IFRS permits the reversal of impairment for long-lived assets (IAS 36). However, impairments cannot be reversed in ASPE (ASPE 3063) accounting standards. This article is only relevant to entities reporting under IFRS, and not relevant to entities reporting under ASPE.
When is Reversal Permitted?
Assuming we are reporting using IFRS, an impairment reversal is only permitted if there has been a change to the estimates used in determining the original impairment loss.
The indicators used to determine if an impairment can be reversed, are similar those used to evaluate the initial impairment loss:
Changes in market values
Interest rate changes
Physical damage
Changes in use
New competition, etc..
Goodwill cannot be reversed. This means that the assessment of impairment reversal should always be based on whether the other assets in the Cash Generating Unit (all non-Goodwill assets) have increased in value.
How to reverse an Impairment
Asset can be increased up to a maximum of:
Carrying Value less Depreciation, had no impairment occurred
If the asset has increased more than: Carrying Value less Depreciation, then the remainder is treated as a revaluation.
Journal Entries for reversals
If the asset was not being carried at a revalued amount, then the gain on impairment would be recorded as a Gain in Impairment Reversal, directly in the Profit/Loss section of the Income Statement.
If the asset was being carried at a revalued amount, we reverse the journal entry, based on the rules listed below.
First Time Revaluation:
Remember that for first impairment, the journal entry was:
Our entry to reverse this would be:
Second Revaluation, or Impairment greater than revaluation amount:
Remember that any additional impairment was originally expensed in Profit/Loss as follows:
Our entry to reverse this would be:
This process may seem complicated, but the general idea is that we want to reserve the previous actions, before adding additional gains on impairment reversals to the Profit/Loss section of the Income Statement.
Cash Generating Units
There are a few things we should always remember when dealing with Cash Generating Units:
Goodwill cannot be reversed
Similar to impairments, reversals should be done on a pro-rata basis
No assets in the CGU can be increased above the lower of:
The recoverable amount, and
The carrying amount (less any depreciation if no impairment had taken place)
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