ACW2491 Financial Reporting

Semester 2 2018
Lecture Handout/Illustrative Example
Topic 6: Impairment of Assets

Example 1
Machinery has a cost of $160 000, and accumulated depreciation of $60 000. The fair value less costs to sell is
determined to be $85 000, and the value in use is $90 000.

Identify model: Cost model

Step 1: Determine CA and RA
Carrying amount: Cost- Acc depreciation= $160 000- 60 000 = $100 000
Recoverable amount: Higher of VIU and FV less cost to sell; $90 000
CA> RA, thus impairment loss of $10 000

Step 2: Journal entry

Dr Impairment loss 10 000
Cr Acc depr and impairment loss 10 000

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Illustrative Example 1: Impairment of cash generating unit
Shepherd Ltd has determined that its dog food division is a cash generating unit. The carrying amounts of the
assets at 30 June 2018 are as follows:
Buildings $500 000
Equipment $300 000
Land $250 000
Fittings $150 000
$1 200 000
The cash generating unit has been assessed for impairment and it has been determined that the fair value less
costs to sell is $1 188 000.

Required
1. Calculate the impairment loss and provide any appropriate journal entries.
2. What would be your answer if the land has a fair value less cost of disposal of $248 500?

Solution
Part 1:
Step 1: Determine CA and RA, identify impairment loss

CA = $1 200 000 and RA = $1 188 000

CA > RA so impairment loss = $12 000

Step 2: Pro-rate impairment loss to assets that can be impaired

The impairment loss is allocated across the assets on a proportional basis as follows…
Carrying Proportion Allocation Net Carrying
Amount of Loss Amount
Buildings 500 000 500 / 1200 5 000 495 000
Equipment 300 000 300 / 1200 3 000 297 000
Land 250 000 250 / 1200 2 500 247 500
Fittings 150 000 150 / 1200 1 500 148 500
1 200 000 12 000

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 ACW2491 Financial Reporting
Semester 2 2018
Lecture Handout/Illustrative Example
Topic 6: Impairment of Assets
Step 3: Check for restriction: NA
Step 5 Journal entry
The journal entry to record the impairment loss is:
Dr Impairment loss 12 000
Cr Acc depn and imp losses – buildings 5 000
Cr Acc depn and imp losses – Equipment 3 000
Cr Land 2 500
Cr Acc depn and imp losses – Fittings 1 500
(Allocation of impairment loss)

Part 2:
Rule: no assets is to be reduced below the highest of its fair value less cost of disposal, or value in use or zero
Step 3: Check for restriction
The amount of impairment allocated to land is $2500 thus the net carrying value after the allocation is
$247,500.
However, land can only be impaired to the maximum value of $1500 so that the net carrying amount after
impairment is $248500.

Step 4: Pro-rate the balance to other assets

Balance of impairment loss of $2,500 -$1500 = $1,000 is to be allocated to be remaining assets on pro rata
basis

Buildings 495 000 495 / 940.5 526 494 474

Equipment 297 000 297 / 940.5 316 296 684
Fittings 148 500 148.5 / 940.5 158 148 342
940 500 1 000

The impairment loss is allocated across the assets on a proportional basis as follows…
Carrying Proportion Allocation Net Carrying
Amount of Loss Amount
Buildings 500 000 5 000+526 494 474
Equipment 300 000 3 000+316 296 684
Land 250 000 1 500 248 500
Fittings 150 000 1 500+158 148 342
1 200 000 12 000

Step 5: Journal entry

The journal entry to record the impairment loss is:
Dr Impairment loss 12 000
Cr Acc depn and imp losses – buildings 5 526
Cr Acc depn and imp losses – Equipment 3 316
Cr Land 1 500
Cr Acc depn and imp losses – Fittings 1 658
(Allocation of impairment loss)

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 ACW2491 Financial Reporting
Semester 2 2018
Lecture Handout/Illustrative Example
Topic 6: Impairment of Assets
Illustrative Example 2: Impairment of CGU with goodwill and reversal
At 30 June 2018, Reacher Ltd reported the following assets:
Land 50 000
Plant 250 000
Accumulated depreciation (50 000)
Goodwill 8 000
Inventory 40 000
Cash 2 000

All assets are measured using the cost model.

At 30 June 2018, the recoverable amount of the entity, considered to be a single cash-generating unit, was
$272,000.
For the period ending 30 June 2019, the depreciation charge on plant was $18 400. If the plant had not been
impaired the charge would have been $25 000.
At 30 June 2019, the recoverable amount of the entity was calculated to be $13 000 greater than the carrying
amount of the assets of the entity. As a result, Reacher Ltd recognised a reversal of the previous year’s
impairment loss.

Required:
Prepare the journal entries relating to impairment at 30 June 2018 and 2019.

Solution
Step 1: Determine CA and RA, identify impairment loss
CA = $50 000 + (250 000 – 50 000) + 8 000 + 40 000 + 2 000 = $300 000
CA > RA so impairment loss = $300 000 - $272 000 = $28 000

Step 2: Charge impairment loss to goodwill

The impairment loss is allocated as follows…
The goodwill of $8 000 is written off first.

Step 3: Pro-rate the balance to other assets that can be impaired

The remaining $20 000 impairment loss is allocated against the non-monetary assets excluding inventory as
per AASB 136/ IAS 36:

Carrying Amount Proportion Allocation Net Amount

Land 50 000 50/250 4 000 46 000
Plant 200 000 200/250 16 000 184 000
250 000 1 20 000 230 000

Step 4: Check for restriction: NA

Step 6: Journal entry
The journal entry to record the impairment loss at 30 June 2018 is:

Impairment loss 28 000

Goodwill 8 000
Land 4 000
Acc depn and impairment losses – plant 16 000
(Allocation of impairment loss)

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 ACW2491 Financial Reporting
Semester 2 2018
Lecture Handout/Illustrative Example
Topic 6: Impairment of Assets
At 30 June 2019:
Step 1: Determine CA and RA, identify reversal of impairment loss.
The recoverable amount is $13 000 greater than the carrying amount, hence there is a reversal of an
impairment loss. Firstly we need to examine the accounts and determine the maximum amount that can be
reversed (our limits):

Step 2: Pro-rate reversal of impairment loss to assets that can be reversed

Allocate the reversal on a proportional basis:
CA at 30/6/18 Proportion Allocation
Land 46 000 46 000 / 211 600 2 826
Plant 165 600 165 600 / 211 600 10 174
211 600 1 13 000

Step 3: Check for restriction

CA at 30/6/18 CA – if no imp Difference
(limit)
Land 46 000 50 000 4 000
Plant 250 000 250 000
Less: Accumulated depn 30/06/18 (50 000) (50 000)
Less: Depn expense during 2019 (18 400) (25 000)
Less: Impairment losses (16 000) -
165 600 175 000 9 400
13 400
However, the plant can only be revalued upwards by $9 400 (limit).

Step 4: Pro-rate to other asset(s)

The balance of (10 174 – 9 400) $774 is allocated to the land which increases its allocation to (2 826 + 774)
$3,600, which is still less than the $4 000 limit.

Step 5: Journal entry

The journal entry to record the reversal of impairment loss is:

Land 3 600
Acc depn & impairment losses - plant 9 400
Income – reversal of impairment loss 13 000
(Reversal of impairment loss)