Financial Accounting Project: Impairment Loss Analysis & CGUs

This project focuses on impairment loss for cash-generating units (CGUs) excluding goodwill. It defines impairment loss as the reduction in an asset's value when its recoverable amount is less than its carrying value, explaining the calculation using net carrying value and fair market value. The project outlines the process of identifying impairment factors, estimating fair market value, and comparing it to the carrying value. It emphasizes the importance of testing assets for impairment, especially within CGUs, which are the smallest identifiable groups of assets generating independent cash inflows. The project details the calculation of impairment loss, including the allocation of loss within a CGU, and the assessment of assets based on IAS 36. It also includes a case study with calculations, focusing on determining impairment loss, the allocation of loss to different assets (goodwill, machinery, copyright), and the corresponding journal entries. The project concludes with a list of relevant references.

PROJECT

PART A
Impairment loss for cash generating units excluding goodwill
Impairment loss can be defined as a reduction in the value of an asset when the
recoverable amount of the asset is less than its carrying value (Waters-Wood And et. Al, 2012).
Net Carrying value is the difference between the acquisition cost of the asset and depreciation
charged on it. Recoverable amount can be defined as the prevailing fair market value of the asset,
if the asset sell it today. Impairment occurs when the net carrying value exceeds the Fair Market
Value of the asset. It is calculated by this formula is Asset's acquisition – Depreciation = Net
carrying value. For example, if the machinery whose net carrying value is $50,000 and its
prevailing recoverable amount in market is $20,000. Since Carrying value is greater than
recoverable amount, the asset is said to be impaired. This asset will be treated as a loss in the
books of the company even if it provides a tax benefit currently (Almardini and et. Al, 2017). For
calculate impairment loss there is first identified the factors that related to the asset's impairment.
In this include factors such as changes in market conditions, turn over in workforce, new
legislation or the asset simply became too old or outdated. After that estimate fair market value
of assets which were sold in the market. If fair market value recognised after that it is compared
with carrying value of the assets that is listed on the financial statement of the company. From
the view of impairment, all assets are tested for impairment where there is an indication that the
assets may be impaired. Although definite assets such as intangible assets are tested for
impairment annually even if there is no impairment indicator. Most of the assets are tested for
impairment in the group of assets that is known as cash generating units.
Cash generating unit (CGU) is the smallest identifiable group of assets that generates
cash inflows that are largely independent of the cash inflows from other assets or group of assets.
An individual asset does not provide correct fair market value of the assets. Therefore a group of
similar assets is taken to evaluate the impairment of an asset (Neri and et. Al, 2014). This group
is known as CGU. CGU includes only those asserts that can be tested for impairment on an
annual basis. For ascertaining the net carrying value of the CGU, it is important to use a base or
method which is conformable with the way fair market value of CGU is calculated. For example
– The XYZ company have tangible assets like plant ($40000), equipment ($6000) and building
($10000) so there is create group of intangible assets that is known as cash generating unit
($110000). After that assesses of CGU for impairment and calculate carrying amount and

