Provisions and Accounting of Impairment Loss of Cash Generating Unit including Goodwill

The article discusses the provisions and accounting of impairment loss of cash generating unit including goodwill as per AASB 36. It includes a solved case study of Gali Ltd. The article covers steps to be followed while accounting, rules prescribed in regards with the CGU if the impairment loss arises where there is the existence of goodwill, and disclosures to be given under the financial statements.

Corporate accounting
BO1COAC318

TABLE OF CONTENTS
Introduction................................................................................................................................3
Part A.........................................................................................................................................3
Provisions of impairment loss of cash generating unit including goodwill...........................3
Part B..........................................................................................................................................6
Calculation for accounting of impairment loss of cash generating unit for Gali Ltd............6
Conclusion..................................................................................................................................7
References..................................................................................................................................8

LIST OF TABLES
Table 1: Statement showing the calculation of impairment loss for Gali Ltd...........................7
Table 2: Statement showing computation of impairment losses to the remaining assets..........7
Table 3: Statement showing the apportionment of Impairment loss to the other assets in
division.......................................................................................................................................8
Table 4: Journal entries for accounting of impairment loss.......................................................8

INTRODUCTION
An impairment loss can be defined as the amount by which the carrying amount of cash-
generating unit’s assets surpasses the fair value amount (Kabir, Rahman and Su, 2017). The
recognized loss is revalued at an annual basis, and the accounting of the reverse of the
estimated impairment loss recoding is done for the CGU. The present study is based on an
evaluation of provisions for impairment loss of cash generating unit including goodwill by
considering theoretical as well as practical aspects. The first part of the research described
accounting provisions applicable for an accounting of impairment loss of cash generating
unit. It further covers, treatment of goodwill, disclosures and steps to be followed for
recording impairment loss of cash generating unit including goodwill. The second part of the
study shows practical applications of described provisions in the first part for the given case
study of Gali Ltd. Journal entries done for an accounting of impairment loss is supported by
appropriate working notes.
PART A
Provisions of impairment loss of cash generating unit including goodwill
An impairment loss is considered as the amount by which the asset’s or cash-generating
unit’s carrying amount surpasses the recoverable amount. In a situation where there is any
sign that impairment of asset is there, then the recoverable amount should be measured or that
specific asset. If it is impossible to measure the recoverable amount of that individual asset,
then the business enterprise is required to identify the CGUs recoverable amount on which
the asset belongs. Further, the CGUs carrying amount should be determined on a constant
basis in the similar manner by which the CGUs recoverable amount is identified (Boennen
and Glaum, 2014). For the impairment testing intent, the goodwill that is obtained in the
business integration should be commenced from the date of acquisition and shall be allotted
to the each cash-generating unit or cluster of CGUs of the acquirer, which is likely to
advantage from the cooperation of two or more organizations, regardless of fact that other
assets or liabilities held by the acquirer are allocated to the same units or the group of units or
not.
All of the units or the group of units by which the allocation of goodwill is done should
showcase the lowest possible level in the business entity at which the monitoring of goodwill

is done for the internal managerial intentions. As well as it must not be higher than the
segment of operation. A CGU on which the goodwill allocation is done is required to be done
for impairment testing on an annual basis, and if the sign that the unit might be impaired
occurs, the comparison of the unit amount, inclusive of the goodwill along with the unit’s
recoverable amount is to be done (Hussey and Ong, 2017).
The CGU that should be tested for impairment on an annual basis does not only inclue
goodwill available for use; it also comprises goodwill incorporated by transactions held from
business combinations.
Under the AASB 36, if the CGU comprise of the goodwill based requirement for accounting,
and the impairment loss taking place in regards with the CGU is accessible. Goodwill is
stated as a permanent balance, inclusive of assets that are not able to be identified separately
(Linnenluecke and et al., 2015). Therefore, it is believable to determine the fair value deducting
sale cost in every situation that is the value determined from the sale of an asset at the
transaction by reducing the cost held from the disposal or either by ascertaining the cash flow
related with the goodwill. It has been specified by the AASB 36 that the goodwill is to be
allocated at the lowest possible level, with the considerations of CGU along. Henceforth, the
impairment testing of goodwill will be merely done at the CGU level.
The impairment loss of CGU can be asserted as the amount that reflects overly recoverable
amount as compared to the written value of the CGU, the impairment loss accounting is
concealed under the AASB 136 (Paragraphs 58-64) and intents to evaluate and ascertain the
impairment losses. On the other hand, the applicability of these specific provisions is not for
goodwill. For this aspect, it has been stated under Paragraphs 12-14, that whether an
impairment loss indication incurs or not and in case any of such signs are present then the
company should conduct recoverable amount estimation.
Yet, there is the existence of exceptions in such provisions, as provided under paragraph
wherein the business entity is not obligatory to consider the recoverable amount estimation
formally if there is no indication of impairment loss.
Moreover, according to the paragraph 60, the recording of impairment loss in P&L account is
done immediately unless and until the CGU is conducted at the amount on which it is
revalued, according to another standard such as AASB 116 which is engaged in addressing
with the CGU revaluation, it is also stated under this standard that the impairment loss is

