Procedure and Calculation of Impairment Loss of Cash Generating Unit with Goodwill

This article explains the procedure and calculation of impairment loss of cash generating unit including goodwill as per AASB 136. It covers the allocation of goodwill and the test of impairment for CGU. It also includes the computation of impairment loss for Gali Ltd. as at 30 June 2015.

31 January 2019
Corporate Accounting
Student Id: 180175

The procedure and the calculation of the impairment loss of the cash generating unit
including the goodwill are set out in the “Accounting Standard AASB 136, Impairment
of Assets.” The accounting standard is applicable for the reporting periods on or after
1 July 2007 (AASB, 2015).
As per the said accounting standard, the impairment loss in relation to a cash
generating unit is referred to as the excess of the carrying amount of a cash
generating unit over its recoverable amount (Kabir, Rahman and Su, 2017). The
accounting standard further defines the recoverable amount to be the higher of the
following, which is firstly, the sum obtained fair value after the deduction of costs if
any, secondly, the value in the use of the cash generating unit. The carrying amount
refers to the amount of the recognition of the assets that is obtained after the
deduction of the amortisation amount. These refer to the amount of the accumulated
impairment losses or the accumulated depreciation thereon.
The cash generating unit refers to the smallest group of the assets that are capable
of being identified and can generate the cash inflows. The significant characteristic of
the cash generating unit is that the inflows of such CGU are independent of the other
assets or such group of assets. The carrying amount of the cash generating units
include only those assets that are capable of being attributable directly, and must be
allocated on a reasonable and a consistent manner. It must be noted that while
computing the carrying amount, the calculation should not include the carrying
amount of a recognised liability. This can be however be allowed in the case when
the recoverable amount cannot be determined without the consideration of the said
liability.
As per the paragraph 81 of the AASB 136, it must be noted that the goodwill is the
representation of an amount that is paid y the acquirer in the anticipation of the
future economic benefits. The said amount cannot be capable of identification
individually or separately and hence, the payment is made along with the assets
itself at the time of acquisition. It is also significant to note that independent cash
flows are not generated by the goodwill, but the goodwill is contributory to the cash
flow generation of the multiple cash-generating units, containing of the group of
assets.

The paragraph 80 states the procedure for the allocation of the goodwill to the cash
generating units. According to the said paragraph, the goodwill amount from the date
of the acquisition be allocated among the various cash generating units or the
groups, that were expected from the combination synergies of the said goodwill.
The paragraph 90 calls for the test of the impairment of the cash generating unit as a
whole, once the goodwill has been allocated as stated above as per paragraph 81.
The paragraph 90 states that the test of the impairment must be done annually for
the CGU as a whole. In the events when there is an indication of the loss being
arisen by the comparison of the carrying amount of the unit, inclusive of the goodwill,
and the recoverable amount of the unit, the impairment test and the procedure must
be followed. In case where the carrying amount inclusive of goodwill is more than the
recoverable amount, the impairment loss would be stated to be occurred. The
recognition of the impairment loss would be done by an enterprise, as per the
procedure laid down in the paragraph 104 of the said accounting standard.
As per the Paragraph 104, there has been prescribed an order for the recognition of
the impairment loss for the cash generating unit or the groups of cash generating
units. Firstly, the total impairment loss would reduce the carrying amount of the
goodwill, if any in the books. The second step is to calculate the ratio of the carrying
amounts of the remaining assets (except the current assets, because the same are
not impaired). Once the ratios of the carrying amounts are computed, the balance
amount of the impairment loss is allocated to the said remaining assets, in the ratio
of their carrying amounts. It must be further noted that the paragraph 104 states for
treatment and the recognition of the said reductions in the books of accounts of the
entity, as computed above as per the paragraph 60.
Paragraph 96 states the timing of the impairment of cash generating units including
goodwill. The impairment of the different cash-generating units may be tested for at
different times. However, it must be noted that in the case where some or the whole
amount of the goodwill that has been allocated to a cash-generating unit was
acquired as a part of the business combination during the current annual period. In
that case, the test for the impairment must be necessarily performed before the end
of the current annual period, for that particular unit.

Computation of Impairment Loss for the Gali Ltd. as at 30 June 2015 (as per
AASB 136 Impairment of Assets (AASB, 2015).
Account Titles Debit ($) Credit ($)
S.
No. Impairment Loss
36,0
00.00
1 Goodwill
12,0
00.00
Factory
17,4
84.00
Trademark 4003.81
Vehicle 2512.19
(Being impairment loss recognized)
2 Profit and Loss
36,0
00.00
Impairment Loss
(Being impairment loss charged to profit and
loss account)
36,0
00.00
A. Carrying amount of cash generating unit
including goodwill
Amount ($)
Factory 222,700.00
Trademark 51,000.00
Vehicle 32,000.00
Inventory 14,000.00
Goodwill 12,000.00
Total 331,700.00
B. Recoverable amount 295,700.00
C. Impairment Loss (A-B) 36,000.00

References
Australian Accounting Standards Board. (2015) AASB 136- Impairment of Assets.
[online] Available from: https://www.legislation.gov.au/Details/F2017C00297
[Accessed on 31/01/2019].
Kabir, H., Rahman, A. and Su, L. (2017) The Association between Goodwill
Impairment Loss and Goodwill Impairment Test-Related Disclosures in Australia.