Impairment Loss: Joint Ventures Viability Assessment Strategies
Question
Task: Provide a short note on the subject of an Impairment loss for the joint ventures.
Answer
Introduction
The condition of impairment happens when there is a devaluation in the market value as compared to the book values provided in the balance sheet and other financial statements of the company. Roughly saying, the term impairment signifies the plunge in the price of its asset which is well-defined in the balance sheet. In this context, the term asset relates to those holdings which have a durable market but has faced a sudden decrease in its value. If said in other words, the disparity between the value of cash-generating units along with the real rectifiable sum is labeled as an loss because of impairment. These sorts of impairments happen only to the assets which come under the classification of IAS 36 – Impairment of Assets. In the similar context, it is very significant to grasp the methodology of calculating the data (investopedia.com, 2016). The supposed asset as documented in the balance sheet of the concerned organization afterwards the incident of devaluation added up with the value of loss because of impairment is classified as the carrying amount. The section of assets like machineries, secondary investments, intangible assets, joint ventures, goodwill, etc. comes under the classification mentioned above.
The major motive of implementing the introduce accounting principle is to make it certain that the investors are informed about the major issues and the value of the actual recoverable amount of assets. This process further helps in calculate the actual wealth of the organization. The international standards of accounting make it compulsory to maintain the relevant records under the category of the impairment loss (iasplus.com, 2014). The value of the asset is considered as revenue in the statement of income in the organization which is deducted from the value of concerned holdings while recording it in the balance sheet. Although the mentioned set of standards is applicable to most of the assets there are some to which this is not applicable. Those are
- Benefits for the employee – IAS 19
- Inventories – IAS 2
- Assets described in the Construction contract – IAS 11
- The contract for insurance – IFRS 4
- Agricultural holdings sustained ate reasonable value – IAS 41
- Deferred tax asset- IAS 12
- The holdings of investment which are sustained at reasonable value – IAS 40
- Various fiscal holdings like financial lease – IAS 39
- Non-current assets which are considered for sale – IFRS 5
At the end of the financial year or any previously set deadline, there is a compulsory provision of testing the impairment issue even if everything seems to be very normal and balanced. After conducting a very detailed analysis, the management would come to know about some external and internal signals concerned with impairment according to which it could be determined by the higher authorities whether the assets should be impaired or not. The term external factors include the dynamics like decrease in the market value, variations in economic factors or significant changes in legal provisions which may cause detrimental effects, innovation in technology, the disparity in the level of market capitalization and net assets of the relevant organization, and hike in the rate of market interest. In the section of internal factors, the elements like futility and ineptness of the assets, the holdings put aside for sale, the fact whether the performance of the company has affected because of the higher value of carrying amount of assets as compared with the carrying amount of assets which are complementary to the decision to impair the assets. It is strongly recommended that if any symptom or sign of impairment is received then it would be very vital to check the longevity of the asset, the residual value and the technique of devaluation to be implemented (accaglobal.com, 2014).
If taken an instance of an asset being allotted for sales, the respective carrying amount would be checked and adjusted to the level which could be attained in the process of sales of the aforesaid asset as compared to the cash flow to be generated in future by the asset.
The standard mentioned above not only clarifies not only the measures to be adopted in accounting process for the decrease in value of assets but also the technique to overturn or undo the loss incurred in the process of impairment. The proposed set of amounts should be put aside solely for the depreciated cost occurred in the past if the cost of asset was not undergone the issue of impairment. Besides reversing the effect with respect to the evaluated assets, the reflection of loss incurred in the records of profit and loss account. Once this procedure is followed correctly the management could calculate the future estimate of the depreciation and record it for further evaluation. Although the drawback of this process is that the turnaround of the loss caused by the occurrence of impairment on reputation and goodwill is not applicable.
The provisions regarding the impairment of assets and revelation stipulations are laid down under the section IAS 36. Some of them are provided below: -
Revelation in classifications of Assets under the provisions of IAS 36. 126):- According to the provisions laid down under the section of IAS 36. 126, it is made mandatory to reveal the damage identified along with the damage that is recovered or inverted in the records of profit and loss account. As the items enlisted in the provision, the declaration on inclusive revenue, the amount of loss incurred because of the impairments happened, and progress on the reversal of the revalued assets are described in this provision in separate and relevant sections.
Revelation provided in the reportable segment of IAS 36. 129:- The special sections which are classified as reportable consist of several assets, therefore, a revelation of the identified reversal of the damage caused by the impairment should be done as obliged in the section of IAS 36. 129.
Other Disclosures: It is mentioned in the section of IAS 36. 130 that if the extent of loss happened in the impairment or its reversal is very significant and noticeable then it should be disclosed. The measure of disclosure is made mandatory because of the strict stipulation of identification and reversal of impairment, the amount, asset which is subjected to impairment and reversal, capital, and distribution of various sum in various sections of assets. It is also provided in this law that if the amount to be recovered is identified to be the remainder of the just worth along with the selling price of the holding then the application of the IFRS 13 must be carried out to calculate the just worth of an asset (pwc.com, 2014).
