Corporate Accounting: Detailed Analysis of Impairment Guidelines

This report provides a comprehensive overview of corporate accounting, specifically focusing on asset impairment guidelines. It begins with an introduction to impairment, defining key concepts such as recoverable amount and fair value. The discussion section delves into the examination of impairment, covering assets like goodwill and indefinite-lived intangible assets. It explains the role of cash-generating units (CGUs) in impairment testing, including the allocation of goodwill to CGUs and the determination of recoverable amounts. The report also addresses the impact of IFRS 8 and IAS 36, including amendments made by the International Accounting Standards Board (IASB). It also explores the allocation of impairment loss to distinct assets within a CGU, and the impact of IFRS 3 on impairment losses when dealing with goodwill. The report concludes by summarizing the key aspects of impairment testing, including the consideration of goodwill and the effect of non-controlling interests (NCI).

Running head: CORPORATE ACCOUNTING
Corporate Accounting
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Table of Contents
Introduction........................................................................................................................2
Discussion..........................................................................................................................2
Conclusion.........................................................................................................................4
References.........................................................................................................................5

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Introduction
The fundamental impairment guidelines states that asset cannot be carried as
per the financial report position pertaining to its recoverable amount which is higher of
the “asset's fair value less costs to sell and its value in use”. As discussed by Mohd-
Saleh and Omar (2014), the carrying value of an asset is seen to be compared with the
recoverable amount along with asset which is impaired when the vendor fair value less
costs to sell exceeds the actual value in use of the asset. In such a situation impairment
of any form damage is allocated in the asset with impairment loss being noted in profit
or loss.
Discussion
It needs to be discerned that in general, all assets are focusedd to impairment
examination which are tested for impairment when there is a significant indication that
the asset may be impaired. This is done despite of the fact that certain assets such as
“goodwill and indefinite-lived intangible assets” are seen to be confirmed for loss
annually even if there is no indicator for impairment. It needs to be further understood
that the recoverable amount is calculated at the individual asset level. However,
commonly an asset seldom generates cash flows independently of other assets and
“mostly these are tested for impairment in groups of assets also known as cash
generating units (CGU)”. It is seen that the CGU is the smallest identifiable group of
assets which is seen to generate the “cash inflows” which are largely nondependent on
the cash inflows from other assets or group of assets (Caruso, Ferrari and Pisano
2016).
As stated by Darrough, Guler and Wang (2014), The goodwill acquired during the
course of business amalgamation is allotted to the acquirers CGUs which are
anticipated to benefit significantly from business combination. Moreover, the largest
group of CGUs allowed for goodwill impairment testing is considered as the lowest level
for the operating segment. In addition to this, as per the compliance with “IAS 36,
Impairment of Assets, impairment testing of goodwill” needs to be assessed at a level

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which is no greater than the operating segment as stated in “IFRS 8, Operating
segments”. However, it needs to be understood that the complexity is created due to
IFRS 8 allowing the operating segments to be combined into advanced level of
reportable operating segment in case certain criterias are met. In addition to this, the
IAS 36 did not specify whether the highest level of CGU aggregation was to be done for
impairment testing or goodwill allocation. To bring clarity to this decision the
“International Accounting Standards Board (IASB)” is seen to amend IAS 36 for
illustrating that CGU cannot be larger than the operating section before aggregation
(André, Dionysiou and Tsalavoutas 2018). Furthermore, it is important for the entities to
make sure that the “cash generating units” are aligned with the different types of the
operating segments. The amount recoverable from the CGU is the same as individual
assets. The carrying amount for the CGU consists assets which are directly and
completely attributable to the CGUs and an allocation of assets which are indirectly
attributable on a consistent and reasonable basis including the CA and goodwill (Chen,
Krishnan and Sami 2015).
In areas where goodwill is allocated CGU and the entities disposes of an
operation within that CGU and the “goodwill attributable” to the operation is contained
within the “carrying amount of the operation when calculating the profit or loss on
disposal”. It is to be understood that the “impairment charge” calculated for CGU needs
to be allocated to the distinct assets of the CGU, where goodwill should be allocated at
first and then the other assets is done “pro rata basis” as per the carrying sum of each
asset in the CGU. For that allocation of impairment loss as per the CGU the carrying
amount for the distinct assets needs to be decreased below the highest level of “fair
value less costs to sell”, “value in use” and “zero” (Li and Sloan 2017).
Any form of unallocated impairment needs to be allocated to the CGU’s other
assets which are subject to same limits. This may result in impairment loss which is fully
assigned or until each of the “CGU's assets” are reduced to the highest level of “fair
value” of the “assets less costs to sell, value in use and zero”. The recognition for the
impairment loss need not be derived from recognition of liabilities until it is able to meet
the definition of liability under IFRS. It has been for the depicted that “IFRS 3, Business

