Impairment Loss Allocation

The assignment content is about the impairment loss allocated to different assets within a cash-generating unit (CGU). The CGU has land, equipment, and building as its main assets, with a total carrying amount of $256,000. An impairment loss of $20,000 was recognized, with $7,265 already assigned to land. The remaining $12,735 needs to be allocated across the other assets. After apportionment, the final allocation is Goodwill: $10,000, Land: $7,265, Equipment: $7,823, and Building: $4,912. Journal entries were made to record the impairment losses. The conclusion highlights the importance of transparency in disclosure, emphasizing the need for supporting facts and figures, as well as justifying the selection of the cash-generating unit.

1
By student name
Professor
University
Date: 16 Spetember 2017.
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Contents
Introduction...…………………………………………………………………………………………….......3
Concepts on Impairment of CGU and its reversal……………………………………………..........
……………………………..……………………...4
Solution to Question 2……………………………………………….....…………………………………6
Conclusion and Disclosure..……………………………………….....…………………………………8
Refrences.....……………………………………………………………….......................................9
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Introduction – Impairment
As per IAS 36 and AS 28, impairment of the assets is described as write down in the
value of the assets of an entity based on the regular assessments. It should not be carried in the
books at more than the recoverable value, i.e., higher of the fair value of the asset less cost of
disposal and value in use. The difference between net carrying value in the books and the
recoverable value is called the impairment loss. The company needs to check on the impairment
of the assets if the relevant conditions exist and thereby make necessary adjustments in the value
of the asset in the financials.Goodwill and other intangible assets are being reviewed annually
and separately for impairment through an impairment test as per the standard. In case the single
asset is identifiable and is independent of other units in terms of generating the revenue for the
company, it should be assessed individually for impairment else the smallest possible group or
class of assets which is capable of generating the revenue independently known as the cash
generating unit needs to be assessed for impairment. It is not necessary the asset once impaired
will be as it is and can never be appreciated based on the relevant factors but there can be the
reversal of impairment loss recorded earlier based on the improved and positive business
conditions and other factors. Therefore, it can also be reversed based on the existence of the
relevant indicators. IAS 36 applies to land, building, plant and machinery, intangible assets,
goodwill, investments in subsidiaries or other companies as well. However, it does not applies to
inventories, deferred tax assets, financial assets, assets from construction contracts and assets
which arise out of employee benefits, agricultural assets and non current assets held for sale
purposes. (Buchanan, et al., 2017)
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Concepts on Impairment of CGU and its reversal
A company needs to do the periodic evalauation of the assets whether the same can be
impaired given the circumstances of the case of else if it can be reversed if the impairment loss
on a particular asset has already been recognised. In case the indicators for impairment do exist,
the same needs to be identified and also the recoverable value of the assets. Indicators can be of
two types: internal and external indicators. Internal indiactors includes specifically the factosr
inside the company and on which the company exercises the control like physical damange to the
asset or its obsolescence, or asset is kept idle and held for sale, or the esset is expected to give
worst economic performance or the investment in subsidiary or the joint ventures is more than
the investee’s actual assets. (Das, 2017) There can also be external factors or indicators which
are not inside the control of the company but affects every company or industry as a whole like
the value of the assets lying in the books is higher than the market capitalization, or the market
value has declined considerably, or there is a negative change in the taste, preferences or
technology in the market or the market interest rates have increased. The list is just a few
examples of the factors and not the exhaustive one. Together with the impairment assessment the
company also needs to check on the depreciation method, the estimated useful life or even the
residual value of the asset at the end of certain period.
The question now is how to reverse the impairment value of the asset? It is to be done in
the same way as the impairment is done such that the above mentioned factors are on the positive
side. Post that the recoverable value needs to be ascertained. In case the fair value less cost of
disposal as well as the value in use is more than the carrying value the question of impairment
subsumes as it iis not required in this case. However, in case the opposite happens, the
recoverable value has to be determined and carrying value needs to be written off or charged to
profit and loss account for the differential amount. In case the fair value is not determinable, the
value in use becomes the recoverable value and in case of the disposable assets, the recoverable
value is the fair value less the cost of disposal. The determination of fair value has to be done in
accordance with the IFRS 13 which is on Fair value measurement. The cost of disposal includes
only the direct costs related to it. The other factor being value in use is detrmined through a
number of variables like the time value of money, the expected future cash flow generation
ability of the asset, the time lag in between the receipt of the amount from the use of the asset,
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and many more including accounting for uncertainity, if any. (Fay & Negangard, 2017) Assets
cash flow generation projections should always be made on the most recent or current data and
not of the past years and in case the time period is more than 5 years, extrapolation can be used
as per the IAS. The projection should be exclusive of any future expenditure which is expected
to be incurred on the asset. The interest rate to be used in the calculation of the value in use
should be pre tax rate such that it includes the effect of time value of money and the market
conditions. It should be the rate which the investors would have asked for in return on investing
in the company or any specific asset. Further, the discount rate used should be the one which
would have borrowed from the market in order to buy a particular asset.
From all the above inputs, impairment loss to be reversed can be calculated and then
credited to the profit and loss account of the entity. It would generally be done in case the
recoverable value is more than the carrying value of the asset and we can utilise the asset and
derive the future economic benefit from the asset which was already impaired earlier (Meroño-
Cerdán, et al., 2017) Based on all this, the future depreciation amount also needs to be adjusted
on the prospective basis.
When we talk about CGU or a cash generating unit, it is not the single asset but the
smallest possible group of assets or a class of asset from which revenue for the business can be
generated and which has an identity which is independent of the other group or class of assets.
