ACCT 2542 Corporate Financial Reporting and Analysis

ACCT 2542 Corporate Financial Reporting and Analysis

Topic 4

Business CombinationsImpairment of Assets

Presented by: Dr Sarowar HossainOffice: QUAD 3083

8/18/20141Australian School of BusinessReadings

chapter 10: Business combinations

chapter 11: Impairment of assets

AASB 3: Business CombinationsAASB 136: Impairment of Assets

2Australian School of BusinessLecture objectivesChapter 10explain the basic steps in the acquisition method of accounting for business combinations (p.446)describe how to recognise and measure the assets acquired and liabilities assumed in a business combination (p.451)account for a business combination in the records of the acquirer (p.457)prepare an acquisition analysis and account for the recognition of goodwill or gain from bargain purchase (p.462)

Chapter 11describe when to undertake an impairment test (p. 515)explain how to undertake an impairment test for an individual asset (p. 517)identify a cash-generating unit, and account for an impairment loss for a cash-generating unit (p. 525)apply the impairment model to a cash generating unit and account for impairment of goodwill (p. 532)

3Australian School of BusinessThe nature of a business combinationAASB 3 defines a business combination as:a transaction or other event in which an acquirer obtains control of one or more businesses

A business is not just a group of assets, rather, it is an entity able to produce output

Control exists when an investor is exposed, or has rights, to variable returns from its involvement with the investee and has the ability to affect those returns through its power over the investee.

4Australian School of Business4The nature of a business combinationFour general forms of business combination are as follows (assuming the existence of two companies A Ltd and B Ltd):

A Ltd acquires all assets and liabilities of B Ltd B Ltd continues as a company, holding shares in A Ltd2.A Ltd acquires all assets and liabilities of B Ltd B Ltd liquidatesC Ltd is formed to acquire all assets and liabilities of A Ltd and B LtdA Ltd and B Ltd liquidateA Ltd acquires a group of net assets of B LtdB Ltd continues to operateRefer to figure 10.2 of text for key steps involved under each of the above scenarios5

Australian School of Business5Accounting for business combinations: Basic principles AASB 3 prescribes the acquisition method in accounting for a business combination. The key steps in this method are:

Identify an acquirerDetermine the acquisition dateRecognise and measure the identifiable assets acquired, the liabilities assumed, and any non-controlling interest in the acquiree; andRecognise and measure goodwill or a gain from bargain purchase.

6Australian School of Business6Accounting for business combinations: Identifying the acquirerThe business combination is viewed from the perspective of the acquirer

The acquirer is the entity that obtains control of the acquiree

In most cases this step is straight forward. In other cases judgement may be required > eg where two existing entities (A&B) combine and a new entity (C) is formed to acquire all the shares of the existing entities

Who is the acquirer? Cannot be C

Indicative factors contained within Appendix B of AASB 3 assist in identifying the acquirer

7acquirer:The entity that obtains control of the acquiree..acquiree:The business or businesses that the acquirer obtains control of in a business combination.Australian School of Business7Accounting for business combinations: Determining the acquisition date Acquisition date is the date that the acquirer obtains control of the acquireeDetermining the correct acquisition date is important as the following are affected by the choice of acquisition date:The fair values of net assets acquiredConsideration given, where the consideration takes a non-cash formMeasurement of the non-controlling interest (discussed in chapter 18).8Australian School of Business8Accounting in the records of the acquirer: assets acquired and liabilities assumedFair value allocation occurs at acquisition date and requires the recognition of:Identifiable tangible and intangible assetsLiabilitiesContingent liabilitiesAny non-controlling interest in the acquireeGoodwill

FVINA = fair value of identifiable net assets (incl. contingent liabilities)9Australian School of Business9Accounting in the records of the acquirer: Contingent liabilitiesAASB 3 requires that contingent liabilities which can be measured reliably are recognised by the acquirer

The above requirement does not consider issues of probability

Therefore contingent liabilities where a present obligation exists but that do not qualify for recognition in the acquiree's books under AASB 137 may be recognised by the acquirer as part of a business combination

