Accounting and Reporting: Impairment Loss

Discuss about the Accounting and Reporting for Impairment Loss.

The Nature of “Impairment Loss” and Required Disclosures

IAS 36 Impairment of assets ensures that the assets of a company are not carried at ore than their recoverable amount. Corporations are therefore mandated to conduct an impairment test to determine the recoverable amount of the assets (Iasplus.com, 2015). At the end of each financial year, a company ought to determine whether there is an indication that the asset at hand is impaired. Impairment of asset means that the recoverable amount of an asset is more than its recoverable amount. There are various indications both external and external that could be used to determine whether an asset may be impaired or not. External sources include the decline of the market value of an asset, changes in the economy, technology, rules, and the rise of the market interest rates (Iasplus.com, 2015). Internal sources on the other hand include obsolescence of the asset, wear and tear, the asset being idle, when it is held for disposal, when it has a worse economic performance than what is expected and so forth as seen in IAS 36.12.

According to IAS 36.13, if an asset is impaired, a firm needs to adjustment and review of the economic life of the asset, the method of depreciation to be used, or the scarp value of the asset at hand (Iasplus.com, 2014). To determine the amount to be recovered or the recoverable amount, IAS 36.19 states that if the fair value of the asset is less than the sales value of that asset or it is more than the carrying amount of the asset, then the asset has not been impaired and it should therefore be impaired. IAS 36.20 further states that if the fair value of the asset less amount that the asset is sold for cannot be determined, then the recoverable amount will be the value of the asset at that present date (Iasplus.com, 2014). For assets that are in the process of disposal, the recoverable amount is the fair value of the asset less any cost of disposal as stated by IAS 36.21.

According to IFRS 7.42 A, an entity ought to disclose any information that enables the users to understand the relationship between the financial assets and the associated liabilities of those assets for using them beyond their useful life (Charterededucation.com, 2013). IFRS 7.42 B further requires entities to disclose any information to its users that could enable them to evaluate the risks of continuing to use the derecognized asset.

IFRS 7.42 D concludes by saying that the disclosures consist of the description of the assets, the risks of continuing to use the assets, and the benefits of using it (Lambert, 2011). It also states that the disclosures should include the carrying amounts of the assets, the fair value of those assets that show continuing use by the firm, the maximum exposure to loss from continuing to use them and the maturity of the undiscounted cash flows to repurchase those assets.

It requires the corporation to disclosure any gain or loss recognized at the date of transfer or sale of the asset, income realized from the sale and any expenses incurred from continuing to use it as well as any uneven distribution of the proceeds throughout the reporting period as stated by IFRS 7.42 G (Choi, 2003).

When calculating the impairment loss of the financial assets of any company, two factors may determine the procedure to be used (Ifrs.org, 2009). The first factor is when the asset in question is held for use by the company. If this were the case, then the loss of impairment would be the recoverable amount of the asset less the carrying value of that asset. For example if an asset had a recoverable amount of $ 1,420,000 while its carrying amount was $ 1,680,000, its loss on impairment would be $ 260,000. The second factor is if the financial asset at hand was held for sale or disposal (Ifrs.org, 2009). If this were the case, then the loss on impairment would be the fair value of the asset less the cost of disposal less the carrying amount of that asset. For example, if a financial asset had a fair value less the cost of disposal of $ 171,000 and if it’s carrying amount was $ 200,000, then the loss on impairment would be $ 29,000 (Iasplus.com, 2015). A financial asset may also realize an impairment gain. This occurs where the carrying amount is less the fair value of the asset less the cost of disposal in the case where the asset is held for sale or disposal and when the carrying amount of the asset is less than the recoverable amount of that asset. In this case, the financial asset would not need any impairment.

To conclude on the nature of impairment loss and the appropriate disclosures, a firm needs to recognize and accrue the impairment loss through a journal entry in order to record and re-evaluate the value of the assets (Iasplus.com, 2015). An asset that has been impaired and that reflects its true carrying amount will ensure that the true and correct profits of the company are reported by reducing the income of the company on the statement of financial performance and reducing the assets of the firm on the statement of financial position.

