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Reversing Impairments

Issue

My client has internally generated software.  As at the 30 June 2018 it had a carrying value of $500,000 with a 5 year useful life remaining (zero scrap value).  Due to poor market penetration they fully impaired the software on 30 June 2018 ($500k write off).  This financial year (30 June 2020) there have been significant sales of the software and a change in market sentiment including a large number of new signed contracts with customers.

Assuming the recoverable amount calculation supports it, can they reverse the whole $500,000 impairment?

Conclusion

No.  There is a cap on the reversal such that the reversal of an impairment loss shall not exceed the carrying amount that would have been determined (net of amortisation or depreciation) had no impairment loss been recognised.

So, assuming no impairment in 2018 then the carrying value of the software as at 30 June 2020 would have been $300,000 (two years amortisation $200,000 = 2yrs * $500,000/5 year useful life).

The impairment reversal will be $300,000 and given that the original impairment was recognised in profit or loss then the reversal will also be recognised in profit or loss.

Background

AASB 136
117 The increased carrying amount of an asset other than goodwill attributable to a reversal of an impairment loss shall not exceed the carrying amount that would have been determined (net of amortisation or depreciation) had no impairment loss been recognised for the asset in prior years.