Impairment Loss for Cash Generating Unit Excluding Goodwill

This article explains the concept of impairment loss for cash generating unit excluding goodwill as per AASB 136. It covers the definition of carrying amount, cash generating unit, recoverable amount, and more. The article also discusses the requirements to identify the CGU, determine the carrying value, and identify the amount of impairment loss for the CGU. It further explains the journal entries and the disclosure requirements for impairment loss for CGU.

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Part A
Impairment loss for cash generating unit excluding goodwill
The main objective of the standard that is AASB 136 on Impairment of the
assets depicts that the assets in the financial statement of the company shall not be
carried out at the amount which is greater than its recoverable amount. Any asset is
recorded at greater than its recoverable amount while the carrying amount of the
asset is more than recoverable amount through the sale or use of the asset
(Corgnati et al. 2013). In this case the asset will be regarded as impaired and it will
require the company to identify the amount of impairment loss. AASB 136 also states
the scenario under which the impairment loss reversal shall be carried out and
disclosed. However the standard is not applicable to inventories, deferred tax assets,
assets generated from the construction contracts, assets generated from the
employee benefits or the assets identified as held for the purpose of sale. The
reason is that the standard is applicable to the mentioned assets that contain the
requirement for measuring and recognising the assets (Robinson and Sensoy 2016).
The standard is applicable to the assets those are carried at the revalued amount
that is the fair value at the revaluation date reduced by the amount of depreciation
and impairment, if any (Aasb.gov.au 2018).
For the accounting standard the term carrying amount is defined as the
amount for which the asset is recorded after subtracting the accumulated
depreciation and accumulated impairment losses, if any. Further, the term cash
generating unit (CGU) is defined as the smallest group for identifiable asset that
create cash inflows. The cash inflows here are widely independent of cash flows
generated from various other assets or the group of asset. Cost of disposal is the

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incremental cost that is directly attributable to disposal of the asset or the CGU while
the income tax expenses and finance costs are not taken into consideration.
Recoverable amount of the assets or CGU is value and use and fair value reduced
by cost of disposal, whichever is higher. Finally the impairment loss is the amount of
loss by which the asset’s carrying amount or the CGU exceeds the recoverable
amount (Bond, Govendir and Wells 2016).
The entity shall assess the asset at the end of every reporting period to check
whether any signal is there for the impairment. If the signal for impairment exists the
entity shall immediately estimate the asset’s recoverable amount. However,
irrespective of the signal the company shall assess the intangible asset for
impairment that has recognisable useful asset and not yet available for the use
through comparing the carrying amount with the recoverable amount. The
impairment test shall be performed at any of the time during the year however; it
shall be carried on same time for each year. Various intangible assets shall be tested
for impairment at various times. However, the test shall be carried out before the
current annual period end (Accounting, Part and Plans 2015). The ability of the
intangible asset to create adequate economic benefits for recovering the carrying
amount is subject to the greater uncertainty when the asset is not available for use
as compared to the time when the asset is available for the use. Therefore, the
company shall test the impairment at least annually for computing the carrying
amount of the asset that is not yet available for use. While assessing the impairment
indication for any asset the company shall takes into consideration the specific
external sources as well as internal sources of information. The external sources are
– (i) the market value of the asset during the period has been significantly reduced
more than expectation owing to normal use (ii) considerable changes has been

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taken place or will take place in future period with adverse impact on the company
during the period. The changes can be in the market, legal, technological or
economic environment under which the company operates or the market to which
the asset is contributed (iii) interest rate in the market or any other return rate of
market on the investment during the period increased. Further, the increases are
expected to have an impact on the rate of discount that is used for computing the
worth of the asset in use and the recoverable amount of asset is decreased
materially (iv) carrying amount of the company’s net asset is more as compared to
the market capitalization. On the other hand, the internal sources of indication are –
(i) it is evidential that asset is obsolete or physically damaged (ii) considerable
changes has been taken place or will take place in future period with adverse impact
on the company during the period. The change includes the plans of reorganization
or discontinuation of the operation; asset is idle, plans for disposing-off the asset
before the date of expectation. It further includes the reassessment of the asset’s
useful life as definite as against indefinite (iii) it is evidential from internal sources
that the economic performance of the asset is worse as compared to expectation.
Paragraph 66 – 108 stated the requirements to identify the CGU to which the
asset is included and determines the carrying value and identify the amount of
impairment loss for the CGU. If signal is there that the asset can be impaired then
the recoverable amount must be projected for the individual asset. If determination of
recoverable amount for individual asset is not possible the company must determine
the CGU’s recoverable amount under which the asset is included (Abbott and Tan‐
Kantor 2017). Further, the individual asset’s recoverable amount is not possible to
determine if any cash inflows cannot be generated from the asset that is widely
independent from the other assets. Individual asset’s recoverable amount is also not

