Impairment Loss Accounting Concept

Question: Describe about the Impairment Loss for Accounting Concept. Answer: Impairment loss is an accounting concept which entails to the fact that the on-financial assets of a firm should not be recorded at more than its recoverable amount. International Accounting Standard (IAS) 36 Impairment of Assets clearly describes the reason why an organization should conduct impairment tests periodically, its accounting and the disclosure requirements. Increasing economic instability is one of the reasons why this standard has gained importance off lately. The entities are required to conduct a comprehensive test for impairment every year of its non-financial assets such as goodwill, patents, trademark, plant and machinery etc as on its date of reporting (Investopedia.com, 2016). It is not mandatory that assets are to be impaired each year. Only if indications exist for the same, will such a loss be recorded. Thus first and foremost indicators for impairment have to be checked and reviewed. It can be external as well as internal to an enterprise. External sources are a negative impact of a change in the market interest rates, change in the technology being used, political and legal issues, the net assets of the firm is higher than the market capitalisation. Internal factors include the performance of the company being worse i.e. low productivity due to internal thrusts, possible obsolescence or restructuring (Iasplus.com, 2015). But it is very important to ensure that even though possible indicators do not exist yet one needs to conduct an impairment test annually for the intangible assets such as goodwill, trademarks and patents. After such test is conducted and if the same portrays any such decrease in the value of an asset then the same should be recorded in the income statement as well as the balance sheet of an entity as impairment loss. Thus if the amount at which an asset is shown in the balance sheet currently exceeds its actual amount of recovery then the difference between the two should be recorded as a loss. It is treated as an operating expense in the income statement and the amount is deducted from the respective asset. Further to this it is very important to note that all the assets shown in the balance sheet of a company do not pass through the test of impairment as per IAS 36. Some of them are stock in trade (IAS 2), assets procured by way of construction (IAS 11), the benefits given to employees such as retirement benefits (IAS 19), biological and investment properties that are recognized in the balance sheet at fair value (IAS 41 and IAS40 respectively) (Alina, 2014). Some terms which are important to understand s as to get a clearer picture of the said standard are : CGU: A cash generating unit (CGU) is a group of assets which are capable of generating cash flows for the company independently. Carrying Amount: The value at which an asset is recorded in the balance sheet of an entity as on a particular date is defined as the carrying amount of the asset. Recoverable Amount: The amount that a company may gain on selling the asset is termed as recoverable amount. It is generally higher of fair value or value in use. Value in Use: NPV of the future cash flows from an asset is termed as value in use (Marques, 2010). Although the assets get impaired, yet there are situations wherein such impairment is required to be reversed as well but for goodwill, which once impaired or devalued cannot be reversed. It is the same internal and external indicators which prompts an entity to consider such a reversal but only to the extent the carrying amount of the asset would have been had it not been impaired in the past. However once such a reversal happens or indications of reversal is known the depreciation or the amortization of the said asset should be considered and necessary accounting entries for the same should be done (Buschhuter, Striegel, 2011). For example if a cash generating unit is subject to impairment and the amount of loss attributable to individual assets is not known then firstly the entire goodwill is written off as a part of such impairment and then the balance is divided amongst the assets remaining for impairment on a pro rata basis. Now if such an impairment is to be reversed then all assets are a subject to the said reversal except for goodwill. IAS 36 requires the entities considering impairment of its assets to make certain disclosures to its notes to financial statements. However it is remarkable to notice that the extent of disclosure with regards impairment of goodwill is much more extensive and exhaustive as compared to other assets impairment. The main disclosures which are mandatory as per the standard are as under: The factors that led to consideration of the impairment of an asset. The amount of impairment loss recognized or reversed for the assets individually or the cash generating units as a whole. The amount of impairment allocated to goodwill. The method used for arriving at the amount of impairment loss i.e. the fair value method or the value in use method. The discount rate used for the determination of the present value of the future cash flows from the assets. If the entity does segmental reporting then a separate disclosure with regards the impairment loss recognized or reversed with regards an asset which is a part of the segment (DAlauro, 2013). Therefore on a concluding note it is understood that the said standard is very important for revelation of a true and fair view of the assets of a company. Further the companys health is known which enables investors to take an informed decision with regards how well the company would be able to pay off its debts with the help of the available asset base. The global economic crisis in the year 2008, has made this standard all the more mandatory. Countries across the globe have recognized this standard as a part of their accounting standards like AASB 136, the standard spelt out by Australian Accounting Standard deals with impairment which is similar to IAS 36. References: Alina, S., (2014), Application Review of IAS 36 : The Issues Companies face Regarding Impairment of Assets, Journal of International Scientific Publications, vol. 8, pp. 25-35 Buschhuter, M., Striegel, A., (2011), IAS36- Impairment of Assets, Gabler: USA DAlauro, G., (2013),The Impact of IAS 36 on goodwill disclosure : Evidence of the write-offs and performance effects, Intangible Capital, vol. 9, no. 3, pp. 754-799 Investopedia.com, (2016), Impaired Asset, Available at https://www.investopedia.com/terms/i/impairedasset.asp (Accessed 17th September 2016) Iasplus.com, (2015), IAS 36- Impairment of Assets, Available at https://www.iasplus.com/en/standards/ias/ias36 (Accessed 17th September 2016) Marques, M.C., (2010), Impairment of assets appraised in accordance with IAS 36, American Based Research Journal, vol. 2, no.7, pp. 23-34