Question

Demonstrate your understanding of impairment losses by preparing journal entries to illustrate the accounting of impairment losses on the group’s current trade receivables and long-term receivables.

Answer 1

When the market value of an asset is below the book value, an asset is deemed to be impaired. In other words, the future projected cash flow of the asset is below it's current carrying value. The asset needs to be written down to the extent of impairment loss to equalize it's book value to market value.

Usually, intangible assets and long term assets are more at impairment risk due to the long span of their holding period. They need to be tested on a periodic basis and impaired accordingly.

IFRS 9 defines the process of impairment of trade receivables by adopting a historical approach to project on the future credit risk. This can also be further enhanced based on segment-wise updates and developments in certain geographies, products and businesses.

In case of current trade receivables, following journal entry needs to be passed

Allowance for Impairment of Trade Receivables A/c Dr.

To Trade Receivables

Allowance for impairment of trade receivables is a contra asset account and is presented as a deduction against trade receivables in balance sheet. It represents the amount that is unlikely to be collectible.

For long term assets following checks should be applied:

• Held for future use - The assets should be held for future use in generation of cash flows
• Significant changes - There should be significant changes resulting in cash flow variances.
• Perform recoverability test - If the future net cash flows are lesser than the estimated carrying value, the asset has failed the recoverability test and the impairment loss needs to be accounted for the difference.

Restoration of an impairment asset is not permitted.

In case of long-term receivables, the impairment loss is calculated as the difference between the investment in long term receivables and the discounted cash flows expected at the historical effective interest rate. The journal entry is passed as follows:

Impairment Loss A/c Dr,

To Allowance for Doubtful Accounts