Impairment Loss Calculation of Cash Generating Unit
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This essay discusses the treatment of impairment loss in relation to asset's cash-generating unit. It reflects that the measurement of impairment loss while considering the cash generating unit is very much unlike from the calculation of impairment loss of separate asset.
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ACCOUNTING
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Contents Introduction...........................................................................................................................................2 Reversal of impairment loss on goodwill..............................................................................................2 Conclusion.............................................................................................................................................4 References.............................................................................................................................................7
Introduction Accordingtogenerallyacceptedaccountingprinciples,anitemofeithertangibleor intangible assets cannot be valued more than its realizable value in the books of accounts. If the value of any asset is more than its realizable worth then impairment account is needed to bring the value of the asset again at the realizable value. When the assets are once recorded at cost price then after, these values are revalued to take into consideration the market conditions on a regular basis (AASB 136. 2009). Generally, acceptable accounting principles allow revaluation of tangible and intangible assets whereas it also needs that revaluation should not overvalue the amounts in the book of accounts. While calculating the amount of impairment loss, it is clearly prescribed in ASAB 136 that calculation becomes a bit difficult in case of cash generating unit. In the crux, the essay brings out a discussion on impairment loss related with cash generating unit. Reversal of impairment of goodwill The prime aim of the impairment loss is to make sure that the given assets are at all not overvalued in the books of accounts. Bookkeeping principles permit the assets to be revalued in financial statements. Revaluation can be upwards or downwards. When the revaluated assets goes upwards then a danger of overvaluation of assets always arises. The asset may be specified at the overestimated amount in the books of accounts, even after when the management revalues it (Dagwell, Wines, and Lambert, 2011). For instance- major downfall in the market value of the item and if same downfall happens in a period of time, then the value shown in the books of accounts would be more than what is. Falling down of market value of asset would lead carrying amount in balance sheet to be at overvalued figures (Gordon, and Hsu, 2017).
According to AASB 136, each asset is examined for impairment and it is simple too. Whereas, while calculating the cash generating unit, various assets are grouped together to test the impairment. Cash generating unit is a group of assets, which can generate cash flows collectively. This signifies that cash flows of whole cash generating unit cannot be produced by single asset in that group. In this case, the net realisable value of grouped assets is calculated and impairment test is implied on the same. This group is also known as cash generating unit (Ernst & Young LLP, 2015). Impairment loss occurs when carrying amount of cash-generating unit amount is more than the recoverable amount. Higher amount between fair value and value in use of cash generating unit is recognised as the recoverable amount. Moreover, value in use is calculated with regards to existing value of cash flows, which are anticipated to be created by the cash generating unit over a period (Chen, Shroff, and Zhang, 2017). It is important to know that impairment loss is booked when an asset or group of assets are purchased. Impairment loss is based on two different value i.e. fair value and value in use. Fair value is the unbiased value or market price of an asset. Whereas value in use is, the amount calculated by adding the revenue from operations of, suppose five years is estimated in the current year. According to value in use and fair value, impairment loss is booked. While testing the impairment, an organisation should review the stated carrying amount in balance sheet (Chang, and Yen, 2015). The organisation should find out the circumstances indicates that realizable value of tangible or intangible assets may be lower than the value carried in books of accounts. In such conditions, the tangible or intangible asset can be impaired to take the carrying amount down to the realisable amount. It is important to know that according to AASB-136, to compute the impairment amount of cash-generating unit, carrying amount should be necessarily given. Firstly, arising goodwill
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of the business combination is to be allocated to impairment. It is because the goodwill can not generate cash flows and it is a non-cash item individually of other tangible assets except inventory. Therefore, it is mandatory to apportion goodwill to the cash-generating unit. It should comprise of many assets, which are anticipated to get benefit from the collaboration of certain combination of businesses. This standard states that the entity keeps changing its composition of the cash-generating unit as per its requirement. The goodwill is allocated to impairment loss at first, but it is not possible to reverse the same if recoverable amount is more than carrying amountand bring back the goodwillinto the booksof accounts (Whitcroft, Cuevas, Haehner, and Hummel, 2017). While calculating impairment loss of cash generating unit, goodwill is allocated and the book amount of cash generating unit should be taken comprehensive of value of goodwill. Amount of impairment loss will be excess when the carrying amount of cash generating will be over the recoverable value. At first, impairment loss is allocated to goodwill then to other assets in the proportion of carrying amount of asset (except inventory) (Cao, Shaari, and Donnelly, 2018). After allocating the impairment loss to each specific asset and the carrying amount will be reduced to some extent. Moreover, it should be noticed that maximum impairment loss allocated to any asset should not exceed the impairment loss computed where the asset is impaired separately. At last, impairment loss is transferred to the profit & loss account. Conclusion From the above discussion, it can be concluded that the essay provides the treatment of impairment loss in relation to asset`s cash-generating unit. Entire argument reflects that the measurement of impairment loss while considering the cash generating unit is very much unlike from the calculation of impairment loss of separate asset.
Part-B Impairment Loss calculation of China Division (a CGU) ofGali Ltd A.Carryingamountofcashgenerating unit comprising goodwill Amount ($) Plant802,700.00 Copyright185,000.00 Machinery117,000.00 Inventory50,000.00 Goodwill42,000.00 Total1196,700.00 B. Recoverable amount1070700.00 C. Impairment Loss (A- B)126000.00 S. No.Account TitlesDebitCredit 1Impairment Loss 126000. 00 Accumulated Impairment Losses126000.00 (Being impairment loss recognized) Accumulated Impairment Losses126000.00 Goodwill42,000.0
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0 Plant (note*) 30,518.0 0 Copyright (126000-42000-30518)/(185000+117000)*185000 32,762.1 5 Machinery (126000-42000-30518)/( 185000+117000)*117000 20,719. 84 InventoryNil (Being impairment loss charged fromeach asset) 2Profit and Loss 126000. 00 Impairment Loss 126,000. 00 (Beingimpairmentlosschargedtoprofitandloss account) Allocation of Impairment on plant (1196,700-772,182) 30,518.0 0 Allocated impairment of CGU 77,021.9 9 (126000-20000)* 802,700/(802,700.00 185,000+117,000.00) Impairment loss on plant cannot be allocated more than $30,518.
References AASB136.2009.ImpairmentofAssets.[Online].Availableat: http://www.aasb.gov.au/admin/file/content102/c3/AASB136_07-04_ERDRjun10_07-09.pdf [Accessed on: 01 January 2017]. Dagwell, R. Wines, G., and Lambert, C. 2011.Corporate Accounting in Australia. Pearson Higher Education AU. Ernst & Young LLP. 2015.International GAAP 2016: Generally Accepted Accounting Principles under International Financial Reporting Standards. John Wiley & Sons. Chen, W., Shroff, P.K. and Zhang, I., 2017. Fair value accounting: Consequences of booking market-driven goodwill impairment. Whitcroft, K.L., Cuevas, M., Haehner, A. and Hummel, T., 2017. Patterns of olfactory impairment reflect underlying disease etiology. The Laryngoscope, 127(2), pp.291-295. 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. Cao, T., Shaari, H. and Donnelly, R., 2018. Impairment reversals: unbiased reporting or earnings management. International Journal of Accounting & Information Management, 26(2), pp.245-271. Gordon, E.A. and Hsu, H.T., 2017. Tangible long-lived asset impairments and future operating cash flows under US GAAP and IFRS. The Accounting Review, 93(1), pp.187- 211.