Essay on Impairment Loss for Cash Generating Units (Finance)

This essay provides a comprehensive overview of impairment losses for cash generating units (CGUs), excluding goodwill, within the framework of Australian Accounting Standards Board 136 (AASB 136). It defines impairment losses and CGUs, emphasizing the importance of these concepts for accurate financial reporting. The essay details the measurement process, including the calculation of recoverable amounts (fair value less costs to sell and value in use) and carrying values. It explains how impairment losses are recognized and allocated, with a specific focus on the order of allocation (first to goodwill, then to other assets). Furthermore, the essay discusses the reversal of impairment losses and the conditions under which this can occur. The essay concludes by highlighting the significance of regularly assessing CGUs for impairment indicators to avoid overvaluation of assets and ensure financial statements reflect a company's true value. It includes a practical example of impairment loss calculation and the related journal entries.

Essay: Impairment Loss for Cash Generating Units Excluding Goodwill
Introduction
In order for a company to perform its daily operations, it will need to invest in assets
such as machinery, property, plant and equipment, factories, land etc. The purpose of
these assets is to assist the company to generate revenue. However, as time passes
by, an asset can become obsolete or damaged resulting in a change in value. This
change in value is referred to as impairment.
However, it is rare to find an asset that generates cash flows independent of other
assets. For example, an airline company will own planes and licenses which it will list
under its assets. If each of these assets is invested in alone, it cannot generate cash
flows. In other words, the airline cannot own planes without a license to operate.
Similarly, the airline cannot have a license without owning a few planes. This
combination of assets is what is referred to as a cash generating unit (CGU). Just like
individual assets, a CGU can also be impaired
In 2008, one of the scandals witnessed by ABC Learning was related to overvaluation of
assets, specifically the improper valuation of its childcare subsidiaries and goodwill
(Koch, 2009).Consequently, there has been a lot of attention to the impairment
practices of companies (Andersson & Wenzel, 2014).
In this essay, I discuss how a company should recognize impairment losses and the
steps they should take to measure these losses with respect to cash generating units
excluding goodwill.
Definition of Impairment Losses and Cash Generating Units
The amendments on how to treat impairment losses in cash generating units are
contained in Australian Accounting Standards Board 136 (also known as AASB 136).
AASB 136 defines an impairment loss as follows- carrying amount of CGU less

recoverable amount of cash generating unit (AASB, 2015). In general, the recoverable
amount is the amount that is obtained via using or selling an asset.
AASB 136 is applicable to the following list of assets- land, goodwill, building,
machinery, intangible assets, equipment, subsidiaries, joint ventures, and subsidiaries.
However, the rules do not apply to the following assets- inventory, contract assets,
investment property or insurance contract (AASB, 2015, p. 6).
Cash Generating Units are defined as assets/group of assets that are able to generate
cashflows independent of another group of assets (AVC Learning, 2017).
Measurement of Impairment Losses for a Cash Generating Unit
AASB 136 paragraph 9 and 10 requires assessment of assets and CGUs for
impairment to be done at end of reporting period and on an annual basis for intangible
assets and goodwill (AASB, 2015, p. 8).
If there are indicators that indeed a Cash Generating Unit is impaired, then the company
must calculate the CGU’s recoverable amount and compare it to the CGU’s carrying
value (AASB, 2015).
The carrying amount is the value of the asset as stated in the financial statement less
accumulated depreciation and impairment losses (AASB, 2015, p. 7).
The CGU’s recoverable amount is calculated as the maximum of value in use and fair
value less cost to sell. We define the fair value less cost to sell as how much a company
will realize from selling the CGU. The value in use is the present value of discounted
future cash flows that is attached to using this combination of assets (AASB, 2015).
When a CGU’s recoverable amount is lower than the carrying value, then the CGU is
impaired. Otherwise, when the CGU’s recoverable amount is greater than its carrying

value and there have been no previous impairments, the CGU is not impaired
consequently, the company should do nothing (AASB, 2015).
An impairment loss in respect to a CGU is recognized by reducing its carrying amount.
The loss will then first be allocated to any goodwill, then next it will be allocated to other
assets within the CGU in proportion to their carrying amount (AVC Learning, 2017).
It is important to ensure that each asset’s carrying amount within a CGU does not fall
below the maximum of the following numbers:
a) zero
b) value in use
c) and fair value less costs to sell (Holt, 2012)
Subject to limits, the unallocated amounts would then be allocated again back to other
assets within a Cash Generating Unit (Holt, 2012).
Reversal of Impairment Losses in Cash Generating Unit
Impairments can be reversed when the conditions which led to its impairment in the first
place has been lifted. AASB 136 paragraphs 110 require these conditions to be
assessed annually (AASB, 2015, p. 21).
If conditions have been lifted, then the company should calculate the recoverable
amount. If carrying value is less than the CGU’s recoverable amount then impairment
reversal can take place subject to a limit of no more than the ceiling. AASB 136
paragraph 117 defines the ceiling as the asset’s carrying amount, had no impairments
taken place (AASB, 2015, p. 22).
Conclusion
Many assets generate cash flows in a combination as opposed to individually. This
group of assets is referred to as cash generating unit or simply a CGU. Similarly to
individual assets, a CGU can change in value over time due to damage of individual

assets and other factors. Therefore, it is important that the company regularly checks for
impairment indicators, to assess if there are changes in values. The purpose of this
check is to avoid reporting of overvalued assets which could distort a company’s
financial statements or forecasts and thus not reflect its true and fair value.
References
AASB. (2015, August). AASB 136: Impairment of Assets. Retrieved from Australian Accounting Standards
Board: http://www.aasb.gov.au/admin/file/content105/c9/AASB136_08-15.pdf
Andersson, S., & Wenzel, F. (2014). Application of IAS 36- Impairment of Fixed Assets. A qualitative
study. University of Gothenburg, School of Business, Economics and Law.
AVC Learning. (2017, April 1). CGU and Allocation of Impairment Loss. Standard You Tube License.
Holt, G. (2012, March). An amendment to IAS 36 . Retrieved from ACCA GLOBAL:
http://www.accaglobal.com/uk/en/member/discover/cpd-articles/corporate-reporting/
goodwill-cgus.html
Koch, D. (2009, November). The ABC of a Corporate Collapse. CPA Australia.
Vogt, M., Pletsch, C., Moras, V., & Klann, R. C. (2015). Determinants of Goodwill Impairment Loss
Recognition. Sao Paulo: Paper presented at the XV USP Controlling and Accounting Congress.

Question 2
Recoverable value = Maximum (Fair value less cost to sell, Value in use)
=$335,000
Carrying value of CGU = $374,000
Since recoverable amount of the CGU (335,000) < Carrying value (374,000), then this
asset is impaired
Impairment loss = 374,000 – 335,000 =39,000
Note- The impairment loss in respect to a CGU is allocated first to goodwill, then other
assets in proportion to their amounts. However, Inventory is not subject to impairment
loss
Journal entries
Debit Credit
30-Jun 15 Loss on Impairment
39,0
00
Acc depreciation& Impairment
loss-Plant
18,8
41
Acc. depreciation & Impairment
loss-Equipment
4,3
71
Acc. depreciation & Impairment
loss-Fittings
2,7
88
Account Carrying Amount Impairment
Loss
Plant 250,000.00 18,840.58
Equipmen
t 58,000.00 4,371.01
Fittings 37,000.00 2,788.41
Inventory 16,000.00 -
Goodwill 13,000.00 13,000.00
Total 374,000.00 39,000.00