Impairment loss with regard to CGU (cash generating unit) including goodwill

This article discusses the procedure prescribed by AASB 136 for assuring that entity’s assets are reported at the value which is not more than the asset’s recoverable amount. It explains the concept of CGU and impairment loss, and the process of estimating recoverable amount for individual asset and CGU. The article also discusses the testing of impairment for goodwill associated with CGU and the recognition of impairment loss for CGU.

Corporate accounting and financial reporting

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Impairment loss with regard to CGU (cash generating unit) including goodwill
Main objective of AASB 136 regarding impairment of assets is prescribing
procedure that is applied by an organisation for assuring that entity’s assets are
reported at the value which is not more than the asset’s recoverable amount. If the
reported value of the asset goes above the amounts to be recovered by selling of the
asset the asset is recorded at the value that is more than it recoverable amount. in
such case the asset is considered as impaired and AASB 36 requires the
organisation to identify the impairment loss (Legislation.gov.au 2019).
CGU is considered as the smallest amount of recognisable group for the
assets that creates the cash flows those are significantly dependent on the cash
flows from other asset group or individual asset. Impairment loss is the value by
which the carrying value of assets or CGU exceeds the value of recoverable amount.
Recoverable value of the CGU or the asset is high value among the VIU (value in
use) or fair value reduced by the amount required for disposing the asset. Here, VIU
is present value of the future cash flows that is estimated to be generated from CGU
or asset (Kabir and Rahman 2016).
As per Para 66 of AASB 136 if there exists any signal that the asset can be
impaired, the amount to be recovered from the asset must be projected for individual
asset. If the individual asset’s recoverable amount cannot be estimated the
organisation shall estimate the CGU’s recoverable value to which the asset belongs.
Recoverable amount for the individual asset cannot be measured if (i) the VIU for the
asset cannot be determined that is close to the fair value less the disposal cost (ii)
cash flows are not generated by the asset those are significantly independent on
other assets (Chang and Yen 2015). In these circumstances, recoverable amount

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and value in use of the asset is determinable only for the CGU of the asset.
However, as per Para 68, the CGU indication for any asset requires judgments. If the
amount to be recovered cannot be estimated for the particular asset, the
organisation recognizes lowest aggregation for the asset that generates significantly
large amount of independent cash flows (Legislation.gov.au 2019).
If there is existence of market for output produced by the asset group or the
individual asset that the asset group or the individual asset shall be recognised as
CGU irrespective of the fact that some of the output may be internally used. If cash
generated by individual asset or CGU are impacted by the internal transfer pricing,
the organisation shall use the best estimate from management for future prices that
can be achieved through applying the arm’s length price to estimate – (i) future cash
flows used for estimating CGU or asset’s VIU and (ii) future cash outflows used for
estimating value in use of CGU however, the CGU shall be consistently identified
from period after period for the same asset or similar asset until any alteration is
justified. Amount to be recovered from CGU is higher among the fair value reduced
by disposal cost of the CGU and VIU of the CGU. Carrying value of the CGU shall be
estimated on the basis that is consistent with the method through which the
recoverable amount is estimated (Legislation.gov.au 2019).
For testing of impairment the goodwill acquired through business combination
from the date of acquisition date shall be assigned to to each of the CGU of acquirer
or to group of CGU that is estimated to be benefitted from cash flows of combination
irrespective of the fact whether the acquiree’s liabilities or assets are allocated to
units or to the unit group. Each of the unit or unit group to which the goodwill is
assigned shall – (i) record lowest level with the organisation at which goodwill is
identified for internal management requirement and (ii) shall not be more the

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operating segment before aggregation (Schwarzbichler, Steiner and Turnheim
2018).
Goodwill identified under the business combination is considered as an asset
that represents future economic benefit generated from other assets. The asset is
acquired from the business combination that are not identified individually or not
recognised separately. If initial allocation for goodwill generated from amalgamation
is not able to be completed before closing of annual period under which
amalgamation is impacted, the initial allocation shall be finished before closing of the
annual period starting after date of acquisition (Shaari, Cao and Donnelly 2017). On
the other hand, if the goodwill is assigned to CGU and the organisation disposes of
the operation belongs to that unit, goodwill related to with disposed operation shall
be (i) included with the carrying amount of operation while estimating loss or gain
from disposal (ii) shall be valued based on disposed operation’s relative values and
part of retained CGU, unless the organisation can establish that any other method
will reflect the associated goodwill with disposed operation in better way (Kabir,
Rahman and Su 2017).
While the goodwill associated with the CGU has not been assigned to that
unit, the unit will be tested for the purpose of impairment. Whenever any indication of
impairment is there regarding the fact that the asset may get impaired carrying value
of the asset excluding good, if any shall be determined with the recoverable amount.
If the amounts to be recovered from CGU exceed reported value, the CGU and the
goodwill allocated to CGU must be considered as not impaired. Further, if carrying
value of CGU is more than the recoverable value of the CGU, the company must
recognise impairment loss as per Para 104 (Zhuang 2016). Para 104 states that
impairment loss for CGU shall be recognisee if and only if amount to be recovered

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from CGU does not exceed the carrying value of CGU in order of – (i) 1 st for lowering
the reported amount of goodwill assigned, if any, to the CGU and (ii) then to the
other asset of CGU based on pro rata on reported value of individual asset under
CGU. These decreases in value shall be recognised as the impairment loss for
individual asset (Bond, Govendir and Wells 2016).

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Reference
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.
Chang, M.L. and Yen, T.Y., 2015. Does Reversal of Asset Impairment Loss Matter?
Evidence from China. International Research Journal of Applied Finance, 6(4),
pp.197-222.
Kabir, H. and Rahman, A., 2016. The role of corporate governance in accounting
discretion under IFRS: Goodwill impairment in Australia. Journal of Contemporary
Accounting & Economics, 12(3), pp.290-308.
Kabir, H., Rahman, A. and Su, L., 2017. The Association between Goodwill
Impairment Loss and Goodwill Impairment Test-Related Disclosures in Australia.
Legislation.gov.au., 2019. AASB 136 - Impairment of Assets - August 2015 . [online]
Available at: https://www.legislation.gov.au/Details/F2017C00297/Download
[Accessed 20 Jan. 2019].
Schwarzbichler, M., Steiner, C. and Turnheim, D., 2018. Impairment of Assets (Fixed
Assets and Goodwill). In Financial Steering (pp. 343-370). Springer, Cham.
Shaari, H., Cao, T. and Donnelly, R., 2017. Reversals of impairment charges under
IAS 36: evidence from Malaysia. International Journal of Disclosure and
Governance, 14(3), pp.224-240.

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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.