AASB 136 & Impairment Loss for Cash Generating Units Analysis

This essay provides a detailed analysis of impairment loss accounting for cash-generating units (CGUs) excluding goodwill, based on AASB 136 standards. It discusses the principles of impairment, the allocation of impairment loss, and the challenges in determining the recoverable value of individual assets within a CGU. The essay also addresses scenarios where machinery suffers physical damage and the implications for impairment assessment. It emphasizes the importance of considering both the fair value and the value in use when evaluating impairment, and it highlights the role of management's budget and future plans in determining the recoverable amount of assets. The document also contains calculations and journal entries for a case study of Gali Ltd and its fine china division, which has been determined to be a CGU. Desklib provides past papers and solved assignments for students.

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Impairment loss for cash generating unit excluding goodwill:
The basic principles of impairment states that it is not probable to bring the asset
forward beyond the recoverable cost into the financial position statement (Chen, Shroff and
Zhang 2017). A comparative study is made among the carrying values and recoverable value
of the assets and impairment happens when the carrying values goes past the recoverable
value. The allocation of asset is performed when the impairment loss is identified in the
income statement.
Every assets that are subjected to impairment is tested where an indication of
impairment of assets is discovered (Roberts 2015). Assets such as goodwill and infinite
intangible assets is tested even though there is no existence of indicator existence. At the
individual asset level the recoverable amount is computed with most of assets that are
considered for testing are categorised under the cash generating unit.
As defined under the “paragraph 104 of the AASB 136” impairment loss is realised
given the recoverable value of the cash generating unit is lower than the carrying amount
(Detzen et al. 2016). The allocation of impairment loss occurs to lower the carrying value of
the assets in two sequential manner. At first the value of goodwill is reduced through the cash
generating unit and later the assets are reduced based on the pro-rata basis.
Lowering of carrying value of assets must be accounted as impairment loss and
recognition must be based on “paragraph 60 of the AASB 136” (Devalle, Rizzato and Pisoni
2017). However, “Paragraph 105 of AASB 136” that carrying value of the assets must not be
minimised higher greater than the three alternatives available to allocate the impairment loss.
The impairment loss that is occurred must be allocated among the other units of assets
based on the pro-rata basis (Lange, Fornaro and Buttermilch 2014). Referring to “Paragraph
106 of AASB 136”, it is difficult to project the recoverable value for each assets of cash

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generating unit (Eccles, and Serafeim 2014). The requirement of standards is based on the
random distribution of impairment loss among the assets except goodwill. This is because all
the units of the cash generating units works in combinations excluding goodwill.
In agreement with “Paragraph 107 of AASB 136”, it is difficult to determine the
recoverable value of the single assets since there can be two different situations (Schaltegger,
Etxeberria and Ortas 2017). At first an assets realises impairment loss only when the carrying
amount is higher than the fair value stated under “Paragraphs 104 and 105 of AASB 136”.
Finally, the impairment loss on assets is identified when the no impairment is performed on
associated cash generating unit (Warren and Jones 2018). The can be only done when the
carrying amount is less than the fair amount following the subtraction of disposal costs.
For example, a machinery suffering a physical damage can still be used for producing
goods despite the effectiveness of machinery is reduced. It is identified that the machinery
carrying value is lower than the fair amount following the subtraction of the disposal of
machinery (Hoyle, Schaefer and Doupnik 2015). Moreover, no independent sum of cash flow
is produced from the machinery. The recoverable sum of the production lines reflects that it is
not impaired completely.
There could be two different assumptions. The initial instances of assumption states
that the budget that is approved the management lacks the obligation of replacing the
machinery (Basu 2017). It is difficult to project the recoverable sum of machinery as the in-
use value of the machine is not similar with the fair value after subtracting the cost of
disposal. The impairment loss is not identified and demands the need of reviewing the period
of depreciation related to machinery. It is recommended that firms should adopt shorter
period of depreciation as it would assist in projecting the consumption of economic benefit.

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Secondly, the budged that is sanctioned to the administration may reflect an
obligation of replacing the machine through sale in future. While the cash flow derived from
the constant use of machine is not high till the disposal (Eccles, and Serafeim 2014). This
results in difficulty in estimating the recoverable value of machine and consideration is made
in the cash generating unit where machinery are belonging to the production line. As the
value derived from sale is comparatively lower than the carrying value of machinery.
As evident from the stated assessment whenever there is an impairment loss in the
cash generating unit, the loss is distributed among all the assets based on the pro-rata basis.
Nevertheless the value of goodwill is excluded and the loss is relative to the carrying value of
cash generating unit. Conclusively, the accounting losses are carried out in an identical
manner similar to the separate assets.

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Reference List:
Basu, A., 2017. Impairment of Intangible Assets-An Effort to Convergence. International
Journal of Engineering and Management Research (IJEMR), 7(5), pp.210-214.
Chen, W., Shroff, P.K. and Zhang, I., 2017. Fair value accounting: Consequences of booking
market-driven goodwill impairment.
Detzen, D., Stork genannt Wersborg, T. and Zülch, H., 2016. Impairment of Goodwill and
Deferred Taxes Under IFRS. Australian Accounting Review, 26(3), pp.301-311.
Devalle, A., Rizzato, F. and Pisoni, P., 2017. Impairment of goodwill, IAS 36 and
determinants of mandatory disclosure in Italian listed companies. African Journal of Business
Management, 11(17), pp.456-463.
Eccles, R.G. and Serafeim, G., 2014. Corporate and integrated reporting: A functional
perspective.
Hoyle, J.B., Schaefer, T. and Doupnik, T., 2015. Advanced accounting. McGraw Hill.
Lange, C.D., Fornaro, J.M. and Buttermilch, R.J., 2014. Qualitative assessment of
impairment for goodwill and other indefinite-lived intangibles. The CPA Journal, 84(6), p.22.
Roberts, R.A., 2015. Goodwill Impairment: A study of Australian Companies 2007-2013.
Schaltegger, S., Etxeberria, I.Á. and Ortas, E., 2017. Innovating corporate accounting and
reporting for sustainability–attributes and challenges. Sustainable Development, 25(2),
pp.113-122.
Warren, C.S. and Jones, J., 2018. Corporate financial accounting. Cengage Learning.

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