Impairment Loss: Accounting for Goodwill and Cash Generating Units

This report provides a comprehensive analysis of impairment loss in accounting, specifically addressing the treatment of goodwill and cash-generating units (CGUs). It begins with an introduction to impairment loss, emphasizing that assets cannot be valued beyond their realizable value, and the role of impairment in bringing asset values to their realizable worth. The report then delves into the reversal of impairment loss on goodwill, explaining how the asset revaluation process works and the implications of overvaluation. It explains the role of AASB 136, and the complexities of impairment tests for CGUs. The report also includes a practical example of impairment loss calculation for the China Division (a CGU) of Gali Ltd, detailing the carrying amount, recoverable amount, and the allocation of impairment loss to different assets, including goodwill, plant, copyright, machinery and inventory. The report concludes that the measurement of impairment loss while considering the cash generating unit is very much unlike from the calculation of impairment loss of separate asset.

ACCOUNTING

Contents
Introduction...........................................................................................................................................2
Reversal of impairment loss on goodwill..............................................................................................2
Conclusion.............................................................................................................................................4
References.............................................................................................................................................7

Introduction
According to generally accepted accounting principles, an item of either tangible or
intangible assets cannot be valued more than its realizable value in the books of accounts. If
the value of any asset is more than its realizable worth then impairment account is needed to
bring the value of the asset again at the realizable value. When the assets are once recorded at
cost price then after, these values are revalued to take into consideration the market
conditions on a regular basis (AASB 136. 2009). Generally, acceptable accounting principles
allow revaluation of tangible and intangible assets whereas it also needs that revaluation
should not overvalue the amounts in the book of accounts. While calculating the amount of
impairment loss, it is clearly prescribed in ASAB 136 that calculation becomes a bit difficult
in case of cash generating unit. In the crux, the essay brings out a discussion on impairment
loss related with cash generating unit.
Reversal of impairment of goodwill
The prime aim of the impairment loss is to make sure that the given assets are at all not
overvalued in the books of accounts. Bookkeeping principles permit the assets to be revalued
in financial statements. Revaluation can be upwards or downwards. When the revaluated
assets goes upwards then a danger of overvaluation of assets always arises. The asset may be
specified at the overestimated amount in the books of accounts, even after when the
management revalues it (Dagwell, Wines, and Lambert, 2011). For instance- major downfall
in the market value of the item and if same downfall happens in a period of time, then the
value shown in the books of accounts would be more than what is. Falling down of market
value of asset would lead carrying amount in balance sheet to be at overvalued figures
(Gordon, and Hsu, 2017).

According to AASB 136, each asset is examined for impairment and it is simple too.
Whereas, while calculating the cash generating unit, various assets are grouped together to
test the impairment. Cash generating unit is a group of assets, which can generate cash flows
collectively. This signifies that cash flows of whole cash generating unit cannot be produced
by single asset in that group. In this case, the net realisable value of grouped assets is
calculated and impairment test is implied on the same. This group is also known as cash
generating unit (Ernst & Young LLP, 2015).
Impairment loss occurs when carrying amount of cash-generating unit amount is more than
the recoverable amount. Higher amount between fair value and value in use of cash
generating unit is recognised as the recoverable amount. Moreover, value in use is calculated
with regards to existing value of cash flows, which are anticipated to be created by the cash
generating unit over a period (Chen, Shroff, and Zhang, 2017).
It is important to know that impairment loss is booked when an asset or group of assets are
purchased. Impairment loss is based on two different value i.e. fair value and value in use.
Fair value is the unbiased value or market price of an asset. Whereas value in use is, the
amount calculated by adding the revenue from operations of, suppose five years is estimated
in the current year. According to value in use and fair value, impairment loss is booked.
While testing the impairment, an organisation should review the stated carrying amount in
balance sheet (Chang, and Yen, 2015). The organisation should find out the circumstances
indicates that realizable value of tangible or intangible assets may be lower than the value
carried in books of accounts. In such conditions, the tangible or intangible asset can be
impaired to take the carrying amount down to the realisable amount.
It is important to know that according to AASB-136, to compute the impairment amount of
cash-generating unit, carrying amount should be necessarily given. Firstly, arising goodwill

