Analysis of Impairment Loss on Cash Generating Units

This essay delves into the concept of impairment loss, focusing specifically on cash-generating units (CGUs) excluding goodwill. It elucidates the fundamental principle that assets should not be carried on the financial position statement above their recoverable amount, which is the higher of fair value less costs to sell and value in use. The essay explains the comparison between the asset's carrying value and recoverable amount, and details when impairment occurs. It covers the allocation of impairment loss, particularly emphasizing the impairment loss recognized in profit or loss. The essay also discusses impairment reviews, annual impairment tests for assets like goodwill, and the reversal of impairment losses. It further examines how impairment loss is treated for revalued assets and the testing of CGUs, which are the smallest identifiable groups of assets generating independent cash inflows. The essay explores the allocation of goodwill to CGUs, the role of IAS 36, and amendments issued by the International Accounting Standards Board (IASB). It also addresses the handling of business combinations, the measurement of non-controlling interest, and the allocation of impairment losses, including the calculation and allocation of impairment charges to individual assets, ensuring that the carrying amount of assets in a CGU does not fall below certain values.

Essay on “Impairment loss on Cash generating Units excluding goodwill”

The basic principle of the impairment is that an asset might not be carried on the financial
position statement which is found above the amount of recovery. This is higher of the asset fair
value less cost to sell and its value is then seen to be in use. The asset carrying value is then
compared to the recoverable amount and the assets are seen to be repaired when the former
exceeds the later assets. The impairment is then allocated for the asset with focusing on the
impairment loss that has been recognized in profit or loss. The asset seems to be subjected for the
impairment review which needs to be tested for the indication that the assets might be impaired.
This are certain assets like goodwill and the indefinite lived intangible assets that are for the
impairment done annually even if there has been no indicator for impairment (Vogt, Pletsch,
Moras & Klann, 2016). The impairment loss, if recognized in the prior times for any asset
excluding goodwill needs to be reversed, if there is a change in estimates which is used to
determine about the recoverable amount for the assets. The impairment loss needs to be
recognized immediately in the profit and loss till there are assets which are carried out at a
revalued amount and then set in accordance to the other Standard with revaluation model of IAS
16. The impairment loss for a revalued asset is recognized in the comprehensive income with the
extent that the loss does not exceed the revaluation amount. The impairment loss is then
revaluated for the asset which reduces the revaluation surplus for that asset (Hellman, 2016).
The asset generates the cashflow which are independent of the other assets and there are
tests for the impairments for the cash generating units. They are smallest identifiable group of
assets that help in generating the cash inflow and are independent of the cash inflows from other
assets or the groups. The goodwill is acquired with the combination that includes the allocation
to CGU which is expected to bring benefit from the combination of business. The largest groups
of CGU are then permitted for the goodwill with testing that is at a lower level and the operating
segment. Under IAS 36, the Impairment of Assets, with impairment testing of the goodwill helps
in performing at a level which is not larger than the segment of operations that are set at IFRS 8,
Operating Segments.
For dealing with the lack of clarity, International Accounting Standards Board (IASB)
has been able to issue the amendment for IAS 36 which is mainly clarifying about CGU that
cannot be larger than the operating segment, till aggregation is there (Lobo et al., 2017). There
are entities which needs to ensure about the alignment with the other operating segments and the

recoverable amount of CGU is considered to be same for any type of an individual asset. The
carrying amounts of CGU includes the assets which are directly there and are attributable for it to
work with proper allocation of the assets (Al Dabbous et al., 2015). The consistency is based on
the allocation to CGU where the goodwill has been allocated and the entity tend to dispose of the
operations in it. The entity might need to work on the handling of business and the changes
related to the composition of one or more CGU, for the allocation of the goodwill. The situations
are attributable for the operations that are moved mainly in between and calculated mainly on the
basis that are relatively set for the fair values of the operations and operations are transferred
(Filip et al., 2015). The liabilities that are related to the financial CGU are not considered to be
allocated for determining about the amount that needs to be carried with relative cashflow which
will exclude any type of the calculations of impairment. The impairment charge is calculated at
the time of allocating it to the individual assets where the goodwill is allocated for the CGU. This
is done to the other assets which is for the pro-rata basis, with the amount that is to be carried
and set for CGU. The allocation of the impairment loss is to carry the amount for the assets in
CGU which should not reduce below the highest values of the fair value less costs of selling, the
values which are in use, and zero.
Any unallocated impairment should then be also reallocated for the CGU other assets that
is subjected for the same limit. It could lead to the processing and continuing till there is any
impairment loss that has been allocated completely. The CGU assets are reduced for the highest
asset fair value costs to sell, with values in use. The recognition of impairment loss should not
lead to the recognition of the liabilities. Here, IFRS 3, Business Combinations is able to bring the
change to the different and new requirements mainly for handling the allocation of impairment
losses (Avallone & Quagli, 2015). This entity is able to acquire a partial interest with subsidiary
that can chosen the acquisition-by-acquisition basis to measure the non-controlling interest. The
measures can be then set at NCI with proportional share for the fair value of the subsidiary that is
defined at an identifiable net assets. The entry choice of method directly affects the amount of
the goodwill which needs to be recognized in the consolidated form of financial statement. Here,
the partial goodwill method tends to hold the shares of the company which is recognized under
the full goodwill method that includes the holding company and NCI shares of goodwill located
in subsidiary.

References
Al Dabbous, N., Abughazaleh, N. and Al-Hares, O., 2015. The Effect of Audit Quality and Audit
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test under IAS 36. Advances in accounting, 31(1), pp.107-114.
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