Loss of Impairment for Cash Generating Units Including Goodwill

This article discusses the principles of impairment and how companies can allocate the loss of impairment for cash generating units including goodwill. It also provides an example and suggestions for companies.

Running head: CORPORATE ACCOUNTING
Corporate Accounting
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1CORPORATE ACCOUNTING
Loss of Impairment for Cash Generating Units Including Goodwill
According to one basic principle of impairment, one cannot introduce a specific
asset above its recoverable value in balance sheet and it is considered as the higher of
the fair value of the asset less value-in-use and selling cost. In case the former exceeds
the latter, the companies are needed to consider the impairment and it is needed to
make the comparison between recoverable value and carrying value. At the time of the
recognition of impairment loss in the income statement, companies are needed to
allocate the asset to impairment (Amiraslani, Iatridis and Pope 2013).
The companies are needed to test the assets for impairment that are subject to
impairment review in the presence of impairment indication. In the absence of
impairment indication, companies are needed to impair the assets like goodwill and
other intangible assets on annual basis. Thus, it is needed to do the calculation of the
recoverable value of the individual assets. It needs to be mentioned that the assets
have independent cash flows from the other assets and thus, they are considered for
impairment testing and classified as cash-generating units (Guthrie and Pang 2013).
According to AASB 136: Impairment of Assets, Paragraph 104, in case the
carrying value of the assets is higher than cash-generating units, it is possible to
recover the loss of impairment (aasb.gov.au 2018). The aim of impairment loss
distribution is the reduction in the asset carrying value in a chronological order. The first
process involves in the reduction in the value of goodwill that is assigned to cash-
generating units. In the second process, there will be minimization of the other units of
assets on the pro-rate basis that depends on the asset carrying value.

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It is needed for the companies to treat these reduction in the carrying amount as
impairment losses on different assets and they are needed to be recognized under
AASB 136: Impairment of Assets, Paragraph 60. In addition, as per AASB 136:
Impairment of Assets, Paragraph 105, the companies should not reduce the asset
carrying amount below the available three highest alternatives for the distribution of the
loss of impairment (aasb.gov.au 2018). The alternatives are zero, fair value less cost of
disposal and value-in-use.
Companies have the option to distribute the loss of impairment to the assets
distributed towards the pro-rata basis to the different units of the asset. According to
AASB 136: Impairment of Assets, Paragraph 106, companies cannot do the
estimation of the recoverable amount every time for the individual asset of the cash-
generating unit (aasb.gov.au 2018). Thus, there is a requirement of random distribution
of the loss of impairment between the assets and goodwill is the only exception. The
main reason is that the cash-generating unit assets operate in combination and goodwill
is the exception.
According to AASB 136: Impairment of Assets, Paragraph 107, two distinct
situations may be occurred when it is not possible for the ascertainment of the separate
assets’ recoverable value. In case, the fair value less cost of disposal is lower than the
carrying value of the asset, there is realization of the impairment loss; and this fact can
be seen in the standard of AASB 136: Impairment of Assets, Paragraph 104. After
that, in case there is not any impairment related to the assets of cash generating units,
there can be the recognition of loss on impairments. This situation is possible when the

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fair value of the asset is higher than the carrying value of the assets after the deduction
of the cost of disposal (aasb.gov.au 2018).
An example can be taken into consideration where there is a physical damage in
a machine. Despite of the reduction of the effectiveness of the machine at the present
date, this can be use for the purpose of production. The company has identified the fact
that the fair value of the machine less cost of disposal is higher the carrying value of
that particular machine. In addition, the machine has failed in generating any
independent cash flow (Linnenluecke et al. 2015). The machine can be considered as
the lowest identifiable asset classes along with the derivation of the independent cash
flows in the production line. The production line’s recoverable value signifies that this
production is not fully impaired.
This situation can lead to two distinct assumptions. As per the initial assumption,
the budget or the estimation of the management indicates towards the level of
commitment for the substitution of the machine. The company cannot estimate the
machine’s recoverable amount in the presence of the non-identical value-in-use of the
machine with the fair values less disposal cost (Bloom 2013). The determination of this
is done for the cash generating units of the machine. Thus, there will not be any
recognition of the loss of impairment and thus, it becomes mandatory for the companies
to reassess the period of deprecation or the deprecation technique related to the
machine. Hence, the suggestion for the companies is the adoption of shorter period of
deprecation or the implementation of paid method of deprecation. This will assist in the
assessment of the remaining life of the machine (Huian 2013).

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As per the second assumption, the management’s budget or estimation indicates
towards the commitment related to the substitution of the machine by selling it in the
future. It is estimated that there will not be many cash flows from the continuous use of
the machine until its disposal and thus, the determination of the recoverable value of the
machine is difficult. Thus, there is not any consideration made to the cash generating
units where the machine belongs to the line of production. Hence, there will be loss of
impairment for the machine as the carrying value of the machine is greater than fair
value less cost of disposal (Bond, Govendir and Wells 2016).
The above discussion indicates towards the fact that loss is distributed among
the cash generating units on pro-rata basis when there is impairment loss. However,
this process does not consider the value of goodwill as the loss has relevance with the
total carrying value of the cash-generating units in the companies. Lastly, the
companies are needed to treat the accounting losses in the same manner as the distinct
asset (Biondi and Lapsley 2014).

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References
Aasb.gov.au. (2018). Impairment of Assets. [online] Available at:
https://www.aasb.gov.au/admin/file/content105/c9/AASB136_07-04_COMPjun09_01-
10.pdf [Accessed 23 Sep. 2018].
Amiraslani, H., Iatridis, G.E. and Pope, P.F., 2013. Accounting for asset impairment: a
test for IFRS compliance across Europe. Centre for Financial Analysis and Reporting
Research (CeFARR).
Biondi, L. and Lapsley, I., 2014. Accounting, transparency and governance: the heritage
assets problem. Qualitative Research in Accounting & Management, 11(2), pp.146-164.
Bloom, M., 2013. Double accounting for goodwill: A problem redefined. Routledge.
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.
Guthrie, J. and Pang, T.T., 2013. Disclosure of Goodwill Impairment under AASB 136
from 2005–2010. Australian Accounting Review, 23(3), pp.216-231.
Huian, M., 2013. Stakeholder’s participation in the development of the new accounting
rules regarding the impairment of financial assets. Business Management
Dynamics, 2(9), pp.23-35.
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.