Impairment Test and Value in Use in Corporate Accounting

CORPORATE ACCOUNTING

The process of identifying those assets that has been recorded in the books of account as per
the carrying value but has exceeded the recoverable amount is known as impairment test. So,
we can see that impairment test is a process in which the company re records the assets held
by him as per the fair value. It is not easy to determine the recoverable amount for individual
assets and therefore recoverable amount for the entire class generating unit is ascertained.
The recoverable amount of a cash generating unit is highly dependent on the cash flows and
intensity with which the management uses its assets. The cash generating unit can contain the
asset which has an active market for the goods produced by it and also if such goods are
consumed within the organisation. The company is required to report about the acid that form
part of the cash generating unit from period to period. The entity is required to make
disclosure if it transfers an individual asset from one cash generating unit to another. A
company should report if there is any payment made or if there is a reversal of any
improvement loss.
An impairment loss of a cash generating unit is calculated in a similar manner of impairment
test of a normal asset. The recoverable amount that is calculated by the following procedure
is compared to the carrying amount and difference is considered to be the laws for the cash
generating unit which will be recognised in the books. The final amount of loss that has been
calculated is distributed among the assets that have been distributed in the ratio of their
carrying amount. The loss that has been distributed as per the carrying value is then deducted
from the carrying amount of individual asset which will result in to reduction of the value of
the asset.
We need to calculate the value in use and their value in use in order to determine the
recoverable amount of an asset. In the process of impairment is the recoverable amount is
used to compare it with carrying amount. We can define a cash generating unit as a pool of
different acids that helps the company to generate cash inflows. (Atkinson, 2012)
Value in use is the present value of the forecasted future cash flows that is derived from a
given cash generating unit. Let us now learn about the steps to determine the value in use.
The steps are as follows:
 The company should estimate the future cash inflows and outflows that can be
derived from the cash generating unit. (Bierman & Smidt, 2010)
 Along with the estimates of the cash flows the company should also be able to state
the variations that may occur.
 In order to calculate the present value of cash flows at discount rate is required. It is
not easy to determine the discount rate as there are various assumptions taken into