This Issue - Icwai

FINANCIAL FINANCIAL FINANCIAL ACCOUNTING
ACCOUNTING
Minority Interest= 20/80 ¥ Rs. 100,000 = Rs. 25,000
Total Carrying Value = Rs 255,000 (A)
Recoverable Amount = 90,000 (B)
Impairment Loss = Rs. 165,000 (A-B)
Loss to be Adjusted in the following order
1. Notional Goodwill Rs. 25,000 being adjustment
no entry in accounts
2. Goodwill Rs. 100,000 written through PL
3. Assets Rs. 40000 Written-off through PL
Reversal of Impairment Loss under IFRS
Reversal of Impairment Loss booked in earlier
years can be reversed under IFRS for other than
Goodwill. It is important to note that reversal of
impairment loss of an asset, other than goodwill, need
to be recognized only to the extent which in no case is
in excess of its original pre-impaired value less
subsequent depreciation. Thus while reversing
impairment loss the first step should be to establish
the pre-impaired value of the asset less subsequent
depreciation. Second step should be to calculate the
difference between the value calculated as per step
first and the carrying amount of the asset. Finally
impairment loss can be reversed to the extent of value
difference as calculated under step second. In the case
of reversal of impairment loss of cash generating
assets the reversal is done on prorata basis with the
carrying amount of the assets, excluding goodwill. In
the case of goodwill reversal of impairment loss is
not allowed. Illustration
Asset Purchased on 2008-09 for a value of
Rs. 200,000 Life 10 yrs. Asset as on 31 March 2010
value Rs. 200,000 Accumulated depreciation 40,000,
Net Book Value Rs. 160,000. As on 31 March 2010
Impairment Indicators exists and the Asset needs to
be tested for impairment. The recoverable value is Rs.
140,000. The carrying Amount is Rs. 160,000 means
that the Assets is impaired and impairment loss of
Rs. 200,00 needs to be taken into account and Asset
written down to Rs. 140,000.
Gross Value Rs. 200,000
Accumulated Depreciation Rs. 40,000
Impairment Rs. 20,000
Net Asset Value Rs. 140,000
As on 31 March 2011 the Asset has a Gross Value
Rs. 200,000 Accumulated Depreciation Rs. 40, 000 +
14,000/8 Current Yr 10-11 Depreciation, (Depreciation
for remaining life and new book value after
impairment) = Rs. 57,500, impairment Rs. 20,000, Net
Book value Rs. 122,500. Say impairment indicators
exist and it needs to be tested again for impairment
and the recoverable value comes to Rs. 150,000.
Now question is how much of Impairment loss can
be reversed. In the first step we have to calculate the
Book value on 31 March 2011 had impairment not
been made
A) Asset Value Rs. 200,000
B) Accumulated Depreciation Rs. 40,000 as on 31
March 2010
C) Current Yr Depreciation Rs. 20,000
Net Book Value Rs. 140,000 (A – B – C)and this is
the Maximum book Value to which the asset can be
written up.
31 March 2010 31 March 2011
Cost of Machine 200,000 Cost of Machine 200,000
Accumulated Depreciation 40,000 Accumulated Depreciation 57,500
Impairment 20,000 Depreciation Charged to PL 17,500
Net Book Value 140,000 Impairment written back 2,500
Net book value 140,000
Total Amount Charged to PL AC Net Effect in PL net of Depreciation
Rs. 40000 Impairment Rs. 20000 and Impairment Rs. 17500 – 2500 =
current yr depreciation Rs. 20000 Rs. 15000 Dr
The FASB in the U.S. does not allow upward
revaluation of fixed assets to reflect fair market values
although it is compulsory to account for impairment
in fixed assets (downward revaluation of fixed assets)
as per FASB Statement No. 144, Accounting for the
Impairment or Disposal of Long-Lived Assets.
The United Kingdom, Australia, and India allow
upward revaluation in the values of fixed assets to
bring them in consonance with fair market values.
However, the law requires disclosure of the basis of
revaluation, amount of revaluation made to each class
of assets (for a specified period after the financial year
in which revaluation is made), and other information.
The standard specifically prohibits the reversal of
impairments to goodwill.
IFRS and US GAAP
Accounting for impairment of assets is one area
where there are significant differences between GAAP
and IFRS
US GAAP IFRS
Impairment of Long
Assets
Two-step approach requires
recoverability test
be performed : Step one,
requires a company to
estimate future undiscounted
cash flows expected
from the use of
that asset and its eventual
disposition (carrying
amount of the asset is
compared to the sum of
future undiscounted
cash flows generated
through use and eventual
disposition). If it is
One-step approach
requires that impairment
testing be performed
if impairment
indicators exist
(contd.)
780 The Management Accountant |September 2011