Impairment of Cash Generating Units - Process and Calculation

This article explains the process and calculation of impairment of cash generating units in corporate accounting. It covers the identification of assets, fair value determination, disclosure requirements, and more. The second part of the article provides an example of impairment calculation and journal entries. Course code, course name, and college/university are not mentioned.

CORPORATE ACCOUNTING

PART A
The process which involves the identification of assets whose recoverable amount is greater
than the carrying amount is known as impairment. The entity re-records the value of assets at
fair value as a result of the impairment test (Bragg, 2016).
The first step of impairment involves identifying assets that forms part of the cash generating
units and then determine the fair value of these assets. When the recoverable amount of each
asset cannot be determined individually we find out the value of entire cash generating unit.
We can define cash generating units as a small pool of assets that helps us to earn revenue.
The cash flows from these assets are sometimes dependent on the use of other assets in the
unit (Kieso, 2014). It is important to know the extent of dependence of each asset on another
which is determined by the policies that are adopted by the management, the basic rules that
the management follows relating to acquisition and disposal of assets.
These assets must be capable of being sold in the market only then it will form part of CGU.
The assets that are not sold but are consumed by the organisation itself can also be included
in the CGU. If there is an influence on these cash flows because of the internal policies of the
company then the management should use arms length price in determining its actual value
(Mattessich, 2016)..
A disclosure is required by the company if there is a transfer of any asset from one unit to the
other. However, the company is required to make a disclosure relating to the impairment loss
charged and also the loss that has been reversed (Paul, 2014).
In order to carry out the calculation of impairment loss for a cash generating units the
recoverable amount of the assets has to be ascertained. It is usually observed that the
recoverable amount of the CGU is higher when compared to the fair value (net of selling
expenses). Only those assets that help to generate future cash flows should be taken while
considering the carrying amount of the assets (Pratt, 2009). Not all liabilities form part of
CGU, only those liabilities that are directly related to the asset that forms part of CGU shall
be considered.
The concept of calculation of impairment loss is similar to that of normal asset. A comparison
between the recoverable amount and carrying amount is made in such a case. If the carrying
amount of the asset exceeds the recoverable amount, then there is an impairment loss and

such losses are recognised in the books. This impairment loss is divided among the different
assets contained in the CGU in the ratio of their carrying amount (Rogers, 2015). This
impairment loss which has been divided is deducted from the carrying value of the asset. It is
to be noticed that the amount deducted from the carrying value should not exceed the higher
value of these – Fair value net of sale expenses, value in use, Zero. However, if there is some
still losses left then it will be treated in the pro rata basis.
Sometimes there is a non cash generating asset included in the cash generating unit, the
carrying amount of such asset should also form part of the CGU. The proportion of carrying
amount that will be included in the CGU is based on the services provided by the assets.
In case the recoverable amount of the assets is not ascertainable, then the impairment loss can
be calculated when the carrying amount exceeds the fair value. However, if there has not
been an impairment loss on this CGU then there will be no deduction from the carrying
amount of non cash generating assets, even if the asset is impaired as an individual.
The impairment loss can be calculated and recorder only when an impairment test is carried
out. If it is seen that there has been impairment then the steps that has been mentioned above
shall be followed. The company is required to make important disclosures relating to
impairment in the financial statements every year. Impairment loss when charged or reversed
should be recorded (Warren, 2017). In case of reversal of impairment loss, the loss is
distributed among the assets on the pro rata basis. Obviously, the carrying amount of asset
will be increased when the impairment loss is reversed. There will be no additions in the
carrying amount in the case of reversal of non cash generating assets.
So, correct calculations along with appropriate disclosures are required to be made by the
company in case of impairment of cash generating units.

PART B
Account Carrying Amount Recoverable Amount Impairment
Plant 361200 3,48,097 13,103
Brand 83000 12,105
Fittings 52000 7,584
Inventor
y 22000 3,208
Goodwill 18000 18,000
Total CA 536200
4,82,200 54,000 22,897
1,57,000
The total impairment loss amounts to 22987 which will be distributed in proportion to the
carrying amount.
Particular
s Carrying Amount Ratio Impairment Loss
Brand 83000 0.53 12,105
Fittings 52000 0.33 7,584
Inventory 22000 0.14 3,208
1,57,000 22,897
The journal entries are as follows:
Particulars Dr Amt Cr Amt
Accumulated Impairment Loss ...
…..Dr 54,000.00
To Land 13,103.00
To Equipment 12,104.78
To Building 7,583.72
To Inventory 3,208.50
To Goodwill 18,000.00

(Being impairment on assets realised)
Impairment loss……Dr 54,000.00
To accumulated impairment loss 54,000.00

Bibliography
Bragg, S. M. (2016). GAAP Guidebook. [S.I]: AccountingTools, Inc.
Kieso, D. E. (2014). 2014 FASB Update Intermediate Accounting. New York: Wiley.
Mattessich, R. (2016). Reality and accounting. [S.I.]: Routledge.
Paul, K. (2014). Managing extreme financial risk. Oxford: Academic Press, Elsevier.
Pratt, J. (2009). Financial Reporting for Managers: A Value-Creation Perspective. Hoboken: John
Wiley & Sons, Inc.
Rayman, A. (2009). Accounting Standards: True or False? . New York (Estados Unidos): Routledge.
Rogers, C. G. (2015). Financial Reporting of Environmental Liabilities and Risks after Sarbanes-
Oxley . Hoboken, N.J.: John Wiley & Sons.
Warren, C. S. (2017). Accounting . [S.I.]: South-Western College Pub.