Corporate Accounting and Reporting - Essay on Impairment Loss (2015)

This essay provides a comprehensive analysis of impairment loss in corporate accounting, specifically focusing on cash-generating units (CGUs) and the relevant accounting standard AASB 136. The essay begins with an overview of the basic principles of impairment, including the comparison of an asset's reported value with its recoverable amount, which is the higher of fair value less costs of disposal and value in use (VIU). It explains how impairment loss is recognized and allocated, first to goodwill and then to other assets within the CGU on a pro-rata basis. The essay also discusses the importance of identifying CGUs and the criteria for their recognition, along with the accounting treatment for impairment loss, including the determination of the reported amount, fair value, and VIU. It also explores the re-allocation of goodwill in case of organizational restructuring and the importance of consistent application of accounting principles. The essay concludes with journal entries in the books of Gali Ltd as at 30th June 2015 and a list of references.

Running head: CORPORATE ACCOUNTING AND REPORTING
Corporate Accounting and Financial Reporting
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1CORPORATE ACCOUNTING AND REPORTING
Part A - Essay
Impairment loss for CGU that is cash generating unit excluding the goodwill
AASB 136 Basic principle behind impairment is the asset cannot be reported
on financial report above of its value expected to be recovered that is higher of
assets fair value reduced by costs of sale and the value in use (VIU). Reported value
of the asset is compared with the expected value to be recovered and the asset is
considered to be impaired when the formers is more than the later. Any impairment
thereby is assigned to asset with recognition of impairment loss under income
statement. At each of the closing period the entity must evaluate whether any signal
is there for asset impairment and if any signal is there the expected value to be
received from the asset shall be projected (Legislation.gov.au 2019).
All assets those are subject to review for impairment is tested for the purpose
of impairment and if there exists the indication of the same. However, few assets like
goodwill and assets those have indefinite useful life are annually rested for the
purpose of impairment. Expected amount to be recovered is computed at individual
asset level. However if the asset seldom creates cash inflows independent of the
other assets and most assets of the group are tested for the purpose of impairment
are defined as CGU. CGU is considered as the smallest recognizable asset group
that creates cash inflow those are significantly independent of cash inflows
generated from other individual asset or from asset group (Zhuang 2016).
Goodwill generated from amalgamation is assigned to CGU of the acquirer
that is likely to be benefitted from the amalgamation. However, the largest group of
the CGU is allowed to test for the impairment of goodwill is considered as the lowest
level of the operating segment. Expected amount to be recovered from the CGU is

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same as what is expected from individual asset. Reported value of the CGU includes
the assets those are exclusively and directly attributable to CGU and distribution of
asset assets directly attributable to CGU on consistent and reasonable basis
including goodwill and corporate assets. When goodwill is assigned to CGU and any
operation from that CGU is disposed off, the goodwill attributable to disposed
operation is included in reporting amount of operation while computing the profit or
loss from disposal (Legislation.gov.au 2019).
Impairment charge computed for CGU shall be assigned to individual asset of
the CGU – 1st to goodwill and ten to other assets of CGU on the pro-rata basis as per
the reported amount of CGU’s each asset. While allocating impairment loss to CGU,
reported amount for each of the asset under CGU shall not be reduced to the higher
level of – (i) VIU (ii) fair value reduced by selling cost (iii) zero. Unallocated
impairment loss value, if any, shall be re-assigned to other assets of CGU limited to
same proportion. This may results into a procedure that goes on until entire amount
of impairment loss is allocated or the asset’s value becomes zero. However, the
impairment loss recognition shall not be resulted into recognition of the liability,
unless it fulfils the liability definition. Any CGU that includes goodwill are tested for
the impairment on annual basis (Bond, Govendir and Wells 2016).
Accounting treatment with regard to impairment loss involves determine
various factors. These are - (i) determining the reported amount of CGU (ii)
determining higher of fair values reduced by selling cost and VIU (iii) computation of
impairment loss where the expected amount to be recovered is lower than the
reported value (iv) identification of impairment loss and adjusting it 1st against the
goodwill and then to other assets on pro-rata basis based on the reported value of
each asset under CGU (v) analysing the limits in standards that is reported value for

3CORPORATE ACCOUNTING AND REPORTING
individual asset under CGU shall not be reduced to lower than its fair value reduced
by selling cost (Linnenluecke et al. 2015). When active market for CGU exists for
output generated by the asset or the asset group it shall be recognised as CGU
irrespective of the fact that some of the output or all the output is internally used.
Reported amount of the CGU includes amount of the asset that is directly
attributable or assigned on consistent and reasonable basis to CGU. It will generate
the future cash inflows that is used for determining the VIU of the CGU and it does
not considers reported amount of the liability. While the cash flows created by the
CGU or asset is impacted by internal transfer pricing, the best estimates for the
future prices is the price that can be generated from arm’s length price used for the
transaction. Reported amount of CGU shall be determined based on the consistent
manner as per which the expected amount to be recovered from the CGU is
determined. Further, the CGU shall be recognised on consistent basis from the time
for same kind of assets, unless any change is validated (Chang and Yen 2015).
In case the reporting structure of the company is reorganised that may
change the CGU composition that has already allocated the goodwill, the goodwill is
required to be re-allocated to CGU using the relative value method. However, if any
other alternative method better reflects the amount of goodwill associated with the
recognised units, that method can be used. In case where the goodwill cannot be
allocated on non-arbitrary approach to any of the individual CGU, impairment test
shall be carried out at lowest level where the goodwill is internally managed
(Rennekamp, Rupar and Seybert 2014). For this purpose the level shall not exceed
the operating segment before aggregation. Goodwill allocation to CGU may be
resulted into more than one requirement for the purpose of impairment test. For
example, impairment testing of individual CGU or group of CGU to which goodwill is

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assigned. Hence, for allocating the impairment loss to the CGU without considering
the goodwill, it must be assigned on the basis of pro-rata approach on reported
amount of the other assets included in the CGU.

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Part B
Computation of impairment loss
Journal entries in the books of Gali td as at 30th June 2015

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Reference
Bond, D., Govendir, B. and Wells, P., 2016. An evaluation of asset impairment
decisions by Australian firms and whether this was impacted by AASB 136.
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.
Legislation.gov.au., 2019. AASB 136 - Impairment of Assets - August 2015 . [online]
Available at: https://www.legislation.gov.au/Details/F2017C00297/Download
[Accessed 26 Jan. 2019].
Linnenluecke, M.K., Birt, J., Lyon, J. and Sidhu, B.K., 2015. Planetary boundaries:
implications for asset impairment. Accounting & Finance, 55(4), pp.911-929.
Rennekamp, K., Rupar, K.K. and Seybert, N., 2014. Impaired judgment: The effects
of asset impairment reversibility and cognitive dissonance on future investment. The
Accounting Review, 90(2), pp.739-759.
Zhuang, Z., 2016. Discussion of ‘An evaluation of asset impairments by Australian
firms and whether they were impacted by AASB 136’. Accounting & Finance, 56(1),
pp.289-294.