Report on Calculating Impairment Loss for CGUs Excluding Goodwill

This report provides a comprehensive overview of impairment loss calculations for Cash Generating Units (CGUs), specifically excluding goodwill. It defines key terms such as impairment, carrying amount, and recoverable amount, referencing AASB 136/IAS 36 accounting standards. The report explains the calculation process, including identifying CGUs, determining future cash flows, calculating value in use and fair value less costs of disposal, and finally, determining the impairment loss. The report also details how impairment loss is charged to individual assets within a CGU on a pro rata basis, and includes a practical example to illustrate the calculation. Relevant references are also provided.

CASH GENRATING UNIT IMPAIRMENT LOSS WITHOUT GOODWILL
Impairment Meaning
According to AASB 136/IAS 36 – Impairment of Assets, Impairment refers to the amount in
excess of the recoverable amount shown in balance sheet as carrying amount on the particular
reporting date. Impairment will only be tested for tangible assets like Property, Plant and
Equipment and for intangible assets like Goodwill, Copyrights, and Patents etc. It will not be
done for current assets like inventory (AASB 136, 2011).
Carrying Amount
Value at which asset is recorded in Balance sheet or book value of asset recorded in financial
statements is called as Carrying Amount of any asset. Carrying amount is stated value which
calculated after deducted of accumulated depreciation and accumulated impairment.
Recoverable Amount
Australian Accounting Standard Board 136/ IAS 36 describe the recoverable amount as greater
of fair value less cost of disposal and value in use (IAS 36, 2014). In which value in use is the
present value of expected future cash flows that certain to be received from usage of asset and
which are discounted at pre tax rate which is generally equal to the cost of capital of the
company. Fair value less cost of disposal means the market price of the asset which the company
will get after selling the asset at current date less directs cost attributable to asset for making the
sale happen.
Cash Generating Units
According to AASB 136, Cash generating units means group of assets which are small in size
and can be easily identified as separate parts but related to class of asset particularly identified.
This concept has been introduced to overcome the limitation of non generation of cash flows by
some individual assets on its own but economic benefits can be obtained from it when they are
combined with certain class of asset. In CGU’s all assets are similar in nature but they are
independent of each other so that combined future economic benefits can be ascertain. AASB
has instructed all the companies that cash generating units cannot be greater in size than
company’s operating segments (IAS 36, 2014).

Calculation of Cash generating unit Impairment Loss excluding Goodwill:
Before calculating impairment loss, impairment testing should be done for CGUs so that validity
of loss from impairment can be judged. Impairment test can be performed at any time during the
reporting period which makes it mandatory to perform the testing at the same time of the
reporting period which is of past year. All CGUs are not required to be tested at the time of the
year. Company should identify finest time for analyzing the individual CGUs which can be
based on data availability like availability of forecast, budgets, seasonality of business, closing
time of business etc.
Impairment Loss once calculated will be charged in statement of profit or loss as an expense and
on the other hand reduced the carrying value of the asset shown in books of account (Zucca,
2012). It will be calculated for Cash Generating units which does not include Goodwill in the
following manner:-
I. First step is to identify the cash generating units that means identification of group of
assets which similar in nature can form cluster of asset. Individual assets will consider for
forming group which cannot generate cash flows on their own.
II. After identifying the Cash generating units then it will be ascertained or find out as to
which particular asset CGU’s belong
III. Third step to find out and identified the cash flows that will be generated by cash
generating units in future on reasonable basis (Wines, 2009)
IV. Next step is to calculate the value in use for cash generating units. Value in use will be
calculated using the given pre tax discount and future expected cash flows which can be
generated from CGU. Value in use the present value of cash flows which will be
discounted with appropriate identified discount rate (Carlin, 2009)
V. Calculate the fair value of CGU and cost of disposal which can be incurred if all the
assets of CGU will be sold in open market. It means calculation of net selling price which
will be received from agreement to sell by the company in ordinary market conditions.

VI. Recoverable amount will be calculated for CGU which is equal to higher of two value as
defined in (IV) and (V) above.
VII. Books value of all assets which are considered as part of single cash generating units will
added to have carrying amount of CGU so that impairment testing can be done. In
calculation of carrying amount of CGU, liabilities which are created to finance the CGU
will be not subtracted from books values of assets.
VIII. The next step is to identify the impairment loss which is equal the difference between
(VII) and (VI) above.
IX. Books values and carrying amount of CGU will then recalculated after considering the
impact of impairment loss and new carrying amount of CGUs as on reporting date will be
calculated(Ghazaleh, 2011). Impairment loss for CGU except Goodwill will charged to
individual asset of CGU on pro rata basis according to their book value which has been
shown in Balance sheet of the company before impairment. An individual asset of CGU
will be impaired till carrying amount at which it is shown in books of account resulting in
zero value of asset after impairment and after that balance impairment will be done on
pro rata basis. Inventory in CGUs will not be impaired as it is already shown at cost or
net realizable value whichever is lower (Abu Ghazaleh, 2011).
For example, A Ltd has following assets as on 30th June, 2017 for its China division: -
Factory = $ 100000, Brand = $ 50000, Fittings and furniture = $ 40000
The value in use of China division is $ 165000 and Fair value less cost of disposal of China
division is $ 144000.
Then the recoverable amount for China division which is considered as CGU for A Ltd will be
greater of two value that are value in use $ 165000 and fair value less cost of disposal $ 144000
which become $ 165000 as recoverable amount.
The carrying amount of China division will be $ 190000 ($ 100000 +$50000+ $ 40000)
Then Impairment Loss of CGUs = Carrying amount – Recoverable Amount
= $ 190000 - $ 144000
= $ 46000

REFERENCES
Abu Ghazaleh, C., 2011. Accounting discretion in goodwill impairments: UK evidence Journal
of International Financial Management & Accounting, 22(3), pp.165-204
AASB 136, (2011), “Impairment of Assets”, online available on
http://www.aasb.gov.au/admin/file/content105/c9/AASB136_07-04_COMPjun09_01-10.pdf
accessed on 19/05/2018.
Carlin, T.M.., 2009 Discount rates in disarray: Evidence on flawed goodwill impairment
testing. Australian Accounting Review, 19(4), pp.326-336
IAS 36, (2014), “Impairment of Assets” online available on
https://www.iasplus.com/en/standards/ias/ias36 accessed on 18/05/2018.
Wines, G.., 2009, Implications of the IFRS goodwill accounting treatment, Managerial Auditing
Journal, 22(9), pp.862-880
Zucca, L.J., 2012. A closer look at discretionary writedowns of impaired assets, accounting
horizons, 6(3), p.30