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1. What is impairment loss?

An impairment is a diminishment in the recoverable amount of a fixed asset or goodwill
underneath its book value. The impairment is recognized as impairment losses on long-
term assets. For example, if a fixed asset is damaged or out-of-date in technical terms,
or because the market is unusable or depreciated, it will be records as impairment loss.
Most records perceive and archive the values of all assets: fixed assets, current assets,
and so. These values are set by the present market and are recorded suitably.
Notwithstanding, the value of most assets changes after some time. Arcording to Loftus,
impairment is the decreasing in quality, quality, amount, or value of an asset. An
expansion in the value of an asset is called appreciation.
An asset can turn out to be less profitable as a result of utilization, as is frequently the
case with assets like machinery for example, or an asset essentially deteriorates in
value after some time. This depreciation is normally dispersed over the asset's whole
According to IAS 36, A guideline has been established that assets will not be recorded
and reported at a value higher than the recoverable amount. An enterprise should write
down the carrying amount of an asset to its recoverable amount if the carrying amount
of the asset can not be recovered in its entirety. An imparment loss is the amount in
which an asset's carrying amount exceeds its recoverable amount.
The basic rule in IAS 36 is that if the value of an asset in the balance sheet is higher
than its actual value, measured as a recoverable amount, the asset is judged to be
impaired a loss of value. Therefore, it should be written off as the value of the loss as
the value of the property. The amount of the impairment loss shall be recorded
immediately in the amount of the interest accrued (like inventory reserves, or provision
for financial instruments)
The major accounting issues to consider here are:
(a) How to determine when a loss due to a property impairment may occur?
(b) How to measure recoverable value?
(c) How is a loss due to devaluation reported?

2. Recognition and measurement of an imparement loss

Principle under IAS 16: If, and only if, the recoverable amount of an asset is less than its
carrying amount, its carrying amount shall be write down the amount of money that can
be recovered. This reduction is an imparement loss. An impairment loss has to be
recognized as an expense in the statement of income immediately unless the asset is
recognized on the revalued amount under the relevant IAS (for example as an
alternative to IAS 16 Tangible fixed assets). Any impairment loss of a revalued asset
should be treated as a revaluation discount under the relevant IAS.
Actually this means:
- For an assessment where they have a surplus of revalued retained on that asset, the
impairment loss must be recorded in the revaluation surplus.
- Any excess of the excess of the revalued amount must be recorded in the statement of
3. Reversal of an impairment loss for individual asset
A periodic review of assets to determine if it is impaired will apply to all assets, including
assets that have been depreciated in the past. In some cases the recoverable amount
of an asset that was previously depreciated may now have a higher value than the
carrying amount of the asset. In other words, there may be a reversal of some previous
impairment losses.
(a) Reversal of impairment loss must be recognized immediately in the statement of
(b) The carrying amount of the asset should be recorded higher than the amount
(c) The asset's carrying amount is to be equal to the amount of recoverable amount.
Principle: A recognized impairment loss of an asset in previous years must be re-
established if and only if there is a change in the estimate (mark) used to determine
Determine the recoverable amount of the asset since the last impairment loss was
recognized. In this case, the book value of the asset must be increased by the amount
recoverable. This increase is a reversal of a diminution in value.
The carrying amount of an asset for which an impairment loss has been already
perceived should be expanded to its recoverable amount if, and just if, there has been
an adjustment in the assessments used to decide the asset's recoverable amount since
the last impairment loss was perceived. This expansion is perceived as salary in the pay
The expanded carrying amount might not surpass the carrying amount that would have
been resolved (net of amortization or depreciation) had no impairment loss been
perceived for the asset in earlier years.
As an exemption to the above necessity, an impairment loss perceived for goodwill is
not switched. After the reversal of an impairment loss, the depreciation (amortization)
charge for an asset should be balanced in future periods to designate the asset's
overhauled carrying amount, less its lingering value (assuming any), on a deliberate
premise over its staying useful life.


Plant $ 917,000.00
Equipment $ 211,000.00
Fittings $ 133,000.00
Inventory $ 57,000.00
Goodwill $ 47,000.00
Total CA $ 1,365,000.00

Value in use $ 1,224,000.00

Fair value in use less cost of
$ 882,882.00
disposal of the PLANT

Value in use - Total CA: $1,224,000 - $1,365,000

Impairment Loss $ 141,000.00

The impairment loss is firstly used to write off the Goodwill. The balance of the loss is allocated across the other assets, except for
inventory assuming it is recorded at the lower of cost and net realisable value:
$141,000 - $47,000 = $ 94,000.00

Allocation of balance of Impairment loss ($94,000) as follow:

Allocation of Net Carrying
Carrying Amount Propotion
Loss Amount
Plant $ 917,000.00 ($917,000/$1,261,000) x $94,000 $ 68,356.86 $ 848,643.14
Equipment $ 211,000.00 ($211,000/$1,261,000) x $94,000 $ 15,728.79 $ 195,271.21
Fittings $ 133,000.00 ($133,000/$1,261,000) x $94,000 $ 9,914.35 $ 123,085.65
$ 1,261,000.00 $ 94,000.00

So we have:
Net carrying amount of Plant Fair value - Cost of disposal of Plant

< $882,882.00

$882,000 - $848,643.14 = $34,238.86

Allocation of the extra impairment loss as follow:

Allocation of Net Carrying

Carrying Amount Propotion
Loss Amount
Equipment $ 195,271.21 ($195,271.21/$318,356.86) x $34238.86 $ 21,001.16 $ 174,270.05
Fittings $ 123,085.65 ($123,085.65/$318,356.86) x $34238.86 $ 13,237.70 $ 109,847.95
$ 318,356.86 $ 34,238.86
As the land Net carrying amount of the plant is less than the fair value less the cost of disposal - plant, therefore the land cannot
be written down to an amount below that figure. Hence the maximum impairment loss allocable to land is:
$917,000 - $882,882 = $34,118.00

Journal entry as follow:

DR Impairment Loss $ 94,000.00

CR Accumulated depreciation and impairment loss - Equipment $ 36,729.95
CR Accumulated depreciation and impairment loss - Fittings $ 23,152.05
CR Plant $ 34,118.00

Loftus, J., 2013. Understanding Australian accounting standards. Milton, Qld.: John
Wiley and Sons.

AASB, C.A.S., 2004. Impairment of Assets. Reversing the impairment loss of an

individual asset, 117-121, p.44.

CPA Australia Ltd, 2011. IAS 16 Property, Plant and Equipment. Grant Thornton.

Duh, R., Lee, W. and Lin, C., 2009. Reversing an impairment loss and earnings
management: The role of corporate governance. The International Journal of
Accounting, 44(2), pp.113-137.

Cocco, A, & Moores, T 1995, 'Accounting for the impairment of long-lived assets', CPA
Journal, 65, 10, p. 24.


122, 1261, pp. 95-105.

Cearns, K 1999, 'Impairment of Assets', Accountancy, vol. 123, no. 1266, pp. 94-95.