The fair value of a contingent liability is the amount that a third party would charge to assume those contingent liabilities. Such an amount reflects the expectations about possible cash flows. This is not simply the expected maximum/minimum cash flow

10Australian School of Business10Accounting in the records of the acquirer: intangible assetsAASB 3 requires the acquirer to recognise intangible assets where their fair value can be measured reliably

Figure 10.4 contains a list of intangibles that the AASB consider would meet the definition of an intangible for the purposes of accounting for a business combination

The fair value of an intangible reflects market expectations about the probability of future economic benefits flowing to the entity

Eg > if the expected benefits are $1,000 and the probability of receiving the benefits is 90%, the fair value will be $900

Examples include trademarks, customer lists, royalty agreements, patented technology etc.11Australian School of Business11Accounting in the records of the acquirer: measurement AASB 3 requires that assets acquired and liabilities and contingent liabilities assumed are measured at FV

Fair value is basically market value and is determined by judgement, estimation and a three-level fair value hierarchy as described in AASB 13 and discussed earlier.

Acquirer has 12 months from acquisition date to determine fair values

At first balance date after acquisition the fair values may only be provisionally determined a best estimate

Finalisation of fair values will result in adjustments to goodwill

12Australian School of Business12Accounting in the records of the acquirer: consideration transferred The acquirer measures the consideration transferred as the fair values at the date of acquisition of

Assets givenLiabilities (including contingent liabilities) assumedEquity instruments

13Australian School of Business13The consideration paid by the acquirer may consist of one or a number of the following forms of consideration:

CashNon-monetary assetsEquity instrumentsLiabilities undertakenCost of issuing debt/equity instrumentsContingent considerationAccounting in the records of the acquirer: consideration transferred 14Australian School of Business14CashWhere the settlement is deferred, the cash must be discounted to present value as at the date of acquisitionThe discount rate used is the entitys incremental borrowing rate

Equity instrumentsWhere an acquirer issues their own shares as consideration they need to determine the fair value of the shares as at the date of exchangeIf listed, the fair value is the quoted market price of the shares (with a few limited exceptions)Accounting in the records of the acquirer: consideration transferred 15Australian School of Business15Costs of issuing debt and equity instrumentsTransaction costs such as stamp duties, underwriting fees and brokers fees may be incurred in issuing equity instrumentsSuch costs are considered to be an integral part of the equity transaction and should be recognised directly in equity

Journal entry required would be:DrShare CapitalxxCrCash xx

Costs associated with the issue of debt instruments are included in the measurement of the liabilityAccounting in the records of the acquirer: consideration transferred 16Australian School of Business16Contingent consideration

In some cases the agreement will provide for an adjustment to the cost of the combination contingent on a future eventExample - where an acquirer issues shares as part of their consideration, the agreement may require an additional payment of the value of the shares falls below a certain amount within a specified period of timeIf the adjustment is probable and can be measured reliably, then the amount should be included in the calculation of the cost of acquisition

Accounting in the records of the acquirer: consideration transferred 17Australian School of Business17Acquisition related costs

Acquisition related costs that are directly attributable to a business combination do not form part of the consideration transferred, rather they are expensed as incurred.

Examples include finders fees; advisory, legal accounting, valuation and other professional or consulting fees; [and] general administrative costs, including the costs of maintaining an internal acquisitions department.Accounting in the records of the acquirer: consideration transferred 18Australian School of Business18Calculating consideration transferred: exampleOn 1 January 2012 A Ltd acquired all the assets and liabilities of B Ltd. Details of the consideration transferred are as follows:Cash of $400,000, half to be paid on 1 January 2012, with the balance due on 1 January 2013. The incremental borrowing rate for A Ltd is 10%100,000 shares in A Ltd were issued. The share price on 1 January 2012 was $1.50 per share. This price represented a six-month high. Costs of issuing the shares was $1,000.Due to doubts as to whether the share price would remain at or above the $1.50 level, A Ltd agreed to supply cash to the value of any decrease in the share price below $1.50. This guarantee was valid for a period of 3 months (to 31 March 2012). A Ltd believed that there was a 75% chance that the share price would remain at or above $1.50 until 31 March 2012 (and a 25% chance that it would fall to $1.40)A supply a patent to B Ltd. The fair value of the patent is $60,000. As the patent was internally generated it has not been recognised in A Ltds books.Legal fees and associated with the acquisition totalled $5,000. 19Australian School of Business19Required:Calculate the consideration transferred

