Impairment test under AASB 136

Questions: 1.The purpose of the impairment test? 2. How the existence of goodwill will affect the impairment test? 3. The basic steps to be followed in applying the impairment test? 4. Crossbow Ltd is an entity that specialises in the manufacture of leather footwear for women. It has aggressively undertaken a strategy of buying out other companies that had competing products. These companies were liquidated and the assets and liabilities brought into Crossbow Ltd? Answers: Introduction Impairment test under AASB 136 on the assets of The Longreach group Ltd could be explained as a way of finding the true value of assets. AASB 136 has been amended and converted into IAS 136. The Longreach group Ltd is private equity firm which is mainly engaged in investment services on the behalf of clients in several mutual funds. Impairment test is very important in order to provide true and fair value of assets in financial statement. As per various rules and regulation many entities have been using impairment test, models, assumption to evaluate all the assets. IAS 136 provides all the basic steps which should be followed by The Longreach group Ltd for implementing impairment test. 1. Purpose of impairment test IAS 136 provides all the steps for impairment of assets. It seeks to ensure that companys assets are not booked at or not shown at the higher value than its recoverable amount in its balance sheet. An impairment test is newly adopted mechanism started in Australia to measure the right value of assets. This test is implemented at the time whenever it is required except in case of goodwill and other intangible assets for which yearly impairment test is implemented by entities. The mainly purpose of impairment test is to identify or assess whether assets shown in financial statement may be impaired throughout the time. Impairment test helps entity to depict the true and fair value of its organization to its stakeholders (Finch, 2009). 2. Impact on the impairment test with the existence of goodwill Goodwill impairment is related with charge that companies record when goodwills carrying value on the balance sheet exceeds its fair value. The Longreach group Ltd has to run its impairment test on its goodwill on annual basis (Godfrey, et., al., 2009). The main impact on the impairment test with the existence of goodwill would be that company has to run its impairment test on annual basis. However, in case if company acquire other company and it results into lower down of cash generating units from the combined business functioning. Then in this case company should decrease its fair value of amount which was paid at the time of acquisition of Target Company. Testing of goodwill for impairment Testing of goodwill for impairment is related with allocation of cash generating units. If Goodwill has been distributing for CGU then goodwill associated with the operation shall be included in the carrying amount (Determined amount) of cash generating unit when deciding loss and gain on disposal. Goodwill in business has direct effect on impairment test on CGU (cash generating units) to which goodwill has been allocated. Ideally goodwill should be allocated to CGU that take benefits form the synergy of combination of two different units. If the recoverable amount of unit is more than booked amount of units (to which goodwill has been allocated) then it would be said not impaired assets. But in case if carrying amount exceeds the recoverable amount of unit then entity would be recognized impairment loss. Impairment test on goodwill allocated to particular year. For impairment test, acquired goodwill in business will affect the impairment test on CGU (group of assets that generate cash inflow). Goodwill must be allocated to CGU that are expected to take benefits from the synergy of combination of two businesses. In this case AIT for the CGU in which Goodwill was allocated must be performed during the reporting period. In addition, individual test would also be done to identity the true value of all assets of The Longreach group Ltd. (Hart, et., al., 2008). Impairment test of goodwill of The Longreach group Ltd is dependent upon the recoverable amount of either entity value or equity value. In case of recoverable amount computed as per entity value then results drawn in impairment test should be compared with invested capital. But in case of equity value amount of recoverable value would be based on the shareholders of equity. After analyzing this fact it would be computed that if recoverable amount based on entity value is less than investment amount of The Longreach group Ltd then it will result into reduction of goodwill amount to difference amount. But at the same time carrying amount would not be decreased from its fair value of cost of capital (Sorros, et., al., 2015). 3. Basis steps in impairment test Impairment test is concerned with computation of carried value, recoverable amount and identification of cash generating units in particular time periods. Prescribe procedure and other basic steps have been given under IAS 136. The Longreach group Ltd has to determine the recoverable value and carried value of all the assets shown in balance sheet to identify whether value of assets have been impaired or not. If recoverable value of assets is less than its carried value then it impairment of assets would be made. However, in case of goodwill impairment test would be made on annually basis. For the impairment test Longreach group Ltd would indulge in recoverable test for identifying the true values of items shown in balance sheet. Impairment test would be evaluated with the undisclosed Cash inflow of CGU and then it would be compared with their carrying amount. If cash inflow of CGU is less than amount of asset shown in financial statement then it would be determine that assets of the company is not recorded at its true value and impairment test would be indulge. There are following basic steps which are shown in the diagram shown below. 4. Computation of the Impairment Loss A. Carrying amount of cash generating unit including goodwill Amount ($) Land 200,000.00 Inventory 180,000.00 Brand 'Crossbow Shoes' 160,000.00 Shoe Factory 700,000.00 Machinery for manufacturing shoes 400,000.00 Goodwill on acquisition of competing 40,000.00 Total 1,680,000.00 B. Recoverable amount 1,420,000.00 C. Impairment Loss (A-B) 260,000.00 Journal Entry to Record Impairment Loss S. No. Account Titles Debit Credit 1 Impairment Loss 260,000.00 Goodwill (Note-1) 40,000.00 Land 26,829.27 Inventory Product ($260000-40000)/($168000-40000)*$180000 24,146.34 Brand Crossbow Shoes ($260000-40000)/($168000-40000)*$160000 21,463.41 Shoe Factory ($260000-40000)/($168000-40000)*$700000 93,902.44 Machinery ($260000-40000)/($168000-40000)*$400000 53,658.54 (Being impairment loss recognized) 2 Profit and Loss 260,000.00 Impairment Loss 260,000.00 (Being impairment loss charged to profit and loss account) Note-1 Goodwill amount will be deducted first then remaining amount will be used on prorate basis to allocate the rest balance (Li, et., al., 2011). Conclusion and recommendation In this essay impairment test on the assets shown in the financial statement of The Longreach group Ltd has been taken into consideration. This test has provided a good understanding regarding how to evaluate true and fair value of assets shown in financial statement of organization. In addition, it is also observed that impairment test is very important for evaluating the true value of intangible and intangible assets of company. Now in the end it would be said that impairment test should be undertaken with clear understanding of procedure given in IAS 136 by The Longreach group Ltd for identifying the true and fair view of its assets. References Detzen, D., Stork genannt Wersborg, T. Zlch, H. 2016, "Impairment of Goodwill and Deferred Taxes Under IFRS",Australian Accounting Review,vol. 26, no. 3, pp. 301-311 Godfrey, J.M. Koh, P. 2009, "Goodwill impairment as a reflection of investment opportunities",Accounting and Finance,vol. 49, no. 1, pp. 117-140. Li, Z., Shroff, P.K., Venkataraman, R. Zhang, I.X. 2011, "Causes and consequences of goodwill impairment losses",Review of Accounting Studies,vol. 16, no. 4, pp. 745-778 PETERSEN, C. PLENBORG, T. 2010, "How Do Firms Implement Impairment Tests of Goodwill?",Abacus,vol. 46, no. 4, pp. 419-446. Sorros, J., Belesis, N. 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