Corporate Accounting: Impairment Loss Analysis of Goodwill and CGUs

This report provides a detailed analysis of impairment loss in corporate accounting, focusing on goodwill and cash generating units (CGUs) under IAS 36. It explores the principles of impairment testing, the allocation of goodwill, and the recognition of impairment losses. The report discusses the rela...Read More

Running head: CORPORATE ACCOUNTING
Corporate accounting
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CORPORATE ACCOUNTING
Impairment loss for cash generating units including goodwill:
Introduction:
The impairment reviewing of goodwill by organization is done at level of cash
generating unit and the impairment testing of goodwill as per the IAS 136 are performed
at level that does not exceed operating segments. Allocation of goodwill acquired in
business combination is done at cash generating unit. It is essential for organization to
alter the composition of one or more acquired cash generating unit to which the
allocation of goodwill as been done.
One of the basic principles of impairment as per IAS 136 is that the carrying
value of assets should not be more than their recoverable amount that is higher of value
in use and fair value of assets less costs. In this regard, it is required by entities to tests
all the assets that are in the scope for potential impairment for goodwill and intangible
assets having indefinite useful lives. It is required by the standard that recognition of any
impairment loss should be done as an expense in profit or loss that are carried out at
costs. Impairment loss is first recorded against revaluation gains that are recognized
previously if the revaluations of affected assets are done in accordance to IAS 16
property, plant and equipment (Avallone and Quagli 2015). For the assets other than
goodwill, recognition of impairment loss in prior period is required to be reversed. This
reversal should be done when there are any alterations in the estimates for determining
recoverable amount of assets. There should be extensive disclosures regarding the
recognition of impairment loss and carrying out impairment testing.

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Discussion:
Recognition of loss related to impairment is done to the extent that assets
recoverable amount is less than their carrying amount. Losses resulting from
impairment for the assets that are carried historical costs are recognized immediately as
an expense in the statement of profit and loss. If under IAS 16 or 38, recognition of
impairment loss is done as a decrease in revaluation if the revalued assets are impaired
assets. Such decrease in revaluation is immediately recognized in the comprehensive
income. This has the impact in terms of declining value that reduces revaluation surplus
of assets. Recognition of impairment loss is done immediately in the statement of profit
and loss as an expense and this is done to the extent that revaluation surplus is less
than impairment loss. Impaired assets carrying amount after the recognition of
impairment loss will never be decreased to below the higher of recoverable amount of
individual assets an zero (Chen et al. 2014).
When the group of cash generating unit (CGU) or a CGU where the allocation of
goodwill done is tested for the purpose of impairment, then firstly allocation of loss
arising from impairment is performed to reduce the carrying amount of goodwill.
Allocation of any existed remaining loss is attributed on pro rata to the other assets of
CGU based on carrying amount each asset in CGU. Nonetheless, assets carrying value
in this regard is never reduced to below of higher of recoverable amount of individual
assets and zero. Allocation of impairment loss for a group of CGU will have the identical
process as that of single CGU (Knauer and Wöhrmann 2016).
Recognition of impairment loss for an asset other than goodwill is done by
gathering information from external and internal sources and such loss have decreased

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or they no longer exist. Some internal indicators indicating recognition of impairment
loss incorporates favorable and positive changes in the performance and use of assets.
Market conditions and considerable favorable changes in the value of assets are some
of the external indicators indicating impairment loss (Johansson et al. 2016).
Consequently, reversal of assets other than goodwill is completed if there is
improvement in estimates for determining recoverable amount of CGU and assets. It
was done since the last recognition of impairment loss. However, change or
improvement in general market scenario and passing of time cannot form the basis of
recognition of impairment reversal. Assets carrying amount should not be less than their
adjusted carrying amount when impairment reversal has been recognized, as it would
have determined there are no impairment losses. However, even if there is no reversal
of impairment loss and there is no indication of impairment existence, organizations are
required to adjust or review the residual value, depreciation methods and remaining
useful life of assets. Reversal of impairment losses for goodwill is specifically prohibited
by IAS 136 (Glaum et al. 2017).
Any losses arising from impairment at the date of transition are recorded by
adjusting retained earnings. Goodwill that is acquired in business combinations is
allocated to CGU acquirer. Impairment testing of goodwill under IAS 136, Impairment of
Assets is performed at level that should not be more than operating segments.
Recoverable amount of individual assets are same as that of CGU. Assets carrying
amount involves assets that are exclusively and directly attributable to the CGU and
assets allocation that are not directly attributable on consistent and reasonable to CGU
(Glaum et al. 2015). When computing disposal of profit and loss, goodwill that are

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incorporated in the carrying amount of operations and are attributable to disposition.
Assets carrying amount within CGU s required to be reduced below the highest of value
in use, fair value minus cost to sell and zero when impairment loss is allocated to CGU
(Bepari et al. 2017). Impairment that has not be allocated should be reallocated to other
assets of CGU and it is subjected to same limits (accaglobal.com 2018). Until, there is
full allocation of impairment loss, this process would continue. Impairment loss
recognition should not lead to liability recognition unless the definition of liability is met
under reporting standard.
Conclusion:
Impairment loss allocation as per IFRS 3, Business combinations brings in new
opportunities when dealing with goodwill. Goodwill that involves CGU is tested annually
for the impairment purpose. Impairment is calculated by comparing recoverable amount
of CGU with the grossed up amount. Only, the share of impairment loss of holing
company is recognized in the statement of profit and loss. Entities electing the
employment of fair value method and using the full goodwill method, impairment loss
that is charged to loss and profit is higher. Under the standard IAS 136, losses arising
from impairment are allocated to goodwill in first stage and subsequently it is done to
identifiable assets using pro rata basis.

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References list:
Avallone, F. and Quagli, A., 2015. Insight into the variables used to manage the
goodwill impairment test under IAS 36. Advances in Accounting, 31(1), pp.107-114.
Bepari, M.K., Bepari, M.K., Mollik, A.T. and Mollik, A.T., 2017. Regime change in the
accounting for goodwill: Goodwill write-offs and the value relevance of older
goodwill. International Journal of Accounting & Information Management, 25(1), pp.43-
69.
Chen, W., Shroff, P.K. and Zhang, I., 2014. Fair Value Accounting: Consequences of
Booking Market-driven Goodwill Impairment.
Glaum, M., Landsman, W. and Wyrwa, S., 2017. Goodwill Impairment: The Effects of
Public Enforcement and Monitoring by Institutional Investors.
Glaum, M., Landsman, W.R. and Wyrwa, S., 2015. Determinants of Goodwill
Impairment: International Evidence.

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Glaum, M., Landsman, W.R. and Wyrwa, S., 2015. Determinants of Goodwill
Impairment under IFRS: International Evidence. Working Paper, available at: http://ssrn.
com/abstract= 2608425.
Johansson, S.E., Hjelström, T. and Hellman, N., 2016. Accounting for goodwill under
IFRS: A critical analysis. Journal of International Accounting, Auditing and Taxation, 27,
pp.13-25.
Knauer, T. and Wöhrmann, A., 2016. Market reaction to goodwill
impairments. European Accounting Review, 25(3), pp.421-449.
www.accaglobal.com, A. (2018). Impairment of goodwill and CGUs | ACCA Global.
[online] Accaglobal.com. Available at:
http://www.accaglobal.com/in/en/member/discover/cpd-articles/corporate-reporting/
goodwill-cgus.html [Accessed 17 Jan. 2018].