CashPayable now200,000Deferred ($200,000 x 0.909091)181,818Shares100,000 x $1.50150,000Guarantee100,000 x ($1.50-$1.40) x 25%2,500Patent60,000Total cost of acquisition594,318Discounted to PV at rate of 10%Based on quoted market priceBased on probability of share price falling below $1.50FV of patentShare issue costs, legal fees and stamp duty are excluded from the calculationCalculating consideration transferred: example8/18/201420Australian School of Business20Accounting in the records of the acquirer: Goodwill When a business combination results in goodwill, AASB 3 requires that the goodwill is:recognised as an assetmeasured at its cost at the date of acquisition

Goodwill = consideration transferred - acquirers interest in the FVINA

Goodwill is considered to be a residual interest

Goodwill is an unidentifiable asset which is incapable of being individually identified and separately recognised21Australian School of Business21 Example Details of B Ltds assets and liabilities acquired by A Ltd are as follows:CAFVPlant & equipment360,000367,000Land260,000257,000Inventory24,00030,000Accounts receivable18,00016,000Accounts payable(35,000)(35,000)Bank overdraft(55,000)(55,000)Net assets572,000580,000B Ltd is currently being sued by a previous customer. The expected damages is $50,000. Lawyers estimate that there is a 20% chance of losing the case. Accounting in the records of the acquirer: Goodwill 8/18/201422Australian School of Business22Required:a)Calculate the FVINA acquired and determine the goodwill on acquisition.b)Prepare the journal entry in the books of A Ltd to account for the acquisitionFair value of recorded net assets

580,000Less: Contingent liability re damages ($50,000 x 20%)(10,000)FVINA570,000Cost of acquisition594,318Goodwill on acquisition24,318Carrying amounts in Bs books are irrelevant to ABased on probability of losing the casePer Slide 20Residual interestAccounting in the records of the acquirer: Goodwill 8/18/201423Australian School of Business23Plant & equipment367,000Land257,000Inventory30,000A/C Receivable16,000Goodwill24,318A/C Payable35,000Bank o/draft55,000Provision for damages10,000Cash200,000Deferred consideration payable181,818Share capital150,000Provision for loss in value of shares2,500Gain on sale of patent60,000Journal entries in the books of A Ltd to account for the acquisition

FVResidual interestFVContingent liability Components of cost of acqnAccounting in the records of the acquirer: Goodwill 8/18/201424Australian School of Business24Journal entries in the books of A Ltd to account for the acquisition (cont.)

Accounting in the records of the acquirer: Goodwill Legal fee expenses5,000Share capital1,000 Cash6,0008/18/201425Australian School of Business25Accounting in the records of the acquirer: Gain from bargain purchaseWhere the acquirers interest in the FVINA exceeds the consideration transferred, negative goodwill arises this is referred to as a gain on bargain purchase

A gain on bargain purchase for the acquirer arises from:Errors in measuring fair valueAnother standards requirementsSuperior negotiating skills

The existence of a gain on bargain purchase is a rare event

In the event of a gain on bargain purchase the acquirer is required to recognise any gain immediately in the profit & loss Refer to example 10.3 of text26Australian School of Business26Accounting by the acquirer: shares acquired in an acquireeWhen shares are acquired rather than the net assets the investment is accounted for in accordance with AASB 9 Financial Instruments

AASB 9 requires the investment to be accounted for at fair value.

