This Issue - Icwai

FINANCIAL FINANCIAL ACCOUNTING
ACCOUNTING
binding agreement at an arm’s length transaction less
cost to sell.
2. If no binding agreement exists then the estimate.
should be based on Asset Prices in an active market
less cost of disposal.
3. If both are not available it is based on the Best
Estimate available on what will be the realisations
from the asset at the end of the reporting period less
cost to sell.
4. If market price is not available then Discounted
Cash Flow can be used for calculating the Fair value.
Treatment of Impairment Loss in Accounts
1. For non-revalued assets
* impairment loss is recognized in profit or loss.
2. For revalued assets
* impairment loss is recognized in other
comprehensive incomes reducing the revaluation
surplus for that Asset.If the Impairment Loss exceeds
the Revaluation Surplus the remaining loss is
recognised as an expense in the Profit & Loss Account.
3. Carrying amount is reduced to recoverable amount
* recoverable amount becomes new carrying amount.
* depreciation will be adjusted based on new
carrying amount.
However, the Standard does not give any direction
whether the Impairment is to be credited to the Asset
A/c directly or added to Accumulated Depreciation
or Treated as a depreciation in Balance Sheet
separately depicted and reduced from asset there.
For assets carried at historical cost, impairment
losses are recognised as an expense immediately in
profit or loss. If the impaired asset is a revalued asset
under IAS 16 or IAS 38, the impairment loss is treated
as a revaluation decrease and recognised directly in
other comprehensive incomes reducing the revaluation
surplus for that asset. To the extent the impairment loss
exceeds the revaluation surplus it is charged in PL.
Corporate Assets
Corporate Assets indicate Head Quarters Building,
Equipments which do not generate any Cash
Flows by itself but needs to be tested for impairment
as per IAS 36, otherwise these Assets will not be tested
for impairment and also give a way out to companies
to bypass the impairment testing. IAS 36 requires
that the Corporate Assets need to allocated to the Cash
Generating Units to which it is most closely associated.
The most logical approach seems to allocate
Corporate Assets on the basis of some objective
criteria like Turnover, Unit Cash flow etc.
Impairment of Goodwill
Goodwill can primarily take two forms: purchased
goodwill and internally-generated goodwill. Under
IFRS 3 and, IFRS 10, internally-generated goodwill
cannot be capitalised. Goodwill as per IAS 36 is to
be tested for impairment once in a year whether
impairment indicators exist or not.
Goodwill of the acquirer is allocated to the CGU
or group of CGU which is effected by the synergies of
the acquisition—whether the assets and liabilities
acquired are transferred or allocated to that CGU/
Group of CGU or not. The Goodwill to be allocated
for impairment Testing to a CGU or a Group of CGU
but the Group of CGU cannot be larger than
“operating Segments” as defined inIFRS8 . If goodwill
has not been allocated to individual CGUs, as is often
the case, but is monitored at a higher level, a twostage
impairment test is required.
Firstly, impairment testing is performed at
individual CGU level, comparing individual CGU
recoverable amounts with the assets that have been
directly allocated to the CGU (for example, a retail
store for a retailer). Any impairment identified at this
level is allocated to the fixed assets being tested.
Secondly, the recoverable amount of the group of
CGUs to which goodwill relates is compared with all
of the assets of those CGUs plus the goodwill. At this
second stage, any impairment is charged against
goodwill until that is exhausted.
When a CGU, or group of CGUs, to which goodwill
is allocated is tested for impairment, any impairment
loss is allocated first to reduce the carrying amount of
the goodwill. The remaining loss (if any) is then
allocated to other assets of the CGU pro rata on the basis
of the carrying amount of each asset in the CGU.
However, in this process, the carrying amount of an
asset will never be reduced below the higher of its
individual recoverable amount and zero.
Example for Goodwill Impairment
ABC takes over 80% of XYZ Ltd on 1 May 2009
Price paid by ABC Rs. 200,000
Net Assets of XYZ is Rs. 150,000
80% of Assets Rs.120,000 for which price paid is
Rs. 200,000 ie Rs. 80,000 has been paid for Goodwill.
ABC allocates Rs 100,000 Goodwill to XYZ Ltd and
balance is allocated to other CGU having synergistic
benefit from the takeover.
On March 31, 2010, ABC Tests Goodwill for
Impairment as required by Standards.
The Recoverable value of XYZ as on 31, 2010, was
Rs 90,000 and its Net Assets excluding Goodwill was
Rs 130,000.
Carrying Amount as on 31 March 100,000 + 130,000
= 230,000. Notional Goodwill for unrecognised
The Management Accountant |September 2011 779