Recognition of Impairment Losses in Cash-Generating Units

This essay sheds light on the recognition of impairment losses by an organisation and the measures to be adopted for gauging the losses in relation to cash-generating units (CGUs) excluding goodwill. It discusses the amendments in AASB 136, the computation of recoverable amount, the reversal of impairments, and the treatment of goodwill impairment. The essay also explains the allocation of impairment loss and the evaluation of individual assets within a CGU. Overall, it provides insights into the process of recognizing impairment losses in CGUs.

Running head: CORPORATE ACCOUNTING
Corporate Accounting
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Table of Contents
Part A:................................................................................................................................2
Part B:................................................................................................................................9
References:......................................................................................................................11

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Part A:
Introduction:
For an organisation to carry out its day-to-day operations, investments have to be
made in assets like property, plant and equipment, land, machinery, factory and others.
The intention is to generate revenue by using these assets. However, with the passage
of time, an asset becomes damaged or obsolete leading to change in value. Such
change in valuation is deemed as impairment (Beaudoin and Hughes 2014).
On the other hand, an asset could be rarely found generating cash flows
independent of other assets. For instance, an airline company would own planes and
their licenses that would be categorised as its assets. In case; these assets are invested
individually, there would be no generation of cash flows. More precisely, it is not
possible for an airline to own planes in the absence of licenses for operating the same.
In a similar manner, it is not possible for the airline to have licenses without owning
some planes. This asset combination is termed as a cash-generating unit (CGU) and it
could be impaired like individual assets (Detzen, Wersborg and Zülch 2015).
In 2008, ABC Learning witnessed a scandal related to overvaluation of assets
and more specifically, the wrong valuation of its childcare subsidiaries and goodwill. As
a result, considerable emphasis has been placed on the impairment practices of the
business organisations (Hassine and Jilani 2017). The current essay would shed light
on the recognition of impairment losses by an organisation and the measures to be
adopted for gauging the losses in relation to CGUs excluding goodwill.

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Discussion:
The amendments on the way of treating impairment losses in CGUs are included
in AASB 136 that defines an impairment loss as the carrying amount of CGU minus
recoverable amount of that CGU (Avallone and Quagli 2015). Recoverable amount
could be defined as the amount, which is collected by selling or using an asset.
The application of AASB 136 could be made in different asset list like goodwill,
land, machinery, building, equipment, intangible assets, joint ventures, subsidiaries and
equipment. However, the guidelines of the standard are not applicable to certain assets
like inventory, contract assets, insurance contract and investment property (Boučková
2016). Cash-generating units could be described as assets or class of assets, which are
able to fetch cash flows independent of other group of assets.
According to “AASB 136, Paragraphs 9 and 10”, assets and CGUs have to be
tested for impairment at the end of the reporting period and annually for goodwill and
intangible assets. If indication is found regarding the impairment of CGU, it is necessary
for the organisation to compute the recoverable amount of CGU ad the same has to be
compared with the carrying amount of the CGU (Aasb.gov. au 2019). The carrying
amount includes the value of the asset as denoted in the financial statement minus
impairment losses and accumulated depreciation.
The recoverable amount of the CGU is computed as the higher between fair
value less selling cost and value-in-use. The fair value less selling cost could be defined
as the value to be realised by an organisation from sale of the CGU. On the other hand,

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value-in-use could be defined as the present value of discounted future cash flows,
which is attached to use the asset combination (Komissarov, Kastantin and Rick 2014).
When the recoverable amount of a CGU is below the carrying amount,
impairment of CGU is evident (Vogt et al. 2016). In opposition, when the recoverable
amount of the CGU is more compared to its carrying amount with no past impairments,
the CGU is not impaired. Hence, the organisation is not needed to conduct any
measure. There is recognition of impairment loss in relation to a CGU by minimisation of
the carrying amount (Linnenluecke et al. 2015). Firstly, the allocation of loss would be
made to goodwill after which other assets would be assigned within the CGU in relation
to their carrying amounts.
It is necessary to assure that the carrying amount of each asset within a CGU
does not fall below zero, value-in-use or fair value less selling cost. By subjecting to
limits, the unallocated amounts would then be assigned back to the other assets within
a CGU.
It is possible to reverse impairments when the conditions resulting in impairment
in the initial stage has been lifted. “AASB 136, Para 10” needs the conditions to be
assessed per year (Aasb.gov.au 2019).
In case; there is lift of conditions, the organisation needs to compute the
recoverable amount. When the carrying amount is lower than the recoverable amount of
CGU, reversal of impairment could occur subject to a limit of not beyond the ceiling.
“AASB 136, Para 117” describes ceiling as the carrying amount of the asset by
assuming that no impairments have taken place (Aasb.gov.au 2019).