The accounting treatment in the acquirers books at acquisition is:Dr Shares in Acquiree XX Cr Share Capital XX Cr Cash XX27Australian School of Business27Accounting by the acquirer: shares acquired in an acquireeSubsequent to initial recognition the acquirer has the choice of recognising movements in fair value:In profit and loss; orOther comprehensive income (OCI)

Transaction costs (such as stamp duty) are accounted for as follows If subsequent movements in FV are accounted for through profit or loss > transaction costs are expensed If subsequent movements in FV are accounted for OCI > transaction costs are included in the measurement of the cost of investments28Australian School of Business28Accounting by the acquirer: shares acquired in an acquiree ExampleAssume that on 1 January 2013 Salmon Ltd acquired all the issued shares in Whiting Ltd for $80000, giving in exchange $10000 cash and 20000 shares in Salmon Ltd; the latter having a fair value of $3.50 per share. Transaction costs of $500 were paid in cash. Share issue costs were $1000. Salmon Ltd does not elect to present subsequent changes in fair value in other comprehensive income. The journal entries in the records of Salmon Ltd at the acquisition date are

* If Salmon Ltd elected to present fair value changes in other comprehensive income, the debit would be to Shares in Whiting Ltd, as the financial asset would be measured at fair value plus transaction costs.Australian School of BusinessAccounting in the records of the acquireeIf acquiree does not liquidate, it recognises a gain or loss on the sale of the assets and liabilities that formed the part of the business being sold

If acquiree liquidates, its accounts are transferred to a liquidation and a shareholders distribution account

No entries needed if acquiree only parts with sharesRefer to figures 10.20-10.21 of text30Australian School of Business30Subsequent adjustments to the initial accounting for business combinationsAdjustments may be made subsequent to acquisition date in relation to:

GoodwillContingent liabilitiesContingent consideration

Goodwill

On an ongoing basis goodwill is subject to impairment testing (refer chapter 11)

31Australian School of Business31Subsequent adjustments to the initial accounting for business combinationsContingent liabilities

Contingent liabilities are initially recognised at FV

Subsequent to acquisition date the liability is measured as the higher of:(a) the best estimate of the expenditure required to settle the present obligation; and

(b) the amount initially recognised less cumulative amortisation recognised in accordance with AASB 118 Revenue.

Subsequent adjustments do not affect the goodwill calculated at acquisition date.

eg, where a liability was recognised in relation to a court caseeg, where a liability was recognised in relation to a guarantee32Australian School of Business32Subsequent adjustments to the initial accounting for business combinationsContingent consideration

At acquisition date, the contingent consideration is measured at fair value, and is classified either:as equity (for example, the requirement for the acquirer to issue more shares subject to subsequent events); or as a liability (for example, the requirement to provide more cash subject to subsequent events).

33Australian School of Business33Subsequent adjustments to the initial accounting for business combinationsContingent consideration

Subsequent accounting treatment is a follows:where classified as equity, no remeasurement is required, and the subsequent settlement is accounted for within equity. This means that extra equity instruments issued are effectively issued for no consideration and there is no change to share capital.

where classified as a liability, it will be accounted for under AASB 139 or AASB 137. So, if there were changes in the amount of an expected cash outflow, the liability would be adjusted and an amount recognised in profit or loss.

Subsequent adjustments do not affect the goodwill calculated at acquisition date.

34Australian School of Business34DisclosuresAASB 3 contains extensive disclosure requirements in relation to business combinationsFigure 10.23 provides a sample of the disclosures35Australian School of Business35Impairment of Assets

Australian School of BusinessIntroduction to AASB 136Entities are required to conduct impairment tests to ensure their assets are not overstated

Impairment results when an assets carrying amount (CA) is more than its recoverable amount (RA)

Not all assets require this test. Notable exclusions include:InventoriesDeferred tax assetsAssets held for resale

The specific requirements in relation to these assets are covered in the AASBs that deal with these balances37Where assets are recorded at fair value, there is no need to test for recoverability of the carrying amount of the asset. Australian School of Business37When to undertake an impairment testFor most assets it is not necessary to conduct impairment tests every year

Assets must be tested for impairment when there is an indication (or evidence) of impairment

The following assets must be tested annually for impairment:Intangibles with indefinite useful livesIntangibles not yet available for useGoodwill acquired in a business combinationReason annual testing required > the CA of these assets is more uncertain than that of other assets38Australian School of Business38Collecting evidence of impairment Minimum indicators contained within AASB 136 are classified into two groups internal and external

External sources

Decline in market value due to technological advancementsAdverse changes in entitys environment/ market eg a competitor may have patented a new product, resulting in a permanent fall in market share of the entityIncreases in interest rates affects the PV of future cashflowsMarket capitalisation39Australian School of Business39Collecting evidence of impairment Internal sources

Obsolescence or physical damage

Change in asset use has the asset become idle?

