Impairment Loss Calculation and Distribution in Cash Generating Units

This article explains the procedure of identifying assets whose carrying amount is higher than the recoverable amount, calculation of impairment loss, and distribution of impairment loss among assets in cash generating units. It also provides insights into impairment loss journal entries and required disclosures in financial reports. The article is relevant for students studying corporate accounting and reporting and covers topics such as fair value, cash generating units, and goodwill.

CORPORATE ACCOUNTING AND REPORTING

Part A:
The procedure in which those assets are identified whose Carrying amount is higher than the
recoverable amount is known as impairment. We can also say that impairment means
recording assets at their fair value (Berry, 2009).
For the calculation of impairment loss, the recoverable amount for each asset that is
contained in the cash generating unit is required individually. Many times it becomes very
difficult to determine the fair value of the assets separately and so the cash generating unit is
used as a whole for the determination of impairment loss (Girard, 2014). Such situation of
non identification might occur when there is any asset in the CGU whose usage is dependent
on any other unit of the same CGU.
All the assets that help to generate cash inflow is contained in the cash generating unit. The
cash flows depend on the efficiency by which the management utilises the assets that are held
by them. However, there are different factors on which the revenue generation depends. Few
of the factors are acquisition and disposal of the assets, optimum utilisation of the resources.
Such cash inflows should be from third parties (Holtzman, 2013).
The products that are produced on the consumption of such assets should be capable of being
sold in the active market or should be capable enough to be consumed in the organisation
itself. If neither of this is satisfied then the asset cannot form part of the cash generating unit.
The generation of cash inflow is very much affected by the pricing policies of the company
that are set up internally. The value of cash generated from a particular CGU must be known.
It is important for the company to apply arms length price for the purpose of determining the
value of cash inflow.
The company that accounts for impairment loss has to keep the users of the financial
statements updated by providing them information regarding the assets that are comprised in
the cash generating units. If the company decides to transfer any specific asset from one cash
generating unit to another then there is a requirement of disclosure (Horngren, 2012). Any
adjustments whether relating to impairment loss or reversal of impairment loss has to be
recorded in the books of accounts.
As we know, we can know the exact amount of impairment loss when we have information
about the recoverable amount of the assets. The companies usually deduct any selling
expenses that incurs from the fair value of the asset. All the assets that help the company to

generate revenues should be taken into consideration and all remaining assets should be
excluded. If there is any liability against any specific asset then such liability also has to be
accounted (McLaney & Adril, 2016).
The calculation of the impairment loss of a normal asset and a cash generating asset is very
similar to each other. If the carrying value of any asset exceeds the fair value then the loss has
to be recognised. Goodwill is written off wholly and the remaining impairment loss is
distributed among the rest of the assets in the ratio of their carrying amounts. The treatment
of impairment of the assets is done by deducting the amount of loss from its carrying value.
This leads to reduction of the value of an asset.
While distributing the impairment loss to all the assets it is important to consider the
following point. The carrying value of the assets should not be reduced more than the figure
which is highest of the following three:
- Fair value less selling expense
- Value in use
- Zero
The remaining impairment loss has to be distributed on the basis of pro rate among all the
assets that are contained in the cash generating unit (Parrino, 2013).
In usual terms, it is observed that all the assets that are a part of CGU contribute in cash
inflows. But sometimes there are some non cash generating assets also that are included in
CGU. If such non cash generating asset is being impaired then it can be treated by adding its
carrying amount to the carrying amount of the unit. The determination of carrying amount
can be done by determining the services used that is provided by the asset.
It is not possible to ascertain recoverable amount for such non cash generating assets and
therefore the treatment of impairment can be done by comparing the carrying value to the fair
value net of impairment loss. If such CGU has not being impaired then the company must not
make any adjustments to the carrying amount, even if the asset is impaired individually.
An impairment test is carried out in order to get the amount of impairment loss and record it
in the books of accounts (Siciliano, 2015). All the steps that have to be adopted in order to
calculate and record the impairment loss have been discussed in this assignment. The
impairment loss and other details regarding the impairment of the last reporting period has to

be disclosed by the company in its financial reports. The company must report about the
reversal of impairment loss also. The procedure by which the impairment loss is distributed
and the impairment loss is reversed is very similar i.e. on pro rata basis.
It is the responsibility of the management of the company to determine the impairment loss
correctly, record such losses properly and also provide the required disclosures in the
financial reports in relation to impairment loss or its reversal (Taillard, 2013).

Part B:
The total impairment loss of the cash generating unit that has been calculated is 36000. In
this, 12000 is against goodwill. The remaining impairment loss amounts to (36000-12000)
=24000. However, this 24000 includes impairment loss against Plant which is said to be
(226700-217973) = 8727. The remaining impairment loss is distributed among the remaining
three assets in the ratio of their carrying amount which is shown in below table:
Particular
s Carrying Amount Ratio Impairment Loss
Franchise 52000 0.53 8,022
Furniture 33000 0.33 5,091
Inventory 14000 0.14 2,160
99,000 15,273
Journal entries for the impairment loss are as follows:
Particulars Dr Amt Cr Amt
Accumulated Impairment Loss ...
…..Dr 36,000.00
To Plant 8,727.00
To Franchise 8,022.18
To Furniture 5,091.00
To Inventory 2,159.82
To Goodwill 12,000.00
(Being impairment on assets realised)
Impairment loss……Dr 36,000.00
To accumulated impairment loss 36,000.00

Bibliography
Berry, L. E. (2009). Management accounting demystified. New York: McGraw-Hill.
Girard, S. L. (2014). Business finance basics. Pompton Plains, NJ: Career Press.
Holtzman, M. (2013). Managerial Accounting For Dummies. Hoboken, NJ: Wiley.
Horngren, C. (2012). Cost accounting. Upper Saddle River, N.J.: Pearson/Prentice Hall.
McLaney, E., & Adril, D. P. (2016). Accounting and Finance: An Introduction. United
Kingdom: Pearson.
Parrino, R. (2013). Fundamentals of Corporate Finance, 2nd Edition. Milton: John Wiley &
Sons.
Siciliano, G. (2015). Finance for Nonfinancial Managers. New York: McGraw-Hill.
Taillard, M. (2013). Corporate finance for dummies. Hoboken, N.J.: Wiley.