Impairment of Assets and Calculation

Impairment of Assets and Calculation


Discuss about the Impairment of Assets and Calculation.



Longreach limited is a company enlisted in ASX. To comply with the impairment testing of assets, the company has sought for consultancy on 30.06.2014. To make them understand the implication of this practice, this report is being made focusing on the issues of objective of this practice, treatment of intangible asset like goodwill for this practice with the basic steps for implementing impairment testing of assets as per AASB standard 136. IASB has made it compulsory to practice impairment testing of assets as per their Standard 36. To ensure convergence with IASB, AASB has also introduced Standard 136 since July 2007. The main focus on this practice is to ensure derivation of the present logical value of the assets as per the business situation presently prevailing with other factors including time factor to be considered. Normal system of derivation of present value of assets is ensured by following the steps of making comparison of fair value of assets with logical volume of increased or decreased value as per consideration of time factor. Basic criterion of deriving impairment of assets is dependent upon the logical deflation of value of assets as per the return it generates to the organization in respect of money value conception. Basic cause of impairment testing of assets is to ensure the recognition of the quantum of cash flow generated from the assets with the undiscounted nature for future time related to any specific asset along with the practice of deriving carrying amount of asset in money-value terms to evaluate specific loss of those assets in monetary terms (Longreachltd, 2016).  
Standard system of calculating impairment impact of any asset is made by the practice of defining current value of any asset by comparing with the fair value of that asset.  The globally acclaimed accounting standards put emphasis on the issue of logical evaluation of impairment of assets. AASB, as per the effort to ensure convergence with IASB is mal\king all attempts to make a platform which seems to be logical in this aspect to confirm present value of assets through calculation of impairment loss of assets through the process of testing. It is not one time effort, instead it is continuous effort. AASB is also moving at par with the changed position of accounting system by ensuring required changes of the existing standards. Present version of Standard 136 is at par with IASB standard 36 and is introduced since 2004 for discussion with subsequent effectiveness since July 2007 (Moodysanalytics, 2016). 

Purpose of Impairment Testing of Assets

AASB has introduced Standard 136for enforcement of directives to ensure impairment testing of assets as endorsed by Section 334 of Corporation Act, 2001. This standard is taken to the discussion board of critiques and experts since 15th July 2004 to ensure value addition in this standard with necessary alteration or amendments and then this standard has been enforced since 15th July 2007 effectively. This Standard 136 had replaced the erstwhile Standard 116 related to this issue. Main purpose of this amendment is to ensure implementation of logical platform related to practice of impairment testing of assets to ascertain present value of assets ensuring proper presentation of financial information related to valuation of assets to the stakeholders of the business entity through certified financial reports.  Financial reports authenticated by auditors and endorsed by Board of Directors is the main document for the investors to take future decision related to further investment. Hence the need of this report demands that it should be true and fair with proper financial information which will be good guide for future logical decision. Main objective of practicing impairment testing of assets is to ensure proper evaluation of the assets of the business entity for any certain period. Basic guideline for this calculation endorses the concept of carrying amount of asset must not exceed the value of assets as recoverable. This practice is mainly directed to assess the loss of asset value of any business entity by opting for proper disclosure by the management. This is compulsory practice for the business organizations that are following the guideline of Part 2M.3 of Corporation Act relating to preparation of financial report as specified General Purpose Financial Report of GPFR (Aasb, 2007).

Goodwill- impact on Impairment Testing

Impact of goodwill on impairment testing of asset is disclosed in AASB standard 136 through specified paragraphs 80 to 84 (Ey, 2008). Paragraph 80 had emphasized the importance on consideration of goodwill in any specific business to be guessed on the allocation of cash generating units of any business entity. It is also advised that valuation of allocated goodwill is subject to minimum value of that asset within the entity as considered internally by the management of the organization. At the same time it is also advised that value of goodwill is to be bound within the operating segment as per value as certified through AASB standard 8.  Paragraph 81 had emphasized on the recognition of goodwill. Respective clarification in the aspect of treatment of goodwill is as an asset which is as per the nature of non-identifiable and non-recognizable while considering its material value. It is also inferred that the role of this asset should not dictate cash flow generation with individual impact on any asset of the business entity. It should be treated as agent of value addition to several cash generating units of the business entity. Paragraph 82-84 had emphasized guidance to the entity to follow proper method of evaluation for impairment testing of goodwill as per decision of the management with specific allocation of the same asset (Aasb, 2009).

Basic steps for impairment testing of assets

AASB standard 136 has specified six steps for impairment testing of assets which are appended below:
Estimated life of Cash Generating Units or CGU
Working Capital- its movement
Capital Expenditure of any business entity with its flow
Derivation of interest benefit through Tax payment
Discount rate of the industry
Terminal or Eternity value of EBIT or EBITDA with the perspective of anticipated cash flow in future(Murone, 2012).


This report had been made to meet the query of Longreach Ltd related to impairment testing of assets as prescribed by Standard 136 of AASB. This report will feature the basic concepts of impairment testing procedure of any business entity as per directives set in the said Standard. Recommendation is advised for following this procedure to make the impairment testing practice of assets in order to ensure proper evaluation of asset in present value with the time factor taken into consideration as specified in the Corporation Act 2001 of Australia. Practicing of this Standard will raise the level of confidence amongst the stakeholders of the company including the investors and the government. It will also be helpful for the stakeholders to depend upon the financial report such generated with the implication of this standard. As per compulsion imposed by ASX for their listed members to comply with this practice of impairment testing of assets to assess the present value of assets in respect of fair value of those, Longreach Ltd should follow this practice to make them trustworthy with their efforts to comply with AASB Standard 136.


Aasb, 2007. Impairment of Assets. [Online] Available at: [Accessed 10 January 2017].
Aasb, 2009. Impairment of Assets. [Online] Available at: [Accessed 10 January 2017].
Ey, 2008. Impairment accounting – the basics of IAS 36 Impairment of Assets. [Online] Available at:$FILE/Impairment_accounting_IAS_36.pdf [Accessed 18 January 2017].
Longreachltd, 2016. The company. [Online] Available at: [Accessed 13 January 2017].
Moodysanalytics, 2016. IFRS 9 and CECL Impairment Calculation. [Online] Available at: [Accessed 22 January 2017].
Murone, P., 2012. The six steps to testing if your impairment testing is impaired. [Online] Available at: [Accessed 10 January 2017].