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The term Goodwill impairment is an earnings charge which is kept recorded in
the income statement of thecompany when the carrying value of goodwill exceeds the
fair value in the financial statements of the company (Sun 2016).The reason behind that
is many companies acquire other firms and bears a price that exceeds the fair value of
the assets and liabilities acquired by the firm. Hence the difference between the
purchase price and the fair value of acquired assets of the firm which is further recorded
as a goodwill.
A particular asset is impaired when the value of the asset exceeds the
recoverable amount of the company and the individual asset is termed as the cash
generating unit. The indication when the intangible asset is impaired is that the asset
market value has significantly reduced more than the expected result of the normal
usage. The significant changes will create an adverse effect on the enterprise due to the
certain factors which take place in the near futureoperates within the technological,
economic market (Sedkiet al. 2018).
The main principle of impairment is that an asset might not be carried on the
balance sheet of the financial statement beyond its recoverable amount. Such value
arising is greater as it is the difference between fair value of the asset and cost to sell
and value-in-use. The carrying value of an asset is compared with its recoverable
amount. Further the asset is impaired at the time when the positive outcome takes place
in such difference. Such impairment which is distributed to the asset at that particular
point of time when the impairment loss is further realisedin profit or loss (Huikku,
Mouritsen and Silvola 2017).

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There lies and indication that the asset might be impaired when all the assets
subject to the review of impairment are verified for impairment. There are various
intangible assets of the firms which are the goodwill, patent, trademark and many more
are quite frequently tested for yearly impairment despite of any absence in the
impairment indicator. The evaluation of recoverable amount is prepared at an individual
level of asset. The assets of the firm leads to the independent cash flow in the system
and further some of the most valuable or the significant assets are tested for impairment
which are explained in the form of the cash generating unit. As per the “AASB 136 of
Para 104”, the cash generating unit of the impairment loss would be made only if the
recoverable amount of the unit is lower than the comparable unit of the company
(Aasb.gov.au, 2019). The significant purpose of the impairment loss is to minimize the
carrying amount of the assets in two separate sequential orders.The carrying amount of
the goodwill apportioned to the cash-generating unit which must be minimized and
secondly, the other asset units carrying amount is based on the pro-rata basis which
would also be minimized.The process ofminimizations in the carrying amounts is
needed to be treated in the form of loss of impairment on the individual assets.As per
“AASB 136 of Para 60” most of the asset impairment is based on the carrying amount.
According to “AASB 136 of Para 105” which further indicates that in order to distribute
impairment loss, it is significant for the organizationtominimize an the carrying amount
of an asset below the greater of three possible alternatives. The possible alternatives
includes the value-in-use, fair value minus disposal costs and zero (Kabir and Rahman
2016).

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The amount of impairment lossis further allocated in a different manner which would
have been allocated differently to the asset. This is further needed to be distributed in
the basis of pro-rata to the assets of the other unit. According to “AASB 136 of Para
106” it is impossible to expect the recoverable amount associated with the cash-
generating unit of the assets. Standard apportionment of impairment loss expect
goodwill because each asset of a cash-generating unit is involved in employed together.
“AASB 136 of Para 107”signifies that recoverable amount which is associated with
an individual asset is not determined as it might lead to two different circumstances. In
“AASB 136 of Para 104 and 105” (AASB 2015), an impairment loss is realisedwhen the
carrying amount is higher in respect to the difference between the fair value minus
disposal cost and the outcomes of the procedures of distribution. The realisation of
impairment loss of an asset is related to the cash-generating unit which is not impaired.
This situation is only applicable when there lies difference between fair value of the
asset and the disposal cost is lower in comparison of the carrying amount of the asset
(Caruso et al. 2016).
The performance of the machine is not effective as it was previously as the machine
has met some of the physical damage (Chen, Shroff and Zhang 2017). The difference
between the fair value and disposal cost of the machine is lower which is further
compared to the carrying cots of the machine. This does not imply the independent
cash flows in the business of the company. As per the norms, it is significant to identify
the class of theassets including the machine along with the independent cash inflows of
the other assets is further related to the line of production where the machine belongs.

