Loss of Impairment for Cash Generating Units Including Goodwill

Running head: CORPORATE ACCOUNTING
Corporate Accounting
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Author’s Note

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.

2CORPORATE ACCOUNTING
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