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Essay on Impairment Loss for Cash Generating Units

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Added on  2019-11-19

Essay on Impairment Loss for Cash Generating Units

   Added on 2019-11-19

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Essay: Impairment Loss for Cash Generating Units Excluding GoodwillIntroductionIn order for a company to perform its daily operations, it will need to invest in assetssuch as machinery, property, plant and equipment, factories, land etc. The purpose ofthese assets is to assist the company to generate revenue. However, as time passesby, an asset can become obsolete or damaged resulting in a change in value. Thischange in value is referred to as impairment. However, it is rare to find an asset that generates cash flows independent of otherassets. For example, an airline company will own planes and licenses which it will listunder its assets. If each of these assets is invested in alone, it cannot generate cashflows. In other words, the airline cannot own planes without a license to operate.Similarly, the airline cannot have a license without owning a few planes. Thiscombination of assets is what is referred to as a cash generating unit (CGU). Just likeindividual assets, a CGU can also be impairedIn 2008, one of the scandals witnessed by ABC Learning was related to overvaluation ofassets, specifically the improper valuation of its childcare subsidiaries and goodwill[CITATION Koc \l 1033 ].Consequently, there has been a lot of attention to the impairmentpractices of companies [ CITATION And14 \l 1033 ].In this essay, I discuss how a company should recognize impairment losses and thesteps they should take to measure these losses with respect to cash generating unitsexcluding goodwill.Definition of Impairment Losses and Cash Generating Units The amendments on how to treat impairment losses in cash generating units arecontained in Australian Accounting Standards Board 136 (also known as AASB 136).AASB 136 defines an impairment loss as follows- carrying amount of CGU less
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recoverable amount of cash generating unit [ CITATION AAS15 \l 1033 ]. In general, therecoverable amount is the amount that is obtained via using or selling an asset.AASB 136 is applicable to the following list of assets- land, goodwill, building,machinery, intangible assets, equipment, subsidiaries, joint ventures, and subsidiaries.However, the rules do not apply to the following assets- inventory, contract assets,investment property or insurance contract [ CITATION AAS15 \p 6 \l 1033 ].Cash Generating Units are defined as assets/group of assets that are able to generatecashflows independent of another group of assets [ CITATION AVC17 \l 1033 ].Measurement of Impairment Losses for a Cash Generating UnitAASB 136 paragraph 9 and 10 requires assessment of assets and CGUs forimpairment to be done at end of reporting period and on an annual basis for intangibleassets and goodwill [ CITATION AAS15 \p 8 \l 1033 ].If there are indicators that indeed a Cash Generating Unit is impaired, then the companymust calculate the CGU’s recoverable amount and compare it to the CGU’s carryingvalue [ CITATION AAS15 \l 1033 ].The carrying amount is the value of the asset as stated in the financial statement lessaccumulated depreciation and impairment losses [ CITATION AAS15 \p 7 \l 1033 ]. The CGU’s recoverable amount is calculated as the maximum of value in use and fairvalue less cost to sell. We define the fair value less cost to sell as how much a companywill realize from selling the CGU. The value in use is the present value of discountedfuture cash flows that is attached to using this combination of assets [ CITATION AAS15 \l1033 ].When a CGU’s recoverable amount is lower than the carrying value, then the CGU isimpaired. Otherwise, when the CGU’s recoverable amount is greater than its carrying
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