An assets economic performance being worse than expected cash inflows may be lower/ cash outflows may be higher than expected40Australian School of Business40Impairment test for an individual asset

41Australian School of Business41Impairment test for an individual assetFrom the previous slide it can be seen that there are two possible amounts against which the carrying amount can be tested for impairmentFair value less costs to sell (FVLCTS)Value in use (VIU)

Not always necessary to measure both amounts when testing for impairment

If either one of these two amounts is higher than the carrying amount, the asset is not impaired

Therefore if the FVLCTS > CA there is no need to calculate the VIU of the asset

VIU more difficult to calculate than FVLCTS42Australian School of Business42Fair value less costs to sellDefined as

Two parts to the definition:Fair valueCosts of disposal

the amount obtainable from the sale of an asset in an arms length transaction less the costs of disposal

Australian School of Business43In an active market, fair value is the market price: easier to calculate than value in use.

Examples of costs of disposal include legal costs, stamp duty & similar transaction taxes, costs of removing the asset or bringing it into condition for sale.

Fair value less costs to sellFair value is determined using the following value hierarchyPrice in a binding sale agreementMarket price (current bid price)Appropriate estimation (eg using NPV calculations)

Costs of disposal include:legal feesstamp dutycosts of removing the asset etc

Finance costs and income tax are not considered to be costs of disposal44Australian School of Business44In an active market, fair value is the market price: easier to calculate than value in use.

Examples of costs of disposal include legal costs, stamp duty & similar transaction taxes, costs of removing the asset or bringing it into condition for sale.

Value in useDefined as

Five elements when calculating value in useEstimate of future cash flows Expectations about possible variations in amount or timing of future cash flowsTime value of moneyPrice for bearing uncertainty inherent in assetOther factors such as illiquidity

the present value of future cash flows expected to be derived from an asset or cash-generating unit45Australian School of Business45Value in use estimating future cash flowsObjective overall is to estimate future cash flows; and apply a discount rate

Projections should be based on managements best estimates. External evidence should be given greater weight than reliance on managements expectations

Projections should be based on most recent budgets/forecasts. Such projections should cover a maximum period of 5 years

Cash inflows should include those from the continuing use of the asset as well as those expected on the disposal of the asset. Cash outflows must also be taken into account46Australian School of Business46Value in use estimating future cash flowsProjected cash flows must be estimated for the asset in its current condition

Financing and tax related cash flows are excluded from the calculation

Disposal price should take into account any expected future price increase/decreases

Appendix A of AASB 136 contains two approaches to computing the present value the traditional approach and the expected cash flow' approach

47Australian School of Business47Value in use determining the discount rateThe discount rate should reflect:The time value of moneyThe risks specific to the asset for which future cash flows have not been adjusted

Discount rates are commonly based onThe entitys WACCThe entitys incremental borrowing rateOther market borrowing rates

The rate must reflect specific risks relating to:Country riskCurrency riskPrice risk

48Australian School of Business48Recording an impairment loss for- an individual assetAn impairment loss is recognised where CA > RA

Where the asset is accounted for under the cost model the impairment loss is recognised immediately in profit or loss

Where the asset is accounted for under the revaluation model the impairment loss is treated as a revaluation decrement

Any subsequent depreciation/amortisation is based on the new recoverable amount.49Australian School of Business49Recording an impairment loss for an individual asset - examplesCost model

An asset has a CA of $100 (cost of $160 accum depn of $60) and a RA of $90.