The process of impairment of assets is described under the AASB 136 section of the Australian Accounting Standard Board which displays a lot of similarities with the International Accounting Standards. The Australian Accounting Standard Board is very strictly bound on the companies that have registered themselves in Australia. This standard came to force from the first of January 2005. In some of the cases, it would be very hectic and even impossible to calculate the amount of impairment in assets on an individual basis in any company. In this situation of dilemma, the new idea of Cash Generating Unit or CGU arises which pertains to the redeemable sum which would signify and helps to calculate the volume of the impaired asset. In this sort of special circumstances, the primary section of the sum in impairment is put aside for the reputation and goodwill of the company. The outstanding fund of the impairment is distributed for the asset classified under the division of the Cash Generating Unit on a proportional basis (Australian Accounting Standards Board, 2009).
The necessities and the provisions mentioned in the section of IAS 36 which pertains to the impairment of the asset are very wide and demanding to be executed since it is very hard to assess each factor related to the impairment of the asset and its cause of occurrence. Although these figures bear a lot of significance in the crucial decisions of the company. Thus the calculation of the requirements under the division of IAS 36 is made very obligatory by the stipulations of the Australian Accounting Standards which is followed on a global basis.
The most common assets which could be subjected to impairment are manufacturing machinery for shoes, shoe manufacturing factory, and reputation which are also associated with the procuring of relatively smaller rival organizations. If considered the case of shoe manufacturing company Crossbow Shoes, it would be observed that the company would not be subjected to the procedure of impairment in its assets since, most of the business processes in the organization are based on online platform and sales strategy in e-commerce and ever since there is no any demise in the reputation of the firm which makes it simpler for the institute to enter and develop in the operational market. Since all the related provisions are enclosed under the provisions of IAS 2 other sections of the records or inventory are not exposed to the effects of the impairment.
In this case, the land under the holding of the company is considered as a separate property thus a separate record and calculation of the company should be conducted to evaluate the impairment on land. As per the records and the financial statements of the organization as per the details on 30 June 2015 the assets amounted to $1680000. Although the amount of recoverable sum was projected to be $1420000. Hence by the common operation of mathematics, it could be deducted that the impairment amounted to be $ 260000 ($1680000 - $1420000 = $260000). It was also calculated that the expected recoverable amount of land is exclusively equal to $ 171000. Thus the quantity or value of the loss because of the impairment of land amounted to $29000 ($ 200000 - $ 171000 = $ 29000).
According to the stipulations provided under IAS 36, if the case arises that there is some ambiguity prevailing in the quantity of the individual holdings the reputation of the company would reduce drastically. This would lead to the depreciation of the other assets one by one (ey.com, 2014). It could be eventually calculated that the value of impairment after distribution of $ 29000 to the land asset is $ 231000, from which the sum of $ 40000 is put aside to develop the status of the company and the remaining $191000 was distributed at the ratio of 7:4 to the factory and machinery. The value of the impairment’s loss incurred in the factory by 7/11 * 191000 = $ 121545 and consecutively for the machinery by 4/11 * 191000 = $ 69455.
As per the records provided in the Journal Entries till the date of 30th June 2015 for loss incurred because of the impairment:
- For impairment of land: Profit and Loss Account (loss on impairment) Dr...............$29000
To accumulated impairment loss (Land)...............................................$29000
- For impairment of other assets: Profit and Loss Account (loss on impairment) Dr.................$231000
To goodwill A/c.....................................................................................$40000
To accumulated impairment loss (Shoe Factory)A/c...........................$121545
To accumulated impairment loss (machinery) A/c................................$69455
References:
accaglobal.com, (2014), IAS 36 Impairment of Assets, Available at https://www.accaglobal.com/in/en/discover/cpd-articles/corporate-reporting/ias36-impairment.html (Accessed 14th September 2016)
Australian Accounting Standards Board, (2009), Impairment of Assets- AASB 136, Available at https://www.aasb.gov.au/admin/file/content105/c9/AASB136_07-04_COMPjun09_01-10.pdf (Accessed 15th September 2016)
Dagwell, R., Wines, G., & Lambert, C., (2012), Corporate Accounting in Australia, Pearson: Australia
ey.com, (2014), Impairment Accounting – the basics of IAS 36 , Impairment of Assets, Available at https://www.ey.com/Publication/vwLUAssets/Impairment_accounting_the_basics_of_IAS_36_Impairment_of_Assets/$FILE/Impairment_accounting_IAS_36.pdf (Accessed 14th September 2016)
iasplus.com, (2014), IAS 36 – Impairment of Assets, Available at https://www.iasplus.com/en/standards/ias/ias36 (Accessed 14th September 2016)
investopedia.com, (2016), Impairment, Available at https://www.investopedia.com/terms/i/impairment.asp (Accessed 15th September 2016)
pwc.com, (2014), Making Sense of a complex world- IAS 36 Impairment of Assets, Available at https://www.pwc.com/gx/en/communications/pdf/ias36_impairment_of_assets_final.pdf (Accessed 14th September 2016)
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