Impairment of assets
This query is : Resolved
19 August 2013
in reversal of impairment loss why we first allocate to Identifiable asset and balance if any will be allocated to goodwill?
And when we record impairment loss than it is first charged to goodwill and then identifiable asset?? give me answer with logic and reason i want to understand.
And when we record impairment loss than it is first charged to goodwill and then identifiable asset?? give me answer with logic and reason i want to understand.
19 August 2013
Because value of Goodwill has the least certainity as compared to any other asset in the books
Message likes :
1 times
22 August 2013
Can you Explain in detail?
22 August 2013
Can you Explain in detail?
28 July 2024
Impairment of assets involves recognizing a loss when the carrying amount of an asset exceeds its recoverable amount. The process of impairment and its reversal is governed by accounting standards like IFRS and AS (Accounting Standards) in India. The treatment of impairment loss and its reversal follows a specific sequence, particularly when dealing with goodwill and identifiable assets.
### **1. Impairment Loss Allocation**
**Initial Impairment Loss Allocation:**
- **Goodwill First:** When an impairment loss is identified, it is first allocated to **goodwill**. This is because goodwill, by nature, cannot be attributed to specific identifiable assets and is considered to be the last in line to absorb impairment losses.
- **Identifiable Assets:** After goodwill has been impaired to its recoverable amount, the remaining impairment loss is allocated to **identifiable assets** on a pro-rata basis or as per the asset’s recoverable amount.
**Logic and Reason:**
- **Goodwill Nature:** Goodwill represents the excess purchase price over the fair value of identifiable net assets acquired in a business combination. It is considered the most intangible and least measurable asset. Therefore, any impairment loss affecting the business is first absorbed by goodwill before impacting the identifiable assets.
- **Identifiable Assets:** Identifiable assets, such as property, plant, and equipment, have a clearer and more measurable value. The impairment of these assets is recognized based on their individual recoverable amounts after goodwill has been fully impaired.
**Journal Entries for Impairment Loss:**
1. **Goodwill:**
```
Debit: Impairment Loss (Goodwill)
Credit: Goodwill
```
2. **Identifiable Assets (if any remaining impairment loss):**
```
Debit: Impairment Loss (Identifiable Assets)
Credit: Asset Account
```
### **2. Reversal of Impairment Loss**
**Reversal Allocation:**
- **Identifiable Assets First:** When reversing an impairment loss, the reversal is first allocated to **identifiable assets**. This is because the impairment loss on identifiable assets is typically based on their recoverable amount and can be clearly measured.
- **Goodwill:** Any remaining reversal of impairment loss, after addressing the identifiable assets, is allocated to **goodwill**.
**Logic and Reason:**
- **Recoverable Amount of Identifiable Assets:** Identifiable assets have a specific recoverable amount that can be determined. Reversals are thus first applied to these assets to bring them back to their recoverable amounts before adjusting goodwill.
- **Goodwill Reversal:** Goodwill does not have a directly measurable recoverable amount. Hence, any remaining reversal after addressing identifiable assets is applied to goodwill. However, the reversal of impairment loss on goodwill is limited to the extent of the original impairment loss recognized for that goodwill.
**Journal Entries for Impairment Reversal:**
1. **Identifiable Assets:**
```
Debit: Asset Account
Credit: Reversal of Impairment Loss (Identifiable Assets)
```
2. **Goodwill (if applicable):**
```
Debit: Goodwill
Credit: Reversal of Impairment Loss (Goodwill)
```
### **Summary**
1. **Initial Impairment Loss:**
- **Goodwill:** Absorbs impairment loss first because it is the most intangible asset.
- **Identifiable Assets:** Absorb any remaining impairment loss based on their recoverable amounts.
2. **Reversal of Impairment Loss:**
- **Identifiable Assets:** Reversal applied first to bring them back to their recoverable amount.
- **Goodwill:** Any remaining reversal applied to goodwill, but only up to the amount of previous impairment.
This process ensures that impairment losses and their reversals are accurately reflected in financial statements, respecting the nature of goodwill and identifiable assets.
### **1. Impairment Loss Allocation**
**Initial Impairment Loss Allocation:**
- **Goodwill First:** When an impairment loss is identified, it is first allocated to **goodwill**. This is because goodwill, by nature, cannot be attributed to specific identifiable assets and is considered to be the last in line to absorb impairment losses.
- **Identifiable Assets:** After goodwill has been impaired to its recoverable amount, the remaining impairment loss is allocated to **identifiable assets** on a pro-rata basis or as per the asset’s recoverable amount.
**Logic and Reason:**
- **Goodwill Nature:** Goodwill represents the excess purchase price over the fair value of identifiable net assets acquired in a business combination. It is considered the most intangible and least measurable asset. Therefore, any impairment loss affecting the business is first absorbed by goodwill before impacting the identifiable assets.
- **Identifiable Assets:** Identifiable assets, such as property, plant, and equipment, have a clearer and more measurable value. The impairment of these assets is recognized based on their individual recoverable amounts after goodwill has been fully impaired.
**Journal Entries for Impairment Loss:**
1. **Goodwill:**
```
Debit: Impairment Loss (Goodwill)
Credit: Goodwill
```
2. **Identifiable Assets (if any remaining impairment loss):**
```
Debit: Impairment Loss (Identifiable Assets)
Credit: Asset Account
```
### **2. Reversal of Impairment Loss**
**Reversal Allocation:**
- **Identifiable Assets First:** When reversing an impairment loss, the reversal is first allocated to **identifiable assets**. This is because the impairment loss on identifiable assets is typically based on their recoverable amount and can be clearly measured.
- **Goodwill:** Any remaining reversal of impairment loss, after addressing the identifiable assets, is allocated to **goodwill**.
**Logic and Reason:**
- **Recoverable Amount of Identifiable Assets:** Identifiable assets have a specific recoverable amount that can be determined. Reversals are thus first applied to these assets to bring them back to their recoverable amounts before adjusting goodwill.
- **Goodwill Reversal:** Goodwill does not have a directly measurable recoverable amount. Hence, any remaining reversal after addressing identifiable assets is applied to goodwill. However, the reversal of impairment loss on goodwill is limited to the extent of the original impairment loss recognized for that goodwill.
**Journal Entries for Impairment Reversal:**
1. **Identifiable Assets:**
```
Debit: Asset Account
Credit: Reversal of Impairment Loss (Identifiable Assets)
```
2. **Goodwill (if applicable):**
```
Debit: Goodwill
Credit: Reversal of Impairment Loss (Goodwill)
```
### **Summary**
1. **Initial Impairment Loss:**
- **Goodwill:** Absorbs impairment loss first because it is the most intangible asset.
- **Identifiable Assets:** Absorb any remaining impairment loss based on their recoverable amounts.
2. **Reversal of Impairment Loss:**
- **Identifiable Assets:** Reversal applied first to bring them back to their recoverable amount.
- **Goodwill:** Any remaining reversal applied to goodwill, but only up to the amount of previous impairment.
This process ensures that impairment losses and their reversals are accurately reflected in financial statements, respecting the nature of goodwill and identifiable assets.
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