Impairment Loss for Cash Generating Units Excluding Goodwill

This article discusses the concept of impairment loss for cash generating units excluding goodwill. It explains the Australian accounting standard board's guidelines for recognizing and measuring impairment loss. The article also covers the identification of cash generating units and provides an example for better understanding.

Impairment loss for cash generating units excluding goodwill
As per the Australian accounting standard board Impairment of assets is defined under
AASB136 under section 334 of the Corporations Act 2001 on 15 July 2004. The principal
objective for the introduction of this particular standard is to not allow the assets to carry
forward more than its recoverable amount. The assets need to be impaired as and when the
carrying amount of assets exceeds the recoverable value are described as impaired as and
when the carrying amount exceeds the recoverable either through use or sale of assets and the
business or entity requires some standard to identify or recognize such impaired assets, which
is impairment loss. (Australian Accounting Standard Board, 2015) However this standards are
not applicable to assets like inventories, assets arising from construction contracts and
employee benefits or deferred tax assets as this assets needs to be recognized and measured.
Let us first define the two terms:
IMPAIRMENT LOSS
“If the recoverable amount of an asset is less than its carrying amount, the carrying amount of
the asset shall be reduced to its recoverable amount and this reduced amount is called
impairment loss.”
CASH GENERATING UNITS
“A cash generating unit is the smallest identifiable groups of assets that generates cash
inflows that are largely independent of the cash inflows from other assets or groups of
assets.”
DISCUSSION
The business/entity at some specific date will check whether the assets is impaired and if
there be any indication of such , the entity has first to analyse the amount to be recovered
from the assets , and even if there is no sign of impairment, a test of impairment need to be
conducted during the financial year for the assets.
The following points should be considered to identify the impairment of assets. :
1) During a period whether the fall in assets value is more than expected.
2) Unfavourable effect has taken place where the entity operates.
3) Interest rate has increased during a period.
4) Is market capitalization of net assets is less than the carrying amount.
5) Physical damage evidence is available.
6) As per internal reporting there is the possibility of worst performance of the assets .
Let us see how to recognize and measure an Impairment Loss.
Loss on impairment shall be instantly recognized in the books of accounts unless the asset is
carried at revalued amount as per standard AASB16.
Impairment loss on revalued asset is directly recognized while the recognition of non revalued
assets is shown in the profit and loss account.
If the carrying amount is less than the amount estimated for an impairment loss of the asset to
which relates , the business shall recognize a liability if and only if that is required by another
Standard.

If the impairment loss recognition is done than the depreciation charged with respect to such
assets shall be adjusted over the future period on the basis of the remaining life of an assets.
In accordance with AASB 112 any related deferred tax assets or liabilities are calculated if
any impairment loss is recognized by making comparison of the revised carrying amount of
the asset with its tax base.
Now let us discuss how to identify the Cash -generating unit to which an Asset Belongs
Any sign that the particular assets need to be impaired than for that particular assets
recoverable amount needs to be estimated .
For each individual cash generating unit the recoverable amount needs to be determined to
which the assets belong, if it is not possible to properly value the recoverable amount of each
assets.
Below are the following cases in which the recoverable amount of each assets cannot be
resolved:
1) Assets in use has not its value close to its fair value less costs to sell.
2) If an assets are not dependent on other assets and it doesnot generate cash inflows.
Thus in the above following cases, value in use and recoverable amount can be analysed only
for the asset’s cash generating unit.
Let us discuss an example for this :
A mining entity acquired a private railway in order to provide support to the activities of
mining. The same assets which have acquired can only be sold as a scrap and there is no
generation of cash inflows and the cash inflows of other assets are also independent.
To estimate the private railways recoverable amount, the value in use is not possible to
determine and is totally different from scrap value, hence the estimation of recoverable
amount is not possible. Therefore the firm shall estimate the recoverable amount of the mine
as a whole.
A cash generating units needs to be recognized and if the recoverable amount is not identified
for an individual assets, than the business needs to identify the assets that is largely
independent of cash inflows. In order to identify whether a business needs to check various
factors say how management monitors the operation of the business or how it takes decisions
of assets to be continued or for disposal.
In case of the business where internal transfer takes place , the management has to use
method of arms length transactions to estimate the future cash inflows and cash outflows in
order to determine the cash generating units in use and to determine the value of any other
assets that are affected by internal transfer pricing respectively. Moreover if the output
produced by those assets have an active market then this assets or group of assets can form a
separate cash generating assets. (Australian Accounting Standard Board, 2015)
As the cash generating units are consistently recognised from year to year, thus if any asset be
a member to cash generating unit than as compared in previous year or the aggregation ratio
for the cash generating units of the assets has changed than a disclosures need to be given.

