 s Paragraph 1 impairment of assets states what are the techniques which business use in order to make sure that the assets are being carried out in right amounts and the value do es not exceed the amount level which are recoverable (Aasb.gov.au. 2018). This paragraph also states that in case the assets value are carried over than the amount which is recoverable, the recoverable amount which is received by selling the asset is lower than the carried over value. AASB 136 requires the company to recognize such impairment losses along with the timing of the loss and also requires proper disclosure of the above in the financial reports. In a case where carrying amount is more than the recovery amount than it is said that an impairment loss has occurred. This is higher than assets s fair value minus the selling cost and the value which is in use (Kuzmina. and Kozlovska 2012). As per the paragraph 59 of the standard, if the recoverable value of an assets is less than its carrying value then carrying value will be minimized to that value as the recoverable amount. The method of estimating and calculating may differ from organization to organization. The standard also states that the impaired loss is to be realized as soon it is recognized with exceptions that other standards apply or the asset has been revalued. The standard is also very useful in analyzing the revaluation model of AASB 116. The methods which are used in the impairments of assets are the revaluation model and the cost model. As per the cost model, when an impaired asset is recorded on the cost basis than the same should be recorded in the profit and loss in terms as soon as possible. Therefore it is clear that the same loss should be recorded in the income statement as an expense for that particular organization. As per Paragraph 60 of AASB 136, revaluation method is considered when impairment is done for assets like plant and machinery, equipment at a revalued amount than such a loss is treated similar to that of a decrease in revaluation. In case of revaluation model, if the impairment loss is taken as an expense and recorded in the profit and loss account than the reversal will be posted in the credit side of the profit and loss account which cancel out the situation and reversal will be done. For example, an assets which has a carrying amount of $70,000 and as depreciation an amount of $15,000. $25,0 00 of revaluation decrements can be seen to have been realized while previous impairment loss recording. The losses in their turn have minimized the balance of the revaluation surplus and deferred liability of tax account. The recoverable amount of the same is $ 15000 and so for reversal recording of $10,000, the loss of impairment previously, the accumulated depreciation and equipment accounts needs to be debited and has $15,000 balances each. Accounts of revaluation surplus and deferred liability of tax will also be credited and will have $14,000 and $6,000 respectively. Thus from the above example is clear that the treatment of revaluation and depreciation in the impairment treatment and reversal of impairment as well. In case of goodwill, the impairment provisions which are applicable for assets are quite different (Trottier 2013). The first thing that needs to be understood is that goodwill is prohibited from being amortised. The previous policy involved amortising goodwill over a period of year not exceeding 40 years in case of purchased goodwill. With the introduction of IFRS 3 goodwill is only now required to be tested for impairment loss on an annual basis. The policy of amortization of goodwill is not allowed anymore (Alves 2013). Any assets which is impaired as per IAS 36 which is an International Standard on Impairment of Assets, can be reverse the impairment loss of the assets which was recorded in the previous year if the factor responsible for such impairment has improved or subsided (Cpaaustralia.com.au 2018). However such reversal option is not available in case of goodwill (Biancone 2014). Earlier businesses were allowed to reverse impairment loss on goodwill which was caused due to some external factor and such factor were not expected to recur. In recent times IAS 36 has specifically declared that there will be no impairment loss reversals in case of goodwill. The reason due to which the IAS 36 prohibited the reversal of impairment loss of goodwill is if the value of goodwill is increased subsequent years than such increase will be considered as increase in internal goodwill of the company and not that of purchased goodwill (Ramanna and Watts 2012). As internal goodwill of the company is not allowed be recognized as an asset of the company, hence there is no scope of increase or decrease which can be accounted in relation to internal goodwill (Guthrie and Pang 2013). Reference Aasb.gov.au. (2018). Available at https://www.aasb.gov.au/admin/file/content105/c9/AASB136_07-04_COMPapr07_07-07.pdf [Accessed 21 Jan. 2018]. AbuGhazaleh, N.M., Al-Hares, O.M. and Haddad, A.E., 2012. The value relevance of goodwill impairments: UK evidence. Alves, S., 2013. The Association Between Goodwill Impairment and Discretionary Accruals: Portuguese Evidence.Journal of Accounting, Business Management,20(2). Biancone, P.P., 2014. IFRS: Italian Experience on Impairment Test of Goodwill.International Journal of Advances in Management Science. Capalbo, F., 2013. Impairment of Assets. Cpaaustralia.com.au. Available at: https://www.cpaaustralia.com.au/~/media/corporate/allfiles/document/professional-resources/reporting/reporting-ifrsfactsheet-impairment-of-assets.pdf?la=en [Accessed 21 Jan. 2018]. Guthrie, J. and Pang, T.T., 2013. Disclosure of Goodwill Impairment under AASB 136 from 20052010.Australian Accounting Review,23(3), pp.216-231. Kuzmina, I. and Kozlovska, I., 2012. ACCOUNTING MEASUREMENT OF LONG-LIVED ASSETS: A CASE OF IMPAIRMENT PRACTICE.Journal of Business Management, (5). Ramanna, K. and Watts, R.L., 2012. Evidence on the use of unverifiable estimates in required goodwill impairment.Review of Accounting Studies,17(4), pp.749-780. Trottier, K., 2013. The effect of reversibility on a manager's decision to record asset impairments.Accounting Perspectives,12(1), pp.1-22.