The journal entry to record the impairment loss would be:

DrImpairment loss10Cr Accum. Depn & impairment losses10

50Australian School of Business50Recording an impairment loss for an individual asset - examplesRevaluation model

An asset has a CA of $100 (FV of $120 accum depn of $20) and a RA of $90. This asset was previously revalued upwards by $50 (ARS balance = $35; DTL balance = $15)The journal entries to record the impairment loss would be:

DrAccumulated depreciation20Cr Asset20

Dr Asset revaluation surplus7DrDeferred tax liability3Cr Asset10

(120 100)30% tax effect(100 90)51Australian School of Business51Cash-generating units (CGUs) Where the FVLCTS < CA it is necessary to calculate the VIU of an asset to determine whether or not it has been impaired

It may not be possible to identify an individual assets VIU when the asset only has a value due to its relationship with other assets. Eg a machine in a factory works in conjunction with the rest of the assets in the factory

In such cases the VIU of the asset must be determined in the context of the assets cash-generating unit (CGU)

CGU - Defined as the smallest identifiable group of assets (generating cash flows from continuing use) that are independent of the cash inflows from other assets or groups of assets

52Australian School of Business52Identifying CGUsIdentification of CGUs requires consideration ofHow management monitors the entitys operations (such as product lines, individual locations, district or regional area); How management makes decisions about continuing or disposing of the entitys assets and operations

If an active market exists for the output of a group of assets (even if some of the output of the group of assets is used internally), this group of assets is classified as a CGU

CGUs must be identified consistently from period to period

AASB 136 allows a segment (determined in accordance with AASB 8 Operating Segments) to be used as a CGU where the segment equates to the smallest group of assets generating independent cash flows.53Australian School of Business53Impairment losses and CGUs no goodwillWhere an impairment loss arises in a CGU with no goodwill the loss is allocated across all of the assets in the CGU on a pro-rata basis based on the CA of each asset relative to the total CA amount of the CGU

Losses are accounted for in the same way as for individual assets discussed earlier

The CA of an individual asset cannot be reduced below the highest of:FVLCTS (if determinable);VIU (if determinable); orZero

Corporate assets (such as headquarter building) should try to allocate these across CGUs on a reasonable and consistent basis if possible.54Australian School of Business54Impairment losses and CGUs no goodwill: exampleA Ltd has identified an impairment loss of $12,000 on one of its CGUs

The CGU consists of the following assets (stated at current carrying amounts):Buildings500,000Equipment300,000Land250,000Fittings150,000

The FVLCTS of the building is $497,000

Required:Calculate the allocation of impairment loss against all assets in the CGU55Australian School of Business55Impairment losses and CGUs no goodwill: exampleAs the FVLCTS of the building is $497,000, the maximum impairment loss that can be allocated to the building is $3,000. The remaining $2,000 must be allocated across the other assets in the CGUCAPro-rataImpairment loss allocatedAdjusted CABuildings500,000Equipment300,000Land250,000Fittings150,0005/12 5,000 495,0003/12 3,000 297,0002.5/12 2,500 247,5001.5/12 1,500 148,5001,200,000 12,000568/18/2014Australian School of Business56Impairment losses and CGUs no goodwill: exampleAdjusted CAPro-rataImpairment loss allocatedTotal impairment loss allocatedBuildingsEquipmentLandFittings297,000 297/693 857 3,857247,500 247.5/693 714 3,214148,500 148.5/693 429 1,929693,000 2,000 12,000From last column of previous slide578/18/2014Australian School of Business57Impairment losses and CGUs with goodwillWhere a CGU includes goodwill, AASB 136 contains specific requirements for accounting for the allocation of impairment losses arising in relation to the CGU

Goodwill is a residual balance, consisting of assets that cannot be individually identified or separately recognised

Therefore it is not possible to determine a FVLCTS for goodwill, or to identify cash flows relating specifically to goodwill

Rather, goodwill can only be tested for impairment at the CGU level58Australian School of Business58Impairment losses and CGUs with goodwillAASB 136 requires that goodwill be allocated to the lowest level at which management monitors the goodwill

Recall that goodwill is required to be tested for impairment annually (or more frequently if there is an indication that the CGU may be impaired)

Where an impairment loss arises in a CGU with goodwill the following allocation rules apply:To reduce the carrying amount of the CGUs goodwill to zeroTo the other assets of the CGU on a pro rata basis (on the same basis as discussed on slide 54)

59Australian School of Business59Impairment losses and CGUs with goodwill: exampleA Ltd has identified an impairment loss of $300,000 on one of its CGUs