of the business combination is to be allocated to impairment. It is because the goodwill can
not generate cash flows and it is a non-cash item individually of other tangible assets except
inventory. Therefore, it is mandatory to apportion goodwill to the cash-generating unit. It
should comprise of many assets, which are anticipated to get benefit from the collaboration of
certain combination of businesses. This standard states that the entity keeps changing its
composition of the cash-generating unit as per its requirement. The goodwill is allocated to
impairment loss at first, but it is not possible to reverse the same if recoverable amount is
more than carrying amount and bring back the goodwill into the books of accounts
(Whitcroft, Cuevas, Haehner, and Hummel, 2017).
While calculating impairment loss of cash generating unit, goodwill is allocated and the book
amount of cash generating unit should be taken comprehensive of value of goodwill.
Amount of impairment loss will be excess when the carrying amount of cash generating will
be over the recoverable value. At first, impairment loss is allocated to goodwill then to other
assets in the proportion of carrying amount of asset (except inventory) (Cao, Shaari, and
Donnelly, 2018). After allocating the impairment loss to each specific asset and the carrying
amount will be reduced to some extent. Moreover, it should be noticed that maximum
impairment loss allocated to any asset should not exceed the impairment loss computed
where the asset is impaired separately. At last, impairment loss is transferred to the profit &
loss account.
Conclusion
From the above discussion, it can be concluded that the essay provides the treatment of
impairment loss in relation to asset`s cash-generating unit. Entire argument reflects that the
measurement of impairment loss while considering the cash generating unit is very much
unlike from the calculation of impairment loss of separate asset.

Part-B
Impairment Loss calculation of China Division (a CGU) of Gali Ltd
A. Carrying amount of cash generating
unit comprising goodwill
Amount ($)
Plant 802,700.00
Copyright 185,000.00
Machinery 117,000.00
Inventory 50,000.00
Goodwill 42,000.00
Total 1196,700.00
B. Recoverable amount 1070700.00
C. Impairment Loss (A-
B) 126000.00
S. No. Account Titles Debit Credit
1 Impairment Loss
126000.
00
Accumulated Impairment Losses 126000.00
(Being impairment loss recognized)
Accumulated Impairment Losses 126000.00
Goodwill 42,000.0

0
Plant (note*)
30,518.0
0
Copyright
(126000-42000-30518)/(185000+117000)*185000
32,762.1
5
Machinery
(126000-42000-30518)/( 185000+117000)*117000
20,719.
84
Inventory Nil
(Being impairment loss charged from each asset)
2 Profit and Loss
126000.
00
Impairment Loss
126,000.
00
(Being impairment loss charged to profit and loss
account)
Allocation of Impairment on plant
(1196,700-772,182)
30,518.0
0
Allocated impairment of CGU
77,021.9
9
(126000-20000)* 802,700/(802,700.00
185,000+117,000.00)
Impairment loss on plant cannot be allocated more than $30,518.

References
AASB 136. 2009. Impairment of Assets. [Online]. Available at:
http://www.aasb.gov.au/admin/file/content102/c3/AASB136_07-04_ERDRjun10_07-09.pdf
[Accessed on: 01 January 2017].
Dagwell, R. Wines, G., and Lambert, C. 2011. Corporate Accounting in Australia. Pearson
Higher Education AU.
Ernst & Young LLP. 2015. International GAAP 2016: Generally Accepted Accounting
Principles under International Financial Reporting Standards. John Wiley & Sons.
Chen, W., Shroff, P.K. and Zhang, I., 2017. Fair value accounting: Consequences of booking
market-driven goodwill impairment.
Whitcroft, K.L., Cuevas, M., Haehner, A. and Hummel, T., 2017. Patterns of olfactory
impairment reflect underlying disease etiology. The Laryngoscope, 127(2), pp.291-295.
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.
Cao, T., Shaari, H. and Donnelly, R., 2018. Impairment reversals: unbiased reporting or
earnings management. International Journal of Accounting & Information Management,
26(2), pp.245-271.
Gordon, E.A. and Hsu, H.T., 2017. Tangible long-lived asset impairments and future
operating cash flows under US GAAP and IFRS. The Accounting Review, 93(1), pp.187-
211.