recoverable amount. In allocating the impairment loss to a CGU the carrying amount of each
asset with in the CGU should not be reduced below the highest of - (a) Fair value less costs to
sell (b) Value in use (c) Zero
At the end of financial reporting period, there is assesses of each assets whether there are
any indicators of impairment for any assets in the scope of IAS 36. In broadly, there is
requirement to tested following assets for impairment regardless of whether an indicator exists –
(1) Intangible assets not yet available for use (2) indefinite life intangible asset. After that
identify indicators that are related to impairment such as outside sources of information – (1)
decline in the market value of assets (2) market interest rates or other market rates of return on
investment have increased (3) modification in technology and market (4) legal and economic
environment impact (5) net assets of the entity that are greater than its market capitalisation
(Gaston and Song, 2014). Internal sources of information – (1) Physical damage of assets (2)
economic performance of an asset (3) harmful changes when used assets in different manner.
There is measure recoverable amount of asset through Recoverable amount = Higher of fair
value or value in use.
An amendment to IAS 36 has clarified that a cash generating unit can not be larger than
an operating segment before aggregation. There is allotment of an impairment loss in a CGU is
firstly deduct the carrying amount of fixed assets to the CGU and after that valuation carrying
amount of each assets. The carrying amount of individual assets with in a CGU must not be
reduced below the highest of fair value less costs of disposal (if determine), value in use (if
determinable) or zero. The impairment testing for intangible assets will be tested on annual basis
and it will shows in final report of the company. Different intangible assets may be tested for
impairment at different times. There is timing for recoverable amount testing because it is
initially recognised during the current period and assets shall be tested for impairment before the
end of the current annual period (Huikku, Mouritsen and Silvola, 2017.
In the accounting treatment of an impairment loss is as follows – Firstly identify of
carrying amount of cash generating unit that are related to same type of assets. After that
determine of higher fair value and less amount to sale out and the value is use. From remaining
amount calculate impairment loss if the recoverable amount is less than the carrying amount.
Recognise the impairment loss on the basis of each assets in cash generating unit. After that

assess the limits in the standards that are related to carrying amount of an individual asset in
CGU shall not be reduce to below its fair value less cost to sell ) (Sooriyakumaran, L., 2016) .
PART B
Gali Ltd calculated the value in use of the division to be - $774,700
If the fair value less costs of disposal of the plant is - $558,889
Account Carrying amount
Plant $580,700
Less – Fair value of the disposal $558,889
Impairment loss $21811
Account Carrying amount
Copyright $134,000
Machinery $84000
Inventory $36000
Goodwill $30000
Total carrying amount $284000
Less – Recoverable amount $215811
Impairment loss $68189
There is total impairment loss is $21811 + $68189 = $90000
Goodwill is written down by $30000 and balance has been $60000 has been written off across
other relevant assets -
Account Carrying
amount
Proportion Allocation of loss Net carrying
amount
Machinery $84000 84 / 218 $23120 $60880
Copyright $134000 134 / 218 $36880 $97120
Journal entry

S.No. Particulars Debit Credit
1 Impairment loss
To Goodwill
To Accumulated depreciation and
impairment losses – machinery
To Accumulated depreciation
and impairment loss – copyright
$90000
$30000
$23120
$36880
From the above calculation there is calculate impairment loss from CGU and it is divided
in goodwill, machinery and copyright. There is total impairment loss is $90000 and goodwill
written down by $30000 so remaining impairment loss is $60000. From remaining amount
written down impairment loss from machinery and copyright in the proportion 84:134. so after
calculation net carrying amount received of machinery is $60880 and copyright $97120.

REFERENCES
Books and journal
Waters-Wood, S. M. And et. Al, 2012. Failure to learn from repeated mistakes: persistent
decision-making impairment as measured by the iowa gambling task in patients with
ventromedial prefrontal cortex lesions. Journal of the International Neuropsychological
Society. 18(5). pp.927-930.
Neri, L., and et. Al, 2014. Constipation severity is associated with productivity losses and
healthcare utilization in patients with chronic constipation. United European
gastroenterology journal. 2(2). pp.138-147.
Gaston, E. and Song, M. I., 2014. Supervisory roles in loan loss provisioning in countries
implementing IFRS (No. 14-170). International Monetary Fund.
Huikku, J., Mouritsen, J. and Silvola, H., 2017. Relative reliability and the recognisable firm:
Calculating goodwill impairment value. Accounting, Organizations and Society. 56.
pp.68-83.
Sooriyakumaran, L., 2016. Impairment of Assets and Market Value of Share: A Study of Listed
Manufacturing Companies in Sri Lanka.
Almardini, R. I., end et. Al, 2017. Renal impairment and complication after kidney transplant at
Queen Rania Abdulla children's hospital. Experimental and clinical transplantation:
official journal of the Middle East Society for Organ Transplantation. 15(Suppl 1),
pp.99-103.