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Combinations” has brought “new requirements for allocation of impairment losses” when
dealing with goodwill (Mazzi, Liberatore and Tsalavoutas 2016). Any form of entity
which acquires partial interest in subsidiary may opt for “acquisition-by-acquisition
basis” on how to determine the “non-controlling interest (NCI”). The NCI may be further
measured at comparable share of the “fair value” of subsidiary's recognizable “net
assets” during the date of acquisition or at a “fair value“of the NCI. The choice of the
entity will affect the goodwill amount which will be recognized in the “consolidated
financial statements”. As per the partial goodwill methodology, only the holding
companies share for the goodwill is seen to include the goodwill value in the subsidiary.
The management needs to further reflect the extent of impact on impairment just been
choosing how to quantify an NCI s per IFRS 3 (International Accounting Standards
Board 2016).
Conclusion
The discourse of the study is further identified with the fact that CGU comprising
“goodwill” is tested for annual impairment. This is the the way the units choose to
measure the goodwill and effect of the NCI is considered with the nature of the test and
amount of “impairment loss” recognized. As per the partial method “notional gross-up of
the entity's goodwill balance is required to ensure the carrying value of the CGU
includes any goodwill attributable to the NCI”. The “grossed-up” amount is assessed as
per the “recoverable amount of CGU and impairment loss”. The holding company share
of impairment loss is considered in PL statement. Under the full goodwill methodology
there does not exist any grossing up because of the already captured goodwill
attributable to the NCI.

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References
André, P., Dionysiou, D. and Tsalavoutas, I. (2018) ‘Mandated disclosures under IAS
36 Impairment of Assets and IAS 38 Intangible Assets: value relevance and impact on
analysts’ forecasts’, Applied Economics, 50(7), pp. 707–725. doi:
10.1080/00036846.2017.1340570.
Caruso, G. D., Ferrari, E. R. and Pisano, V. (2016) ‘Earnings management and goodwill
impairment’, Journal of Intellectual Capital, 17(1), pp. 120–147. doi: 10.1108/JIC-09-
2015-0081.
Chen, L. H., Krishnan, J. and Sami, H. (2015) ‘Goodwill impairment charges and analyst
forecast properties’, Accounting Horizons, 29(1), pp. 141–169. doi: 10.2308/acch-
50941.
Darrough, M. N., Guler, L. and Wang, P. (2014) ‘Goodwill impairment losses and CEO
compensation’, Journal of Accounting, Auditing and Finance, 29(4), pp. 435–463. doi:
10.1177/0148558X14537824.
International Accounting Standards Board (2016) ‘IAS 36 Impairment of Assets’, IFRS
Green Book 2016, pp. B2459–B2570. doi: 10.9780/22315063.
Li, K. K. and Sloan, R. G. (2017) ‘Has goodwill accounting gone bad?’, Review of
Accounting Studies, 22(2), pp. 964–1003. doi: 10.1007/s11142-017-9401-7.
Mazzi, F., Liberatore, G. and Tsalavoutas, I. (2016) ‘Insights on CFOs’ Perceptions
about Impairment Testing Under IAS 36’, Accounting in Europe, 13(3), pp. 353–379.
doi: 10.1080/17449480.2016.1244341.
Mohd-Saleh, N. and Omar, N. (2014) ‘CEO duality, family-control and goodwill
impairment’, Asian Journal of Business and Accounting, 7(1), pp. 143–179.