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The recoverable amount which is related to the line of production indicates that the lone
of production is not impaired to the machine.
In this case, two different assumptions are sortedwhen the forecasts or budgets
which is approved by the management seeks lack of commitment level of the assets.
The recoverable amount of the machine could not be expected, as there might be
deviation from the value-in-use of the machine to the fair value minus disposal costs.
This could be determined for the CGU to which the machine particularly exists. However
there is no realisation of impairment loss for the machine as per the above discussion. It
is further significant for the organization to evaluate the period or the method of
depreciation related to the machine (Vogt et al. 2016). It is recommended to the
organization to adopt the faster method of depreciation for suggesting the remaining life
or rather the economic way in which the benefits are estimated which are further
consumed by the machine.
Conclusion:
It has been analysed from the above discussion that numerous assets generate
cash flows in a combination in opposition to individual assets. This class of assets is
denoted as a cash generating unit or in simple words, CGU. Like individual assets, a
CGU could change in value with the passage of time owing to the damage of separate
assets along with other factors. Therefore, it is crucial for the organisation to conduct
regular checks for the indicators of impairment for analysing if there are changes in
values. The objective of the check is to avoid the reporting of over-valued assets, which
could not alter the financial statements of an organisation or estimations and thus, it
does not represent its fair and true value.

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Part B:

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References:
Aasb.gov.au, 2019. [online] Available at:
https://www.aasb.gov.au/admin/file/content102/c3/AASB136_07-04_ERDRjun10_07-
09.pdf [Accessed 10 Jun. 2019].
Avallone, F. and Quagli, A., 2015. Insight into the variables used to manage the
goodwill impairment test under IAS 36. Advances in accounting, 31(1), pp.107-114.
Beaudoin, C.A. and Hughes, S.B., 2014. APT, Inc.: An application of impairment testing
and fair value estimation using International Financial Reporting Standards. Issues in
Accounting Education Teaching Notes, 29(1), pp.1-17.
Boučková, M., 2016. Quality of disclosed information with emphasis on goodwill
impairment. European Financial and Accounting Journal, 11(2), pp.37-52.
Caruso, G.D., Ferrari, E.R. and Pisano, V., 2016. Earnings management and goodwill
impairment: An empirical analysis in the Italian M & A context. Journal of Intellectual
Capital, 17(1), pp.120-147.
Chen, W., Shroff, P.K. and Zhang, I., 2017. Fair value accounting: consequences of
booking market-driven goodwill impairment. Available at SSRN 2420528.
Detzen, D., Wersborg, T.S.G. and Zülch, H., 2015. Bleak weather for sun-shine AG: A
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Hassine, N.M. and Jilani, F., 2017. Earnings Management Behavior with Respect to
Goodwill Impairment Losses under IAS 36: The French Case. International Journal of

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Academic Research in Accounting, Finance and Management Sciences, 7(2), pp.177-
196.
Huikku, J., Mouritsen, J. and Silvola, H., 2017. Relative reliability and the recognisable
firm: Calculating goodwill impairment value. Accounting, Organizations and Society, 56,
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Kabir, H. and Rahman, A., 2016. The role of corporate governance in accounting
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Accounting & Economics, 12(3), pp.290-308.
Komissarov, S., Kastantin, J.T. and Rick, K., 2014. Impairment of Long-Lived Assets: A
Comparison under the ASC and IFRS. The CPA Journal, 84(5), p.28.
Linnenluecke, M.K., Birt, J., Lyon, J. and Sidhu, B.K., 2015. Planetary boundaries:
implications for asset impairment. Accounting & Finance, 55(4), pp.911-929.
Sedki, S.S., Posada, G.A. and Pruske, K.A., 2018. Differences Between US GAAP and
IFRS in Accounting for Goodwill Impairment and Inventory: Tax Treatment Under the
Internal Revenue Code. Journal of Accounting and Finance, 18(4).
Sun, L., 2016. Managerial ability and goodwill impairment. Advances in accounting, 32,
pp.42-51.
Vogt, M., Pletsch, C.S., Morás, V.R. and Klann, R.C., 2016. Determinants of goodwill
impairment loss recognition. Revista Contabilidade & Finanças, 27(72), pp.349-362.