Impairment of Asset
Impairment of Asset is guided by Australian Accounting Standard Board 136 which states
that the said accounting standard is applicable on all assets except inventory, construction
contracts, deferred tax asset, assets arising out of employee benefits, instruments recognised
under Australian Accounting Standard Board 139, property covered under AASB 140,
biological asset covered under AASB 141, acquisition cost of deferred nature as per AASB 4,
AASB 1023 and AASB 1038 and non-current asset covered under AASB 5 which are held for
sale. (BDO Australia Ltd. A, 2016)
The key terms used for solving the sum includes Active market wherein the product are
homogenous, buyers and seller are available and public price is present.
The term carrying amount shall mean the amount at which the asset is recognised in the books
of the firm post meeting the accumulated depreciation i.e. Original Cost less accumulated
depreciation if any.
Cash Generating Unit is the smallest identifiable group of asset which generates its own cash
flows independent of other units of the business.
Cost of Disposal shall mean the cost which are incurred for disposing the asset and does not
include finance charge or expense in relation to income tax.
Depreciation amount means the amount which has been notionally subjected to profit and loss
account and represents wear and tear of the asset.
Fair Value of the asset less cost to sell: This term represents the amount which can be
obtained from the disposal of the asset in the market between independent parties who are
knowledgeable and willing to enter the transaction. Further, the said fair value shall be
reduced by cost to sell.
Loss of Impairment: It represents the amount by which the recoverable amount of the asset is
lower than the carrying value of the asset.
Recoverable amount of the asset represents higher of value in use or fair value less cost of
disposal.
Present case
In the present case, the value in use of the asset is $1,097,700 which is the recoverable value
of
the asset as fair value less cost of disposal of all asset has not been provided. Further, the
question states the carrying amount of the asset $ 12,23,700/- leading to impairment loss of $
126000 as computed by taking difference of carrying value and recoverable value.
Further, the amortisation computed has been allocated among the cash generating assets of
the Cash Generating Unit except inventory. Goodwill has been fully impaired in terms of
hierarchy of impairment and plant has been impaired by $ 30,559 by taking the difference
between the carrying value and fair value. Post above, the balance value of impairment loss
has been allocated between copyright and machinery based on carrying value. The
computation has been provided as under:

Computation of Impairment Amount
Sl No Particulars Carrying Amount Fair Value Impairment
1 Plant 822700 792141 30559
2 Copyright 189000 32793.3
3 Machinery 119000 20647.7
4 Inventory 51000
5 Goodwill 42000 42000
6 Total Carrying Amount 1223700
7 Value in Use 1097700
8 Impairment (6-7) 126000
Sl No Particulars Impairment Amount
1 Goodwill 42000
2 Plant 30559
3 Total 72559
4 Total impairment 126000
5 Balance Impairment (4-3) 53441
6 Allocation
7 Copyright 32793.3
8 Machinery 20647.7
In the books of Gali Limited
Journal Entries
Date Particulars Dr Cr
30-Jun Loss on Impairment A/c..Dr 126000
To Goodwill A/c 42000
To Plant A/c 30559
To Copyright A/c 32793.3
To Machinery A/c 20647.7
(Being Asset Impaired)
30-Jun Profit and Loss A/c..Dr 126000
To Impairment Loss A/c 126000
(Being Final entry passed)

References
Australian Accounting Standard Board, 2015. Impairment of Assets. [Online]
Available at: https://www.aasb.gov.au/admin/file/content105/c9/AASB136_08-15.pdf
[Accessed 28 May 2019].
BDO Australia Ltd. A, 2016. ACCOUNTING NEWS. [Online]
Available at: https://www.bdo.com.au/getattachment/Microsites/Accounting-News/Accounting-
News-May-2016/Home/elements/In-this-issue/1605_Accountingnews.pdf.aspx
[Accessed 28 May 2018].