related with the revalued CGU and will be cited as a reduction in the revalued amount (Steele,
2015).
If the recoverable amount of the CHU is not more than the carrying amount, then following
to that recording of the impairment loss is done in books of accounts. The rationale behind
doing so is that the carrying value should be decreased to the absolute extent of the
recoverable amount. Thus, the difference amid the carrying value amount and the recoverable
loss is called impairment loss. Further, this loss is realized as a deficit in the P&L account. If
there is a decline in the value of the particular cash-generating unit then the recording of the
impairment loss is done by taking the provision of a specified standard into account (Basu,
2017). Furthermore, in the situation of CGU impairment loss, recording and allocation are
done in the following way: At first, there is a need to reduce the goodwill’s carrying amount
allotting to the CGU. After that, the left loss is allocated to the left CGU unit according to the
method of pro-rata with the consideration towards carrying the amount of all units.
In the context of the calculations, it should be assessed that the individual asset’s carrying
value within the CGU must not be decreased below to the utmost of the fair value after the
cost of disposal, the value in use or nil adjustments are made.
Rules prescribed in regards with the CGU if the impairment loss arises where there is the
existence of goodwill:
The goodwill’s carrying value is related to the CGU unit that is required to decrease at nil.
The allocation of balance amount left of remaining CGU is conducted at the basis of pro-rata.
The recognized loss is revalued at an annual basis, and the accounting of the reverse of the
estimated impairment loss recoding is done on the CGU for which the reversal is carried that
is if or if not belong to single CGU asset or goodwill (Kabir, Rahman and Su, 2017). The
applicability of the sign for the impairment reversal is required to be the same, as used during
the application of impairment. Further, the impairment loss associated with the individual
asset could be made a reversal in case the rules are met already. It is significant to consider
some aspects that the reformed carrying amount is not higher than the existing amount which
will be employed in the asset recording if no recognition of impairment loss is done.
Steps to be followed while accounting
The first and foremost step is to determine the recoverable amount, in this primary step is to
be identified that the recoverable amount is equivalent to the maximum of either the value in

use or fair value (cost of disposal). Fair value is referred to as the amount that is receivable in
case the asset is put into a sale on the basis of arm length decreased by the cost of disposal. It
is comparatively easy to calculate the asset’s fair value as compared to the value in use.
The value in use means the net present value (NPV) of the cash flows that will be produced
by the specific CGU units. Further, the recoverable amount will be the same as the most of
the value in use or fair value (cost of disposal) (Glaum, Landsman and Wyrwa, 2018).
The next step is to calculate the recoverable amount with the assets carrying amount. In the
situation 1, when recoverable amount is lower than the carrying amount, then it is considered
that there is the presence of an impairment loss and it demands to be on the debit side to the
revenue account. In situation second, when the recoverable amount is higher than the
carrying amount, then no further accounting is required to be conducted.
Disclosures to be given under the financial statements, the impairment loss amount provided
in the P&L account as of the year is required to be disclosed (Zhuang, 2016). Further, the
disclosure should be conducted with the amount relating to the impairment loss reversal in
the accounting books and thereby on the asset revaluation on a direct basis in the income
statement.
PART B
In the present case scenario, total recoverable value and carrying value cash generated unit is
provided from which overall impairment loss will be computed. Further, from the computed
loss, amount of goodwill and Impairment loss directly identifiable to factory will be separated
and remaining loss will be allocated to remaining assets in cash generating unit of Gali Ltd.
Calculation for an accounting of impairment loss of cash generating unit for Gali Ltd
Table 1: Statement showing the calculation of impairment loss for Gali Ltd
Particulars Amount
Asset Carried Value in books of account $430,700
Less: Value in use of assets $481,700
Impairment loss $51,000

