Financial Report: Impairment Loss

Introduction

The Australian Accounting Standards Board (AASB) in 2004 released a 106-page accounting standard related to the impairment of assets. The AASB 136 is applicable to the annual reporting on or after 1 January 2005. The key feature of the AASB 136 is that it will replace the accounting standard AASB 1010, which is applied for the recoverable amount of non-current assets (Kabir & Rahman, 2016). In cases of profit, entities that comply with AASB 136 will simultaneously comply with IAS 136. This standard is applicable to all the entities required to prepare financial statements as per the Corporation Act. It should be noted that this standard applies to most assets except certain assets like financial obligations, inventories, deferred tax assets, and others.

Definition and Indications of Impairment Loss

Paragraph 6 of the standard defines impairment loss as the amount by which the recoverable amount is lower than the carrying amount of the assets. The recoverable amount is determined by comparing the value in use with the fair value after deducting the cost to sell. Paragraph 9 states that an entity is required to assess, at the end of the reporting period, whether there is an indication of the impairment of the assets. If such an indication exists, the entity must determine the recoverable amount of the assets (Sun & Zhang, 2017). However, it should be noted that as per Paragraph 10, irrespective of the indication, the test for impairment shall be conducted for intangible assets with an indefinite useful life and goodwill acquired in a business combination. Paragraph 12 provides that an entity should consider at least the following indications for assessing whether the asset is impaired:

• There is evidence of physical damage to the assets;
• There have been significant changes that adversely affected the entity;
• Internal reporting suggests that the economic performance of the assets might be adversely affected;
• There has been a significant decline in the market value of the assets;
• There have been significant changes in the political, social, and economic environment of the entity;
• There has been an increase in the market rate of return or market interest rate during the period.

Recognition and Measurement of Impairment Loss

Paragraph 59 of the standard provides that an entity is required to reduce the carrying amount of the assets to its recoverable amount if the recoverable amount is less. The reduction in the amount is treated as the impairment loss. Paragraph 60 states that the loss on impairment should be immediately recognized in the profit or loss statement (Gordon & Hsu, 2016). In the case of assets with an impairment loss greater than the carrying amount of the assets, the entity is required to recognize the liability as per Paragraph 62. It should be noted that as per Paragraph 63, after the recognition of the impairment loss, the depreciation charge is adjusted so that the revised carrying amount can be allocated to the remaining useful life of the assets.

Reversal of Impairment Loss

Paragraphs 110 to 116 of the AASB 136 provide the requirements relating to the reversal of impairment loss. It is stated that an entity should assess at the reporting date whether the impairment loss recognized in the previous year has reduced or no longer exists. If it is seen that there is an indication of such a possibility, the entity will assess the recoverable amount of the assets (Peterson, 2015). Paragraph 114 specifies that the loss on impairment recognized in the previous year for an asset other than goodwill should be reversed if there is an indication that there has been a change in the recoverable amount of the asset since the recognition of the impairment loss. Therefore, it can be said that the carrying amount of the asset should be increased to the recoverable amount. This process of increasing the carrying amount of the asset to its recoverable amount is termed the reversal of an impairment loss.

Disclosure and Reporting

Paragraph 119 of the AASB 136 states that the reversal of impairment loss, other than goodwill, should be recognized immediately in the statement of profit or loss. In the case of revalued assets, the reversal of impairment loss should be treated against the revalued amount. Paragraph 121 states that after the reversal of impairment loss is recognized, the depreciation charge should be adjusted for the carrying amount (Andersson & Wenzel, 2014). The entity is required to disclose the amount of reversal in the loss that has been recognized in the profit or loss statement. The amount of the reversal in the impairment loss that has been recognized immediately and directly to the equity during the period should also be recognized. In cases of material impairment, the entity is required to disclose the events or circumstances that led to the reversal of the impairment loss. The amount of the loss that has been reversed should be disclosed in the financial statement (Kowalski et al., 2016).

Conclusion

Therefore, based on the above discussion, it can be said that the reversal of the impairment loss of an asset should be recognized in the profit or loss statement. The reversal of the impairment loss and the appropriate accounting helps the entity to provide a correct view of the financial position of the company. This practice ensures transparency and accuracy in financial reporting, which is crucial for stakeholders' trust and informed decision-making.

References

Andersson, L., & Wenzel, S. (2014). Accounting standards and impairment loss. Journal of Business Finance.

Gordon, L. A., & Hsu, H. T. (2016). Impairment of assets: A study of accounting standards. Financial Analysis Journal.

Kabir, M. H., & Rahman, A. (2016). The evolution of accounting standards in Australia. Accounting Review.

Kowalski, J., Smith, R., & Black, T. (2016). Disclosure requirements for impairment losses. International Accounting Journal.

Peterson, R. (2015). Reversing impairment losses: An analysis. Journal of Accounting and Economics.

Sun, Y., & Zhang, W. (2017). Impairment testing and asset valuation. Journal of Financial Reporting.