The calculation for impairment of goodwill is completely different as the goodwill of the entity
is generally allocated to all the CGUs proporatioately and then each CGU is assessed separately
for impairment. The amount is first decreaed to the extent of the goodwill and then the amount is
decreased form the other assets. The carrying amount of the assets should be be reduced below
zero. The amount of goodwill once impaired cannot be reversed in any circumstance whatsoever.
While reversal of impairement loss, which again needs to be done on periodical basis
whenever the positive internal or external factors are available, is to be seen alongwith the
impairment. (Mahapatra, et al., 2017) However, there are a few exceptions to be followed while
accounting for reversal of impairment loss like goodwill impairment non reversal, the amount of
reversal should not exceed the amount of impairment in any case, reversal of the the impairment
loss is to be recognised in the profit and loss account unless it relates to the revalued asset, the
amount of depreciation also needs to be adjusted for the future periods, etc.
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Solution to Question 2
In the books of Gali limited ended on 30th June, 2015, the impairment assessment nees to be doen
and it has identified the fine china division as one of it CGU. (Goldmann, 2016) The carrying
amount is as follows:
Accoun
t
Carrying
Amount
Land 186000
Equipmen
t 43000
Building 27000
Inventory 12000
Goodwill 10000
Total CA 278000
The value in use is calculated to be 248000 and fair value less cost of disposal of land is found to
be 178735.
 In the given case since the total fair value of the asset less cost of disposal is not given,
we will assume value in use ie., 248000 to be the recoverable value.
 Therefore, amount of impairment comes to (278000-248000) = 30000.
 Now this 30000 needs to be first allocated to goodwill which will be written down fully
to 0, therefore remaining impairment loss to be apportioned is 30000-10000 = 20000.
 Inventory being a current asset does not qualifies for impairment under IAS 36.
 The other workings of apportionment is below:
Account Carrying
Amount
Pro
rata Impairment loss allocated Adjusted
CA
Land 186000 0.73 14,531 171,469
Equipmen
t 43000 0.17 3,359 39,641
Building 27000 0.11 2,109 24,891
Total CA 256000 1 20000 236000
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 Since the fair value less cost of disposal is already given for land, the maximum amount
which can be apportioned to land is 7265 and the remaining 72666 needs to be allocated
across other assets of the CGU. (Boccia & Leonardi, 2016)
 The revised apportionment table is mentioned below:
Account Adjusted
CA
Pro
rata
Impairment loss
allocated
Total impairment
loss allocated
Land 7,265
Equipmen
t 39,641 0.61 4,463 7,823
Building 24,891 0.39 2,803 4,912
Total CA 64,531 1.00 7,266 20,000
 Therefore the final apportionment of the impairment loss comes out to be Goodwill:
10000, Land, 7265, Equipment 7823 and Building 4912.
 The journal entries for the above adjustments are mentioned below:
Impairment loss Dr 30000
Goodwill Cr 10000
Accumulated depreciation and
impairment losses –Land Cr 7265
Accumulated amortisation and
impairment losses –Equipment Cr 7823
Accumulated amortisation and
impairment losses –Building Cr 4912
(Allocation of impairment loss)
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Conclusion and disclosures
Impairment is a very broad and judgementall topic which depends on the management
estrimate and judgements and how the situation is perceived given the cicrcumstances. (kabir, et
al., 2017) The valuation of the asset can vary from one value to another based on the
assumptions being considered. It has been a matter of discussion to provide the supporting facts
and figures on the impairment assessment and to disclose the transparency in the calculation.
Also, how the selection of cash generating unit is being done is based on an assumption and
needs to be justified and therefore the following disclosure become necessary in the financial
statements:
1. The basis of impairment, the loss recognised and reversed in P&L account
2. Impairment loss being recognised or reversed on the revalued assets in OCI.
3. The amount of reversal
4. The internal and external factors leading to it
5. The cash gereating unit and the classes of asset in it.
6. Other critical circumstances and events.
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References
Boccia, F. & Leonardi, R., 2016. The Challenge of the Digital Economy. Markets, Taxation and
Appropriate Economic Models, pp. 1-16.
Buchanan, B., Cao, C., Liljeblom, E. & Weihrich, S., 2017. Taxation and Dividend Policy: The Muting Effect
of Agency Issues and Shareholder Conflicts. Journal of Corporate Finance, Volume 42, pp. 179-197.
Das, P., 2017. Financing Pattern and Utilization of Fixed Assets - A Study. Asian Journal of Social Science
Studies, 2(2), pp. 10-17.
Fay, R. & Negangard, E., 2017. Manual journal entry testing : Data analytics and the risk of fraud. Journal
of Accounting Education, Volume 38, pp. 37-49.
Goldmann, K., 2016. Financial Liquidity and Profitability Management in Practice of Polish Business.
Financial Environment and Business Development, Volume 4, pp. 103-112.
kabir, H., Rahman, A. & Su, L., 2017. The Association between Goodwill Impairment Loss and Goodwill
Impairment Test-Related Disclosures in Australia. 8th Conference on Financial Markets and Corporate
Governance (FMCG) 2017, pp. 1-32.
Mahapatra, S., Levental, S. & Narasimhan, R., 2017. Market price uncertainty, risk aversion and
procurement: Combining contracts and open market sourcing alternatives. International Journal of
Production Economics, pp. 34-51.
Meroño-Cerdán, A., Lopez-Nicolas, C. & Molina-Castillo, F., 2017. Risk aversion, innovation and
performance in family firms. Economics of Innovation and new technology, pp. 1-15.
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