Common Errors in Accounting for Impairment

Question: Discuss about the Common Errors in Accounting for Impairment. Answer: Introduction: This report is meant for Longreach Ltd. who is intending to implement impairment testing of their assets to comply with AASB standard 136. Impairment testing of assets is endorsed by Corporation Act 2001 through the procedure fixed by AASB standard 136 basic objective of impairment testing of assets to find the logical value of assets in real time factor. Normally derivation of present value of assets is made with the comparison of fair value of assets with logical decrement or increment. Basic criteria of impairment of assets are due to logical declination of the asset value due to its return to the firm. The reason of impairment testing of assets is made to understand the quantum of undiscounted future cash flow of any asset with the quantification of carrying amount of those assets to ensure evaluation of the loss of value of those assets(Aasb, 2007). The normal procedure of calculating impairment loss is through the exercise of finding out the current value of the asset in comparison to the fair value of those assets. Different world acclaimed accounting standards put real emphasis on derivation of impairment of assets as it becomes major area of concern for them. AASB with the convergence of IASB is trying hard to make a logical platform for this purpose to ensure proper evaluation of present value of assets with the derivation of impairment loss through testing procedure. This is not one time effort; instead AASB is continually evolving different logical features to make this practice more acceptable and logical through implementation of different modification to the existing Standards. Present standard prevailing for this purpose of AASB 136 which is being implemented since 2004(Aasb, 2009). Objective of impairment test: Australian Accounting Standard Board or AASB has brought Standard 136 for impairment of assets with guideline which is endorsed by section 334 of Corporation Act. The introduction of this standard is made on 15th July 2004 for logical discussion through welcoming different value addition by experts. Ultimately this standard is put in system since 1st July 2007. This standard is at par with the IASB standard 36 and had replaced erstwhile AASB standard 116 effective for impairment of assets in order to implement logical implementation of guideline for impairment of assets. Main goal of this effort is to ensure proper guidance to the business entity related to valuation of assets with the guideline that carrying amount of any asset should not cross the valuation of recoverable amount for that asset. Exception to this conception can happen in the context if carrying valuation of any asset exceeds the recoverable value of the asset. AASB standard 136 has provided option of impairment test ing of such asset for assessing the loss by the concerned business organization. This standard is also making provision of specification through which reversal of impairment loss may be effected through relevant disclosure. The standard is to be implemented mandatorily for the business entities from Australian origin that are in the process of preparation of financial report as specified Part 2M.3 of the Corporation Act related to General Purpose Financial Report or GPFR(Jade, 2015). Impairment test of Goodwill: Impairment test of goodwill is clarified in AASB standard 136 which is defined as intangible asset. Standard 136 of AASB is covering impairment test of goodwill through different paragraphs with numbers as 80 to 84. Consideration of goodwill is directly connected with cash generating unit of the business entity for this purpose. To ensure the objective of impairment test of goodwill, it is prescribed that goodwill considered for any business combination is to be treated with the cash generating units allocation of the said entity. This instruction is framed for ensuring the synergy of the combined units and without any connection refers to the existing assets or liabilities featured in the financial position of the entity. The derived valuation of goodwill allocated through the process will make representation of the lowest level of valuation within the entity and that is to be acceptable by the management of the entity in order to evaluate in internal consequences. Goodwill is not to be evaluated in the way so that it proves bigger than the operating segment as conferred by AASB 8 which defines operating segment before impact of aggregate valuation(Bdo, 2016). This paragraph is designated for recognizing goodwill for any business organization. The concept of recognition of goodwill is conferred as an asset for the specified business entity and is featured with non-recognizable and non identifiable so far its material value is concerned. It is also inferred that goodwill is not detrimental for generation of individual cash flow refer to any asset of business. Goodwill is there to add value to different multiple units which are responsible for generating cash for the specific business entity. It is also conferred that goodwill valuation is only acceptable in the lowest level of valuation within the entity to monitor internal process of management. At times the treatment of allocation of goodwill is made to the group of identified cash generating units and cannot be provided for allocation. These paragraphs are meant for evaluation process of impairment testing of goodwill as per the discretion of entity management and allocation of goodwill. Basic steps for Impairment test: AASB 136 has defined six basic steps for this purpose: Life of Cash generating Units or CGU Working capital movement Entitys Capital Expenditure Flow Payment of Tax Discount Rate of Industry Perpetual or Terminal Value of EBIT and EBITDA with to-be maintained cash flow(Murone, 2012). Conclusion: To summarize the report, impairment testing of assets of any entity is determined with the guideline of proper evaluation of assets as per compliance of AASB 136 so far Australian perspective is concerned. This standard is endorsed by Corporation Act 2001 of Australia. This impairment testing process of assets as per AASB 136 is complying with globally acclaimed IAS 36. Hence for Longreach Ltd, when they are intending to take impairment testing of assets, they have to consider the features of AASB standard 136 for successful implementation of this process. References: Aasb, 2007. Impairment of Assets. [Online] Available at: https://www.aasb.gov.au/admin/file/content105/c9/AASB136_07-04_COMPapr07_07-07.pdf [Accessed 10 January 2017]. Aasb, 2009. Impairment of Assets. [Online] Available at: https://www.aasb.gov.au/admin/file/content105/c9/AASB136_07-04_COMPjun09_01-10.pdf [Accessed 10 January 2017]. Bdo, 2016. Blind Freddy- Common Errors in Accounting for Impairment. [Online] Available at: https://www.bdo.com.au/getattachment/Microsites/Accounting-News/Accounting-News-May-2016/Home/elements/In-this-issue/1605_Accountingnews.pdf.aspx [Accessed 12 January 2017]. Jade, 2015. Impairment of Assets. [Online] Available at: https://jade.io/j/?a=outlineid=500075 [Accessed 10 January 2017]. Murone, P., 2012. The six steps to testing if your impairment testing is impaired. [Online] Available at: https://www.pitcher.com.au/news/six-steps-testing-if-your-impairment-testing-impaired [Accessed 12 January 2017].