Impairment Loss Assessment for CGUs, Excluding Goodwill: A Report

This report provides a comprehensive analysis of impairment loss calculations for Cash Generating Units (CGUs), specifically excluding goodwill. It begins by defining key terms such as impairment, carrying amount, and recoverable amount, referencing relevant accounting standards like AASB 136 and IAS 36. The report explains the concept of Cash Generating Units and the circumstances under which goodwill allocation is considered. It then outlines a step-by-step process for calculating impairment loss, emphasizing the identification of CGUs, determining the recoverable amount (value in use or net selling price), and calculating the impairment loss. The methodology includes applying discount rates, identifying carrying amounts, and calculating the revised carrying amount after the impairment loss. The report concludes by explaining how the impairment loss is allocated to goodwill and other assets. References to supporting literature are included.

ANSWER
IMPAIRMENT LOSS FOR CGU’S EXCLUDING GOODWILL
Impairment – Australian Accounting Standard 136 has defined the impairment as the excess of
the amount of the carrying amount of an asset over the amount which is recoverable from the
asset at that point of time (AASB 136, 2011).
Carrying Amount – The value at which the asset is recorded in the books of accounts is known as
the carrying amount. Carrying amount is nothing but the book value of an asset which is derived
after deducting the depreciation from the cost of the asset.
Recoverable Amount – International Accounting standard 36 has defined the recoverable amount
as the higher of value in use or net selling price (IAS 36, 2014).
- Value in use is the present value of cash inflows likely to be generated in the future years.
These are discounted at the rate equivalent to either the internal rate of return of the
company or the cost of capital.
- Net Selling price is equivalent to the difference between the selling price of an asset and
cost of disposing of the asset.
Cash Generating Units – As per the Australian Accounting Standard 136, cash generating units
have been defined as the cluster of asset which is very small and which is easily identifiable and
relatable to the particular class of the assets. It has been also defined that the cash flows of one
group of assets will be independent of the other cluster. The concept has been introduced because
of the fact that some of the assets were not able to provide the economic benefits in terms of the
cash flows on their own. Therefore, this small group of assets or the cluster of assets has been
made (IAS 36, 2014).
Impairment Loss for CGU’s excluding Goodwill:
Impairment loss is charged to the profit and loss account and is deducted from the value of the
asset as shown in the balance sheet. In case there is the situation that the goodwill as shown in
the books of the company is not able to allocate on reasonable basis then the following
circumstances will follow (Carlin, 2009; Zucca, 2012):

 Non allocation of Goodwill and company assets
 Allocation of goodwill only
 Allocation of company assets only
 Allocation of few assets of the company.
The loss on impairment shall be calculated without including the goodwill in the following
manner:
a) At first the cash generating units will be found
b) Then it is ascertained as to which specific asset they belong.
c) Then the cash flows that the each of the cash generating unit will generate will be
identified and calculated with reasonable terms (Wines, 2009)
d) Applying the discount rate as mentioned in the company details and the value in use is
identified as equivalent to the present value of cash inflows.
e) Calculating the amount which can be recovered from the asset as defined as the net
selling price.
f) Calculating the amount recoverable as higher of value shown in (d) or (e)
g) Then the carrying amount will be identified for only of the cash generating units
h) Identifying and calculating the loss on impairment as the difference between the value
shown in step (g) and step (f)
i) Revised carrying amount is calculated by deducting the impairment loss from the
carrying amount.
j) The huge cash generating unit and calculate its recoverable amount.
k) Finally calculating the carrying amount of this huge cash generating unit and calculating
the impairment loss accordingly (Ghazaleh, 2011).
Then the amount of the loss on impairment so calculated will at first allocated to the goodwill
and then to the assets of the company.

REFERENCES
Abu Ghazaleh, C., 2011. Accounting discretion in goodwill impairments: UK evidence. Journal
of International Financial Management & Accounting, 22(3), pp.165-204.
AASB 136, (2011), “Impairment of Assets”, available on
http://www.aasb.gov.au/admin/file/content105/c9/AASB136_07-04_COMPjun09_01-10.pdf
accessed on 16/09/2017.
Carlin, T.M.., 2009. Discount rates in disarray: Evidence on flawed goodwill impairment
testing. Australian Accounting Review, 19(4), pp.326-336.
IAS 36, (2014), “Impairment of Assets” available on
https://www.iasplus.com/en/standards/ias/ias36 accessed on 16/09/2017.
Wines, G.., 2007. Implications of the IFRS goodwill accounting treatment. Managerial Auditing
Journal, 22(9), pp.862-880.
Zucca, L.J., 2012. A closer look at discretionary writedowns of impaired assets. Accounting
horizons, 6(3), p.30.