Journal Entries

Impairment of assets is the decrease of value of those assets. It mainly occurs due to depreciation, wear and tear, obsolescence, outdated assets or out of fashion and so forth (Iasplus.com, 2014). An impaired asset is an asset whose market price is less than the value of the asset that is listed in the organization’s balance sheet. The assets that are likely to be impaired are the goodwill of the firm, the accounts receivable and any fixed assets and intangible assets of the corporation. Upon adjusting the carrying value of the assets, the loss on impairment is recorded on the company’s statement of financial performance. The impaired loss of an asset should only be recorded in the company’s profit and loss account only if the amount of that asset is irrecoverable (Iasplus.com, 2014). For example, if the accounts receivable of the firm is unlikely to pay due to bankruptcy that is when the enterprise can impair them and record the bad debts written off.

To record an impairment loss in a journal entry, the firm ought to debit the loss on impairment account or the expense account and credit the asset that is being considered (Charterededucation.com, 2013). A contra entry may also be shown on the asset impairment account in order to maintain the original carrying cost of that particular asset. If for instance an asset group experiences or shows indicators of impairment then all assets within that group should be adjusted for impairment.

In this question, Crossbow Ltd is a manufacturing company that manufacturers leather footwear for women (Lambert, 2011). The corporation had the following assets from its statement of financial position: land worth $ 200,000, inventory products worth $ 180,000, and brand ‘crossbow shoes’ worth $ 160,000. The firm also had a shoe factory worth $ 700,000, machinery that was used to manufacturer shoes worth $ 40,000 and goodwill on the acquisition of the competing companies worth $ 40,000. The total value of the assets of Crossbow Ltd was $ 1,680,000 (Lambert, 2011). The information further states that the recoverable amount of the business was $ 1,420,000 and its fair value less the cost of disposal of the land was $ 171,000.

Since the land and the total assets of Crossbow Ltd have shown indicators for impairment, they ought to be adjusted for impairment. In this case, the land had a fair value less the cost of disposal of $ 171,000 (Ifrs.org, 2009). Its carrying amount as at 30^th June 2015 was $ 200,000. Since the carrying amount is higher than the fair value less cost of disposal, there is an indication that the land may be impaired and therefore we need to adjust for impairment. The loss on impairment of land will therefore be $ 29,000. For the total assets of the business, the recoverable amount or the market value was $ 1,420,000 while the carrying amount of those financial assets was $ 1,680,000 (Ifrs.org, 2009). This means that the loss on impairment of those financial assets was $ 260,000 as shown in the tables below. I would advice the company to adjust the value of these financial statements in order to reflect the true net worth of the company. 

Impairment of land- asset held for sale or disposal
	Dr.	Cr.
Loss on impairment	$      29,000.00
Fair value less cost of disposal	$    171,000.00
Carrying amount of land		$    200,000.00
Impairment of financial assets of the company- assets held for use
	Dr.	Cr.
Loss on impairment	$    260,000.00
Recoverable amount of the financial assets	$ 1,420,000.00
Carrying amount of the financial assets		$ 1,680,000.00

References

Iasplus.com (2015). IAS 36- Impairment of Assets. Web. Retrieved on 20^th September 2016 from http://www.iasplus.com/en/standards/ias/ias36/

Iasplus.com (2014). IFRS 7- Financial Statements: Disclosures. Web. Retrieved on 20^th September 2016 from http://www.iasplus.com/en/standards/ifrs/ifrs7/

Charterededucation.com (2013). Impairment: Recognition and Measurement of IAS 36. Web. Retrieved on 20^th September 2016 from http://www.charterededucation.com/ifrs/impairment-recognition-measurement-for-ias-36/

Lambert, R. (2011). Finance & accounting. Philadelphia: Wharton Digital Press. Retrieved on 20^th September 2016.

Choi, F. (2003). International finance and accounting handbook. Hoboken, N.J.: J. Wiley. Retrieved on 20^th September 2016.

Ifrs.org (2009). Module 7- Impairment of Assets- IFRS. Retrieved on 20^th September 2016 from http://www.ifrs.org/IFRS-for-SMEs/Documents/Module%2027_version2012-08_Impairment%20of%20Assets.pdf/

 

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