This Issue - Icwai

(contd.)
Impairment Loss
calculation
Allocation of goodwill
Method of determining
impairment—goodwill
Impairment loss calculation
— goodwill
Impairment loss calculation—indefinitelived
intangible assets
Reversal of loss
FINANCIAL FINANCIAL ACCOUNTING
ACCOUNTING
US GAAP
determined that the asset
is not recoverable, impairment
testing must be
performed
The amount by which
the carrying amount of
the asset exceeds its fair
value, as calculated in
accordance with ASC
820 (formerly FAS 157).
Goodwill is allocated to
a reporting unit, which
is an operating segment
or one level below an
operating segment
(component).
Requires a recoverability
first at the reporting
unit level. If the
carrying amount of the
reporting unit exceeds
its fair value, then
impairment testing
must be performed.
The amount by which
the carrying amount of
goodwill exceeds the
implied fair value of the
goodwill within its
reporting unit.
The amount by which
the carrying value of the
asset exceeds its fair
value.
Not permitted
IFRS
The amount by which
the carrying amount of
the asset exceeds its
recoverable amount;
recoverable amount is
the higher of : (1) fair
value less costs to sell,
and (2) value in use
Goodwill is allocated to
a cash-generating unit
(CGU) or group of CGUs
which represents the
lowest level within the
entity at which the
goodwill is monitored
for internal management
purposes and cannot be
larger than an operating
segment as defined
in IFRS 8 Operating
Segments.
One-step approach requires
that an impairment
test be done at the
cash generating unit
(CGU) level by comparing
the CGU’s
carrying amount, including
goodwill, with its
recoverable amount.
Impairment loss on the
CGU is allocated first to
reduce goodwill to zero,
then, the carrying
amount of other assets in
the CGU are reduced pro
rata, based on the carrying
amount of each asset.
The amount by which
carrying value of the
asset exceeds its recoverable
amount.
Not permitted for
goodwill. Other longlived
assets must be
reviewed annually for
reversal indicators. If
appropriate, loss may
be reversed up to the
newly estimated recoverable
amount, not to
exceed the initial carrying
amount adjusted
for depreciation.
Impairment loss under IFRS and US GAAP
● Cost Rs 6,000,000 ● Accumulated depreciation
Rs. 3,000,000 ● Expected future cash flows (discounted)
Rs. 2,800,000 ● Expected future cash flows (undiscounted)
Rs. 3,100,000. Fair value less costs to sell Rs. 2,400,000.
Under IFRS, impairment loss of Rs 200,000 is
recognized for (carrying value of Rs 3,000,000 minus
discounted future cash flows of Rs 2,800,000.
Under US GAAP, no impairment loss is recognized
—(since the carrying amount of Rs 3,000,000 is less than
the sum of the undiscounted cash flows of Rs. 3,100,000.
Few issues for Management
From the above discussion it is fairly clear that
Impairment testing and its requirements under IFRS
is a management’s task and not solely an accountants
job.The Management systems needs to be synchronised
and adapted for all the issues of impairment
and for all the issues emanating from impairment.
Impairment is a process of evaluating the business
itself—hence involvement of Senior Management is a
must firstly for assessing impairment and evaluating
its strategic dimensions.
Scenario Relevance
Large Indian companies could report a sharp fall
in the valuation of their assets as new accounting
norms prompt these firms to reassess the fair value
of their units, a mandatory condition under globalised
reporting standards. Adoption of the International
Financial Reporting Standards (IFRS), a modern
accounting system that Indian companies have to
migrate to from next year, could see local firms
publicly admit to any erosion in the value of their
subsidiaries or other assets — like Vodafone that
recently shaved off $3.2 billion (about Rs 14,600 crore)
from its Indian unit due to adverse market conditions.
Impairment of Assets for Consolidated Accounts for
Tata Chemicals is Rs 119.22Cr in 08-09 and Rs 34.90
Cr in 09-10 as per Annual Report—a variance of more
than 300%. Impairment for Fixed Assets for Dabur
India Ltd Rs 2.58Cr 09-10 and Rs. 1.59Cr for 09-10. In
2005-06 Hindalco had written off Rs. 336.29 million
as per AS 28 as impairment of different Assets. The
above figures has been given to emphasise that
impairment is an important component in assessing
the business and has strategic implications. An
accountant merely records it but the figures of
impairment are emanated from decisions taken at the
strategic level for the company as a whole. A wrong
acquisition, a new product in the category with new
technological dimensions are some of them. Again,
market when in a downturn or recession, will lead to
increase in reported impairment figures of corporates
which, in turn, will affect the bottomline, in addition
to the decrease in sales or market size affecting the
bottomline. Impairment is a subject which needs
attention of Highest levels of Management as it is—
in one way —Evaluation of the Business itself. ❐
Reference
■ Annual Reports of Tata Chemicals,Dabur India,Hindalco
■ /EzineArticles.com/?expert=Matthew_DeMark.
The Management Accountant |September 2011 781