Financial Accounting: Analyzing Impairment of Cash Generating Units

This assignment explores the concept of asset impairment, particularly within the context of cash generating units (CGUs). It defines impairment as the re-recording of assets when their carrying value exceeds their recoverable amount. The assignment explains the importance of determining the recoverable amount for individual assets or entire CGUs, especially when cash flows depend on multiple assets. It details the composition of a CGU, emphasizing that it comprises assets generating future cash flows, and highlights the influence of management policies and external factors on revenue generation. The assignment also covers reporting requirements, including disclosures for asset transfers and adjustments for impairment losses. Furthermore, it describes the calculation of impairment loss, its allocation to assets, and the specific considerations for non-cash generating assets within a CGU. The assignment includes a practical example with carrying amounts, impairment loss calculations, and corresponding journal entries to illustrate the accounting treatment of impairment. It emphasizes the importance of proper calculations, loss recording, and financial statement disclosures to ensure accurate financial reporting. The assignment concludes with a discussion of the relevant accounting standards and the importance of thoroughness in the impairment process. Finally, references are provided to support the concepts discussed in the assignment.

CORPORATE ACCOUNTING AND
REPORTING

Part A:
Impairment is a procedure that involves identifying those assets in the balance sheet whose
carrying value is more when compared to the recoverable amount. Hence, we can say that
impairment of assets means re- recording the assets at its fair value.
Recoverable amount of all the individual assets is the main component that is required to be
known in order to compute the impairment loss for each cash generating unit. Sometimes it
becomes difficult to determine the recoverable amount for individual asset. In such a case the
recoverable amount for the entire cash generating unit should be taken into consideration in
order to calculate impairment loss. The situation of difficulty in determining the recoverable
amount of individual asset arises when cash flows that are going to be generated are
dependent on the usage of any other asset in the cash generating unit (Gibson, 2013).
A cash generating unit comprises of few assets that helps the company to generate future cash
flows. Obviously, the cash flows are dependent on how the management makes use of it. The
generation of revenue from such assets are dependent on various other factors also such as
the policies that are followed by the management in respect to usage, decision regarding
acquisition and disposal of such assets. The cash flow generated from such asset should be
received from the external parties.
These assets are said to be cash generating units only when the goods produced by such
assets are marketable. We can say that pool of asset will be regarded as a cash generating unit
also when the goods produces are capable of being consumed within the organisation. Many
times the cash inflows of the company is highly affected by the internal pricing policies that
are adopted by the company. But it is important to know the value of cash generated from a
particular cash generating unit. Therefore, the company should apply arms length price in
determining such value (Greite, 2007).
A reporting has to be done from time to time in relation to the assets that form part of the
cash generating units. The company has to provide a disclosure if it decides to transfer a
particular asset from one cash generating unit to another. All the adjustments such as any loss
that has been reversed or any impairment loss that has been further made has to be recorded.
As discussed above, we have to determine the recoverable amount to calculate the
impairment loss of a cash generating unit. It is observed that the fair value of such assets are
greater to fair value after deducting selling expenses from it. Only those assets that make a
contribution in generating future revenues should be taken in the CGU all other should be
excluded. In relation to the liabilities, only those liabilities that are directly and wholly related
to the asset contained in the cash generating unit should be considered (Ittelson, 2009).
The calculation of impairment loss is very similar to the loss that is calculated on the normal
asset. Loss has to be recognised when the carrying value of an asset exceeds the fair value.
The total loss that has been calculated will be allocated to all the assets that are contained in
the unit in the ratio of their carrying value. The impairment loss that is calculated is shown as
a deduction from carrying asset which leads to reduction of value of the asset. The treatment

for the loss of each asset of the cash generating unit is same as the treatment of normal asset
(Loftus, 2013).
There is an important point that has to be kept in mind while allocating the loss to the various
asset of the unit- the amount that has been deducted as a loss should not reduce the carrying
amount of the assets below the higher of the following (Mard et al. 2011)-
 Fair value net of sale expenses
 Value in use
 Zero
The remaining loss has to be distributed among the other asset of the CGU in the pro rata
basis.
Usually, there are assets that are cash generating but sometimes there are also some assets
that are non cash generating but still forms a part of the CGU. In such a case, if such asset Is
impaired, then the carrying amount of such asset will also be added in the carrying amount of
the unit. However, the carrying amount of such non cash generating asset can be determined
by the service of the asset that is used by the CGU (Rahman, 2014).
In a case when the recoverable amount of the asset cannot be determined, then impairment
could be done if the carrying amount of such asset is higher to the fir value net of impairment
loss. If the CGU to which this particular asset belongs is not impaired then there are no
adjustments made in the carrying amount, even though this particular asset has been impaired
individually.
An entity has to carry out an impairment test in order to record these impairment losses. The
above steps that has been explained above has to be followed. All the entities must make a
disclosure in its annual reports if there is any information relating to impairment during the
last reporting period. It should also report if there is any reversal of losses (Wahlen et al.,
n.d.). This loss that has been reversed is also divided among the different assets on the pro
rata basis. There may be an increase in the carrying amount of the assets but there shall be no
increase in the carrying asset in relation to the non cash generating assets.
We can conclude that it is the duty of the entity to carry out proper calculations, to record all
the losses properly and provide disclosures wherever required in the financial statements for
the impairment of cash generating unit. All the steps has to be followed thoroughly so that the
entity can make correct calculations and provide a correct reporting in its annual reports
(Revsine, 2015).

Part B:
We have been provided with the following information:
Account
Carrying
Amount
Land 474000
Equipmen
t 109000
Building 69000
Inventory 30000
Goodwill 25000
Total CA 707000
The carrying amount of the Cash generating unit is 632000.
The total impairment loss is ( 707000-632000)= 75000 of which 18175 related to land alone
and also the value of goodwill 25000 will be written off. The remaining impairment loss
which is 31825 is distributed amongst the following asset in proportion to their carrying
amount as shown below:
Particular
s Carrying Amount Ratio Impaiment Loss
Equipment 109000 0.52 16,678
Building 69000 0.33 10,557
Inventory 30000 0.14 4,590
2,08,000 31,825
The journal entries are as follows:
Particulars Dr Amt Cr Amt
Accumulated Impairment Loss ...
…..Dr
75,000.0
0
To Land
18,175.0
0
To Equipment
16,677.5
2
To Building
10,557.3

3
To Inventory 4,590.14
To Goodwill
25,000.0
0
(Being impaiment on assets
realised)
Impairment loss……Dr
75,000.0
0
To accumulated impairment loss
75,000.0
0

REFERENCES:
Gibson, C. (2013). Financial reporting & analysis. 1st ed. Mason, Ohio: South-Western.
Greite, S. (2007). The development of the Australian accounting standards after the end of
the G4+1. 1st ed. München: GRIN Verlag.
Ittelson, T. (2009). Financial statements. 1st ed. Franklin Lakes, N.J.: Career Press.
Loftus, J. (2013). Understanding Australian accounting standards. 1st ed. Milton, Qld.: John
Wiley and Sons.
Mard, M., Hitchner, J. and Hyden, S. (2011). Valuation for financial reporting. 1st ed.
Hoboken, New Jersey: John Wiley & Sons.
Rahman, A. (2014). The Australian Accounting Standards Review Board. 1st ed.
Oxfordshire, England: Routledge.
Revsine, L. (2015). Financial reporting & analysis. 1st ed. New York, NY: McGraw-Hill
Education.
Wahlen, J., Bradshaw, M., Baginski, S. and Stickney, C. (n.d.). Financial reporting, financial
statement analysis, and valuation. 1st ed.