Table 2: Statement showing the computation of impairment losses to the remaining assets
Particulars Amount
Impairment loss $51,000.00
Less: Goodwill $17,000.00
Less: Impairment loss allocated to
factory
=(323700-311326) $12,374.00
Impairment losses to the
remaining assets $21,626.00
Total loss to be allocate $34000
Table 3: Statement showing the apportionment of Impairment loss to the other assets in
division
Asset Value in
Use
Allocable
Impairment loss
Value to be carried in
Balance Sheet
Factory $323700.00
$34000*( $323700/
$444,700) $ 24749 $323700-$24749=$298951
Trademark $74,000.00
$34000*( $74000/
$444,700) $5658 $74000-$5658=$68342
Vehicle $47,000.00
$34000*( $47000/
$444,700) $3593 $47000-$3593=$43407
Inventory $ 20,000.00 0 $20000-0= $20000
Goodwill $17,000.00 $17,000.00 $17,000.00-$17,000.000
Relocation of loss
=$24749-12374
=$12375
Reallocation of loss 12374
Asset Allocable
Impairment loss
Value to be carried in
Balance Sheet
Trademark
$12374*( $68342/
$111,749) $ 7568 $68342-$7568=$60774
Vehicle
$12374*( $43407/
$111,749) $4806 $43407-$806=$38601

Table 4: Journal entries for accounting of impairment loss
Date Particulars Dr Amount Cr. Amount
30.06.2015 Impairment loss Dr. $51,000.00
Goodwill Cr. $17,000.00
Accumulated Losses for amortisation and
Impairment (Trademark)
Cr. $13227
Accumulated Losses for amortisation and
Impairment (Vehicle)
Cr. $8399
Accumulated amortisation Losses for and
Impairment (Factory)
Cr. $12,374
(Being impairment loss adjusted to
different assets in the division)
30.06.2015 Profit and Loss Account A/c Dr. $51,000.00
Impairment loss Cr. $51,000.00
(Being impairment loss charged to Profit
and Loss Account A/c)
For this impairment loss Gali Ltd is required to following disclosure:
 Impairment loss of overall CGU
 Method used for determination of fair value of CGU
 Necessary assumptions
 Fair value of assets will be recorded in balance sheet as part of CGU
 Impairment loss will be charged to profit and loss account
CONCLUSION
In accordance with the present study, it can be concluded that impairment loss of cash
generated unit is made as per provisions described under AASB 36. For recording an overall
impairment loss of cash-generating unit, the initial value of goodwill and value loss of
specific assets is separated. Further, remaining loss is allocated on the proportionate basis of
separate asset value in comparison value of CGU except for goodwill or assets on which loss
is separately recognisable. The recognised loss is charged from profit and loss account, and
fair value is recorded in cash generating units. As per the described provisions, the company

is further required to provide appropriate disclosure for an accounting of impairment loss
supported by workings.

REFERENCES
Basu, A., 2017. Impairment of Intangible Assets-An Effort to Convergence. International
Journal of Engineering and Management Research (IJEMR), 7(5), pp.210-214.
Boennen, S. and Glaum, M., 2014. Goodwill accounting: A review of the literature. Sage.
Glaum, M., Landsman, W.R. and Wyrwa, S., 2018. Goodwill Impairment: The Effects of
Public Enforcement and Monitoring by Institutional Investors. The Accounting Review. 2(5),
pp.10-14.
Hussey, R. and Ong, A., 2017. Corporate Financial Reporting. Macmillan International
Higher Education.
Kabir, H., Rahman, A. and Su, L., 2017. The Association between Goodwill Impairment Loss
and Goodwill Impairment Test-Related Disclosures in Australia.
Linnenluecke, M.K., Birt, J., Lyon, J. and Sidhu, B.K., 2015. Planetary boundaries: implications for
asset impairment. Accounting & Finance, 55(4), pp.911-929.
Steele, N., 2015. Accounting: Get the numbers right. Company Director, 31(5), p.41.
Zhuang, Z., 2016. Discussion of ‘An evaluation of asset impairments by Australian firms and
whether they were impacted by AASB 136’. Accounting & Finance, 56(1), pp.289-294.