ACC2100 · Financial Accounting
Impairment of Assets (AASB 136)
Impairment of Assets (Week 3, AASB 136) asks whether an asset is carried above what it is really worth. The test compares carrying amount with recoverable amount — the higher of fair value less costs of disposal (FVLCD) and value in use (VIU) — and recognises a loss only when CA exceeds RA. For a cash-generating unit, the loss is allocated to goodwill first and then pro-rata across the other assets, subject to a per-asset floor.
This is an MCQ-pool topic (Weeks 3, 4, 5 supply the non-shared MCQs). Expect questions on computing recoverable amount, the single-asset journal, the CGU allocation order, and the reversal rules.
What this chapter covers
- 01Impairment loss = Carrying amount (CA) − Recoverable amount (RA), recognised only if CA > RA
- 02Recoverable amount = higher of FVLCD and value in use (VIU = PV of future cash flows)
- 03Indicator-based testing each period (external and internal sources)
- 04Annual test regardless of indicators: indefinite-life intangibles, intangibles not yet in use, and goodwill
- 05Cost model journal (Dr Impairment loss / Cr Accum depreciation & impairment) vs revaluation model (treat as a downward revaluation through OCI)
- 06Cash-generating unit (CGU): smallest group generating largely independent cash inflows
- 07CGU allocation order: write goodwill to zero first, then pro-rata across other assets by carrying amount; floor = highest of FVLCD, VIU, zero
- 08Reversal allowed up to the no-impairment carrying amount, but goodwill impairment is never reversed
Single-asset impairment under the cost model
- 1 markDepreciate first: 300,000 / 10 = $30,000. Dr Depreciation expense 30,000 / Cr Accumulated depreciation 30,000. Carrying amount becomes 300,000 − 30,000 = $270,000.
- 1 markCompute recoverable amount = higher of FVLCD ($250,000) and VIU ($262,000) = $262,000.
- 2 marksTest: CA $270,000 > RA $262,000, so the asset is impaired. Impairment loss = 270,000 − 262,000 = $8,000.
- 1 markJournalise (cost model): Dr Impairment loss 8,000 / Cr Accumulated depreciation & impairment losses 8,000.
Key terms
- Recoverable amount (RA)
- The higher of an asset's (or CGU's) fair value less costs of disposal (FVLCD) and its value in use (VIU). It is the benchmark the carrying amount is tested against.
- Value in use (VIU)
- The present value of the future cash flows expected to be derived from continuing to use an asset (or CGU) and from its ultimate disposal.
- Cash-generating unit (CGU)
- The smallest identifiable group of assets that generates cash inflows largely independent of the cash inflows from other assets. When an individual asset's recoverable amount can't be measured, it is tested as part of its CGU.
- Impairment loss
- The amount by which carrying amount exceeds recoverable amount (CA − RA). Recognised in profit or loss under the cost model, or first against any revaluation surplus (through OCI) under the revaluation model.
- Allocation floor
- In a CGU, an individual asset cannot be written below the highest of its FVLCD, its VIU, or zero. Any excess loss that would breach this floor is reallocated across the remaining assets.
Impairment of Assets (AASB 136) FAQ
Recoverable amount is the higher or the lower of the two figures?
The higher. Recoverable amount = the greater of fair value less costs of disposal (FVLCD) and value in use (VIU). The logic is that a rational owner would either sell the asset or keep using it, whichever gives more, so the asset is worth at least the better of those two routes. Picking the lower figure is a common and costly slip.
When must I test for impairment regardless of indicators?
Most assets are tested only when an indicator suggests impairment (external signals like market-value decline or rising interest rates, internal ones like obsolescence or worse-than-expected performance). But three things are tested at least annually no matter what: indefinite-life intangibles, intangibles not yet available for use, and goodwill acquired in a business combination.
How is a CGU impairment loss allocated?
Write any goodwill in the unit down to zero first, then allocate the remaining loss pro-rata across the other assets based on their carrying amounts. Cash, inventory and deferred tax assets are outside AASB 136's allocation. Watch the floor: no asset is reduced below the highest of its FVLCD, VIU or zero, and any excess is reallocated to the others.
Can an impairment loss be reversed?
Yes for most assets — up to the carrying amount the asset would have had (net of depreciation) if no impairment had ever been recognised; you cannot reverse above that ceiling. The major exception is goodwill: an impairment of goodwill is never reversed.
Exam move
Treat impairment as a fixed sequence and the marks follow. For a single asset: depreciate for the year → carrying amount → recoverable amount as the HIGHER of FVLCD and VIU → if CA > RA, loss = CA − RA → journal (cost model to P&L; revaluation model against the surplus through OCI first). For a CGU, memorise the allocation order: goodwill to zero, then pro-rata by carrying amount, then apply the per-asset floor and reallocate any excess. Keep two rules at your fingertips for the MCQs — the annual-test list (indefinite-life intangibles, intangibles not yet in use, goodwill) and the no-reversal-of-goodwill rule. Practise one CGU question with a floor each week so the reallocation step stops surprising you.
