Recognition of Impairment Losses in Cash-Generating Units

Running head: CORPORATE ACCOUNTING
Corporate Accounting
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1CORPORATE ACCOUNTING
Table of Contents
Part A:................................................................................................................................2
Part B:................................................................................................................................9
References:......................................................................................................................11

2CORPORATE ACCOUNTING
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.

3CORPORATE ACCOUNTING
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,