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possible if the value in use of the asset is not possible to project to near its fair value
reduced by selling cost. If there is an active market for the output generated by the
group of asset or the individual asset the group of asset or the individual asset shall
be recognized as the CGU even if all the output or some of the output is internally
used. Further, if cash inflows created by any individual asset or CGU are impacted
by the internal transfer pricing the company shall use the best estimate by the
management for future prices that can be obtained under arm length transaction
(Hull and White 2014). It is applied while estimating the future outflows of cash that is
used for determining the value in use of CGU or any other individual asset that may
be impacted by the internal transfer pricing. The CGU shall be recognized
consistently for same asset or for same kind of asset from period to period unless
any changes have been recognized.
Recoverable amount of the CGU is greater among the value in use and fair
value less selling cost. The carrying value of CGU must be determined on the basis
that is consistent with the method in which the CGU’s recoverable amount is
determined. While the assets are combined as a group for assessing the
recoverability it is suggested to include all the assets under the CGU those are used
to generate relevant cash inflows (Kabir, Rahman and Su 2017). On the contrary, the
CGU are considered as fully recoverable if the impairment loss takes place. While
testing the CGU for impairment the company shall recognize all corporate assets
that are associated to the CGU under consideration. The corporate asset includes
the individual asset or the group of the asset like headquarter building, research
centre or EDP equipment. If part of the carrying value of corporate asset can be
assigned to the unit on consistent and reasonable basis the company shall compare
the unit’s carrying amount inclusive of the part of corporate asset’s carrying amount

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that is assigned to the unit with the recoverable amount (Singleton-Green 2014).
However, if the part of corporate asset’s carrying amount cannot be assigned to the
unit on consistent and reasonable basis the company shall – (i) compare the unit’s
carrying amount not taking into consideration corporate asset with the recoverable
amount and shall identify the impairment loss, if any (ii) compare the group’s carrying
amount of the CGU taking into consideration the corporate asset that is assigned to
the group of units along with the group’s recoverable amount (Johnson 2014). Here
in this case, the impairment loss must be recognised, if any (iii) the smallest group of
the CGU shall be identified that is inclusive of CGU under review and under which
part of the carrying amount of corporate asset can be assigned on consistent and
reasonable basis (Vanza, Wells and Wright 2018).
Impairment loss for the CGU (the smallest group of CGU) shall be identified if
the recoverable value of the unit is less as compared to the carrying value of the unit.
The amount of impairment loss shall be assigned to reduce carrying amount of
assets in the following manner – (i) in the 1st step, the carrying amount of goodwill
that is assigned to CGU shall be reduced (ii) thereafter the amount shall be assigned
to other assets of the CGU on pro rata basis on carrying value for each of the asset
(Rennekamp, Rupar and Seybert 2014). The reduction for the carrying amount shall
be recognized and recorded as impairment looses on the individual asset. While the
impairment loss in assigned the company shall not reduce carrying amount of the
asset at the higher values among – (i) the fair value reduced by the selling cost (ii)
value in use and (iii) zero.
Reversal of the impairment loss for the CGU shall be assigned to the assets
of the CGU excluding the goodwill. The allocation shall be made on pro rata basis
based on carrying value of the asset. The increase of the carrying value owing to the

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reversal of impairment shall be recognised and recorded as reversal of impairment
losses for the individual asset. While assigning the impairment loss reversal value for
the CGU the carrying value of the asset to which the amount is allocated shall not be
increased above – (i) the recoverable value if it can be assessed and (ii) the carrying
amount of the asset that would have assessed after deducting the depreciation and
amortisation, if any, whichever is lower (Christensen and Nikolaev 2013).
For disclosing the impairment loss for CGU the following shall be disclosed –
(i) description of CGU like plant, product line, geographical area, business operation
or the reportable segment (ii) amount recognized for impairment loss or reversal for
the asset class if the company reports the segment information (iii) if the aggregate
amount of asset for the CGU has altered from previous projection of CGU’ s
recoverable amount the description of previous and present method of aggregating
the assets and changes in the recognition of CGU (Zhuang 2016).

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Part B
Impairment loss computation
Journal entries –

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Note – inventories are not considered for impairment as it is valued at cost or market
value whichever is lower.

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Reference
Aasb.gov.au., 2018. [online] Available at:
http://www.aasb.gov.au/admin/file/content105/c9/AASB136_07-04_COMPjun09_01-
10.pdf [Accessed 15 Jun. 2018].
Abbott, M. and Tan‐Kantor, A., 2017. Fair Value Measurement and Mandated
Accounting Changes: The Case of the Victorian Rail Track Corporation. Australian
Accounting Review.
Accounting, H., Part, B. and Plans, D.B., 2015. Notes to the financial statements.
Bond, D., Govendir, B. and Wells, P., 2016. An evaluation of asset impairments by
Australian firms and whether they were impacted by AASB 136. Accounting &
Finance, 56(1), pp.259-288.
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775.
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Johnson, P.F., 2014. Purchasing and supply management. McGraw-Hill Higher
Education.

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Kabir, H., Rahman, A.R. and Su, L., 2017. The Association between Goodwill
Impairment Loss and Goodwill Impairment Test-Related Disclosures in Australia.
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Accounting Review, 90(2), pp.739-759.
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Vanza, S., Wells, P. and Wright, A., 2018. Do asset impairments and the associated
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Zhuang, Z., 2016. Discussion of ‘An evaluation of asset impairments by Australian
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