Reversal Of Impairment Loss On Individual Asset †Free Samples

Question: Discuss About The Reversal Of Impairment Individual Asset? Answer: Introduction Impairment loss refers to the reduction in value of the asset i.e. reduction of present value of amount that can be recovered from the asset from the carrying value of the asset. In Australia, AASB 136 deals with the accounting for the impairment of assets and reversal of such impairment. This essay is written for making an analysis regarding the process of reversing previously recognized impairment loss on the individual asset. Meaning of Impairment loss An impairment loss in reference to an asset refers to the additional amount in the carrying amount of asset over the present value of amount that can be recovered from the asset (Anon., 2017). This definition includes some words which require more clarification hence meaning of those words is, Carrying amount of asset = Book value of asset Recoverable amount of asset = Fair value of asset less cost of sale or value in use whichever is maximum Value in use of asset = Value that can be recovered from the use of asset, such value calculated by using present value techniques. Situations denotes presence of impairment loss Loss in consideration cannot recognized by the organization on own discretion. Every organization needs to make a test for impairment loss at the end of each year and impairment loss can recognize only having the presence of indicators of impairment loss. Impairment loss can be recognized by the organization for presence of the following indicators, Significant decline in assets market value. Major unfavorable market change regarding technology, legal guidelines and economic conditions of organization Increase in market required rate of return due to which value in use will decline Organizations market capitalization becomes lower than the amount shown by book value of net assets Significant damage or obsolescence of asset Expected significant change in entity like restricting etc which will put adverse effect on assets value Proofs regarding the decline in performance of asset (Reinstein Lander, 2004). Accounting for Impairment loss Impairment loss on an individual asset accounted by the organization by passing an accounting entry by debiting impairment loss account and crediting asset account. Such impairment loss will recognize in profit and loss account (International Accounting Standards Committee, 1998). Meaning of process of reversing previously recognized impairment loss Reversal of loss in consideration refers to the abolishment of the impairment loss recognized earlier. As per paragraph 110 of AASB 136, the organization required to make an assessment at the end of each year end regarding the indicators that prior recognized impairment loss still exists and if yes then up to what extent (Australian Accounting Standards Board, 2007). Reversal of impairment loss can be recognized as a situation where previously recognize Impairment loss diminished or eliminated. This situation arises due to the presence of some indicators. Such reversing previously recognized impairment loss provides a way to show increased earnings in the financial statements of the organization (Duh et al., 2009). Situations denotes need of reversing impairment loss An impairment loss cannot be reversed by the organization on own discretion. Every organization needs to make a test for reversing previously recognized impairment loss at the end of each year and impairment loss can reverse only having the presence of indicators of reversal of impairment loss. Impairment loss can be reversed by the organization for presence of the following indicators, Significant increase in assets market value Major favorable market change regarding technology, legal guidelines and economic conditions of organization The decrease in market required rate of return due to which value in use of asset will increase. Expected significant change in entity like abolishment of restriction on production etc which will put favorable effect on assets value Proofs regarding the better in the performance of asset (Australian Accounting Standards Board, 2007). Accounting for reversing previously recognized impairment loss Previously recognized impairment loss can be reversed. Such reversal can be made by organization for every asset as well as assets in cash generating unit but not for goodwill (Shoaf Zaldivar, 2005). Reversal of impairment loss cannot be more then the net impairment loss recognized earlier. The net impairment loss recognized earlier means impairment loss recognized earlier less amortization. After such reversal asset cannot have carrying value that would be when impairment loss does not recognize but depreciation will be recognized in the same manner. Such reversal for an asset does not revalued in past, recognized in the income statement as expense. Therefore it results in an increase in profits during the year and increase in carrying the amount of asset. On the other hand, reversal of impairment loss for asset revalued in past, recognized in the revaluation account. Hence, the reversal of impairment loss, for the asset revalues in past, results in an increase in revaluation reserve of the organization and increase in other comprehensive income during the year. Conclusion Above discussion regarding the impairment loss and reversal of impairment loss on individual asset concludes that no organization can account for impairment loss and reversal of impairment loss by own discretion. Such accounting needs the presence of some indicators which adhere to the various accounting standards. Reversal of impairment loss either results in a rise in book value of asset or rise in revaluation reserve of the organization. References , 2017. IAS 36 Impairment of Assets. [Online] Available at: https://www.iasplus.com/en/standards/ias/ias36 [Accessed 2017 september 12]. Australian Accounting Standards Board, 2007. Impairment of Assets. [Online] Available at: https://www.aasb.gov.au/admin/file/content102/c3/AASB136_07-04_ERDRjun10_07-09.pdf [Accessed 13 september 2017]. Duh, R.-R., Lee, W.-C. Lin, C.-C., 2009. Reversing an impairment loss and earnings management: The role of corporate governance. The International Journal of Accounting, 44(2), pp.133-37. International Accounting Standards Committee, 1998. Impairment of assets. International Accounting Standards Committee. Reinstein, A. Lander, G., 2004. Implementing the impairment of assets requirements of SFAS No. 144: An empirical analysis. Managerial Auditing Journal, 19(3), pp.400-11. Shoaf, V. Zaldivar, I., 2005. goodwill impairment. Review of Business, 26(2), p.31.