The CGU consists of the following assets (stated at current carrying amounts):Buildings 500,000Equipment300,000Land250,000Goodwill150,000

Required:Calculate the allocation of impairment loss against all assets in the CGU.60Australian School of Business60Impairment losses and CGUs with goodwill: exampleCAPro-rataImpairment loss allocatedAdjusted CAGoodwill150,000Buildings500,000Equipment300,000Land250,000 150,000*-500/1,05071,429**428,571300/1,05042,857257,143250/1,05035,714214,2861,050,000 300,000* Remaining impairment loss still to be allocated = $150,000** 500/1,050 x $150,000 = 71,429618/18/2014Australian School of Business61Reversal of an impairment loss Recognised losses are reassessed annually

Indicators for reversals of impairment losses are the same as those used for initially recognising a loss

Ability to recognise a reversal of an impairment loss and the accounting for that reversal is dependent on whether the reversal relates to an individual asset, a CGU, or goodwill

Previously recognised impairment losses in relation to individual assets are able to be reversed.

The new CA cannot be higher than the CA that would have been determined had no impairment loss been previously recognised (ie for depreciable assets, the impact of depreciation needs to be considered)

62Australian School of Business62Section 11.6 p. 466.

Impairment loss reversal may relate to individual assets, cash-generating units or goodwill (as detailed on the following slides)

While the information sources may be the same, in this case we are of course looking for evidence of FAVOURABLE effects (like decreased interest rates) or INCREASED market value.Reversal of an impairment loss individual assetsCost model

The journal entry to record the reversal of the impairment loss would be:

Dr Accum depn & impairment losses xxCrIncome - impairment loss reversalxx

63Australian School of Business63Section 11.6 p. 466.

Impairment loss reversal may relate to individual assets, cash-generating units or goodwill (as detailed on the following slides)

While the information sources may be the same, in this case we are of course looking for evidence of FAVOURABLE effects (like decreased interest rates) or INCREASED market value.Reversal of an impairment loss individual assetsRevaluation model

Where the impairment loss was taken to the P&L the journal entry would be the same as that shown above under the cost model

Where the impairment loss was taken against the ARS the journal entry to record the reversal of the impairment loss would be:

DrAssetxxCrDeferred tax liabilityxxCr Asset revaluation surplusxx

64Australian School of Business64Section 11.6 p. 466.

Impairment loss reversal may relate to individual assets, cash-generating units or goodwill (as detailed on the following slides)

While the information sources may be the same, in this case we are of course looking for evidence of FAVOURABLE effects (like decreased interest rates) or INCREASED market value.Reversal of an impairment loss CGUsImpairment losses relating to goodwill cannot be reversed

The reversal of any impairment loss relating to a CGU is allocated across the assets of the CGU (excluding goodwill) on a pro-rata basis

The reversals for specific assets will be accounted for in the same way as outlined above for individual assets

65Australian School of Business65Section 11.6 p. 466.

Impairment loss reversal may relate to individual assets, cash-generating units or goodwill (as detailed on the following slides)

While the information sources may be the same, in this case we are of course looking for evidence of FAVOURABLE effects (like decreased interest rates) or INCREASED market value.Reversal of an impairment loss CGUsThe CA of an asset cannot be increased above the lower of:its RA (if determinable)the CA that would have been determined had no impairment loss been recognised in prior periods

Any excess from the above situation is allocated across the remaining assets in the CGU on a pro-rata basis (consistent with the example on slide 57)66Australian School of Business66Section 11.6 p. 466.

Impairment loss reversal may relate to individual assets, cash-generating units or goodwill (as detailed on the following slides)

While the information sources may be the same, in this case we are of course looking for evidence of FAVOURABLE effects (like decreased interest rates) or INCREASED market value.DisclosuresKey disclosures include:

The amount of impairment losses recognised in profit or loss during the period and line on income statementThe amount of reversals of impairment losses recognised in profit or loss during the period and line on income statementThe amount of impairment losses on revalued assets recognised directly in equity during the periodThe amount of reversals of impairment losses on revalued assets recognised directly in equity during the period

67Australian School of Business67THANK YOU!68Australian School of Business