Reversal Of An Impairment Loss For Goodwill-Myassignmenthelp.Com

Question: Discuss About The Reversal Of An Impairment Loss For Goodwill? Answer: Introducation Testing the goodwill for impairment that is acquired under the business combination shall be allocated to 1 or more than 1 of the CGU of acquirer that is forecasted to provide synergies for the business combination irrespective of the fact that whether the other liabilities and assets of acquirer are allocated to CGU or particular asset. There is depreciation of intangible assets with passes of time and hence in the financial statement these assets are valued in terms of depreciation cost or after revaluation of such items. There are times when computed carrying amount for non-current assets does not equalize with the amount that are recoverable. As per AASB 136-Imapairment of assets, carrying amount of assets should not exceed its recovery amount. AASB 136-impairment defines recoverable amount as higher fair value of an asset after deducting its disposal cost or net selling price and considers its used value (Rennekamp, Rupar and Seybert 2014). The value obtain after deducting disposal cost is called fair value of the asset as per revision of AASB 136 asset impairment on 31St March, 2004. Next, a brief discussion is made on Recoverable amount, Value in use and Fair value. Recoverable accounting is defined as higher of fair value of an asset or value in use. In determination of impairment of assets, the idea of recoverable amount is used. The recoverable amount is computed in the following way- Recoverable amount gives the value in use. Fair value: The selling price of an asset in the market Cost of Disposal: incremental expenses attributing to disposal of an asset and its sale In case where company belief its asset value is impaired, it should estimate recoverable amount of fixed asset. The recoverable amount equals to its value in use for cases where fair value of an asset less than the disposal cost. The fixed assets recoverable amount equal to far value less disposal cost when company willing to sell assets. If the asset is not impaired then recoverable amount is not necessary to compute. It is the situation where recoverable amount (FV less cost of disposal) less than the carrying amount of the asset. Value in use refers to net present value (NPV) of a cash flow. Companies derived the value in use to calculate recoverable amount and hence, compute the los impaired with the asset (Michalski 2014). Future cash flow is calculated from the asset use (Robinson and Sensoy 2016). Other possible components of assets should also be considered while computing cash flow. Discount rate: It is an important component of asset value. The average capital cost of a company is calculated considering the time value of money. The rate of time value is called the discount rate. Other: Apart from discount rate, another important factor is liquidity. It is the ability of selling an asset and hence, convertibility to liquid cash. here are some supportive assumptions regarding the projection of cash flow like forecasting, budgets planning. Companies generally make a five year budget forecast and made long run projections (Hull and White 2014). Discount rate that is used in determining the present value of the assets should be one of the followings. The incremental cost of borrowing Weighted average of companys capital cost. Or other existing market borrowing rate It should be noted that, Value in use is generally lower than fair market value because of using a conservative approach. It is the selling price of an asset in the market. Fair value is the price on which both parties of transaction buyers and sellers are agreed upon without any force (Christensen and Nikolaev 2013). The selling price of a asset can easily be derived from the market. The simplest way for doing this is to compare prices of identical assets transaction in the market. The method of computing fair value of an asset is described below First task is to observe the product and its special characteristic. Conduct a study on the assets history and age of it. Four or five items should be found to proceed with the evaluation. The similar product should have some identical characteristic in terms of age, history or physical condition. The next step is to calculate the average price of the chosen similar product by using standard averaging rule. This will give an idea of the market of the chosen items. To crosscheck the derived market price, one should take the chosen sample items to the specialist in order to confirm market value (Johnson 2014). Company calculates its disposal cost of asset whenever the asset value is impaired as suggested in the standard principal of asset impairment- AASB 136 asset impairment. The company put off this liability only when it fails to determine the fair market value of the asset (Corgnati et al. 2013). The important fact that is required to be noted with regard to goodwill is that it is now prohibited for amortization. As per the IFRS 3, the goodwill is only available for analysis of impairment loss annually and amortization as well as systematic decrease now is not allowed for goodwill. For any assets that is recognized for impairment is available for reversal of impairment if the circumstances is improved or reversed. However, such reversal option under the financial statement is not available for goodwill. AASB 136 further prohibits that the reversal of goodwill with regard to the impairment loss that is recognized in earlier period will not be allowed. Further, as per AASB 136 earlier the goodwill were allowed to reverse under particular circumstances, however, that option is not available now for any organization. The reason behind that is AASB 138 on Intangible asset does not allow reversal of the internally generated goodwill. The increase, if any is there for the goodwills recoverable amount after recognition of impairment loss for that. It is likely to generate from the enhancement of goodwill that is internally generated instead of reversing the acquired goodwill. Calculation of Impairment Loss: Particulars Amount Fair Value,less, Cost to Sell $645,528 Value in Use $894,000 Recoverable Amount $894,000 (Higher of Fair Value Value in use) Less: Carrying Amount of CGU $999,000 Total Impairment Gain/(Loss) ($105,000) Allocation of Specified Impairment Loss: Particulars Carrying Amount Total Impairment Loss Less: Plant 671000 Goodwill $35,000 Balance Impairment Loss Impairment Loss Allocation as per Weightage: Particulars Carrying Amount Balance Impairment Loss Equipment $154,000 Fittings $97,000 Inventory $42,000 Total $293,000 In the books of Gali Ltd. Journal Entries Date Particulars 30/06/2017 Impairment Loss A/c. (Being assets under the specific cash generating unit impaired) Profit Loss A/c. (Being impairment loss transferred to P/L A/c.) References Christensen, H.B. and Nikolaev, V.V., 2013. Does fair value accounting for non-financial assets pass the market test?.Review of Accounting Studies,18(3), pp.734-775. Corgnati, S.P., Fabrizio, E., Filippi, M. and Monetti, V., 2013. Reference buildings for cost optimal analysis: Method of definition and application.Applied energy,102, pp.983-993. Hull, J. and White, A., 2014. Valuing derivatives: Funding value adjustments and fair value.Financial Analysts Journal,70(3), pp.46-56. Johnson, P.F., 2014.Purchasing and supply management. McGraw-Hill Higher Education. Michalski, G., 2014. Factoring and the firm value. Rennekamp, K., Rupar, K.K. and Seybert, N., 2014. Impaired judgment: The effects of asset impairment reversibility and cognitive dissonance on future investment.The Accounting Review,90(2), pp.739-759. Robinson, D.T. and Sensoy, B.A., 2016. Cyclicality, performance measurement, and cash flow liquidity in private equity.Journal of Financial Economics,122(3), pp.521-543. Singleton-Green, B., 2014. Should financial reporting reflect firms business models? What accounting can learn from the economic theory of the firm.Journal of Management Governance,18(3), pp.697-706.