A Detailed Essay on Impairment Loss for Cash Generating Units

This essay discusses the concept of impairment loss for cash-generating units (CGUs), focusing on identifying assets whose recorded cost exceeds their recoverable amount. It explains the process of re-recording the fair value of assets to ensure accurate financial data. The essay details how to calculate impairment loss by determining the recoverable amount of assets within a CGU, emphasizing that the assessment should be conducted for the entire CGU when individual asset losses cannot be determined. It further elaborates on the characteristics of CGUs, their role in generating cash flows, and the importance of consistent reporting. The essay also addresses the allocation of impairment losses, ensuring that the carrying amount of assets is not unduly affected, and highlights the significance of proper disclosure of impairment losses and their reversals in financial statements. The document is available on Desklib, a platform offering study tools and resources for students.

CORPORATE ACCOUNTING

ANSWER:
The process of impairment refers to the identification of assets whose cost value is recorded
more than the amount that can be recovered from them. Therefore this process is mainly a re-
recording of the fair value of the assets of an organization so that a proper set of data can be
evaluated. The calculation of the impairment loss can be done by determining the recoverable
amount of the asset that was part of the cash generating unit. If there is any such case in
which the individual loss on impairment of an asset cannot be determined then the
recoverable amount of the whole cash-generating unit is needed to be evaluated. The value of
the said that can be recovered will not be calculated if all the cash flows of that particular
asset are dependent on the use of other assets. Therefore, for finding impairment losses in
such cases, assessment of the cash generating unit as a whole should be evaluated. (Atkinson,
2012)
The smallest group of assets of the entity that helps to generate cash flows in an organization
is the cash generating unit. The external party receives these kinds of cash flows which are
generated by the smaller units. Also, in order to find the relation between the assets about
their dependence on each other, there are many facts that should be considered like
monitoring the use and decision of management with respect to the usage and disposal of the
organization's assets. (Girard, 2014)
If it is observed that the prevailing market is having a huge demand for the goods that are
being produced by these assets, then these assets are collectively named as cash generating
units. Even if all the goods are manufactured and consumed by the organization itself, then
also they will be considered as a cash-generating unit for the organization.
It should be noted that the assets should form a cash-generating unit that should be reported
from time to time until there are no changes required to be made because of certain
circumstances (McLaney & Adril, 2016). In some cases, when it is required by the
organization to transfer an asset from one of the cash generating units to another, then it is
very important that the firm should disclose this transfer in their reports. The organization
needs to look after any type of losses or impairment charges that have been incurred and then
report it so that no other circumstances can further affect the accounts of the organization.
For the evaluation of the impairment losses of the cash generating unit, it is important that we
ascertain the amount which can be recovered from that particular unit. The recoverable

amount from the cash generating unit can be higher than the fair value of the Asset. The cost
of the CGU should also be included in the evaluation of the assets that contribute to the
process of revenue generation. Also, if there is any type of liability that is directly related to
the Asset of the cash generating unit, then it should also be recorded as has helped to generate
revenue. (Paul, 2014)
The impairment loss on the cash generating units can be evaluated in the same method that
has been followed for the calculation of losses of the normal assets. If the recoverable amount
of the specific cash-generating unit is much below than the cost, then the loss that has been
incurred because of that particular CGU should also be recorded in the books of accounts.
The loss that has been incurred will be treated as any other losses on regular assets, and it will
be deducted from the carrying amount of the asset so that the value can be reduced. (Pratt,
2009)
At the time of allocating the losses to the particular assets of the CGU, it must be followed
that the deducted amount does not affect the carrying amount of the asset below the higher of
following:
1. Value in use
2. Zero
3. Fair value net of sales expenses
The losses that were still not distributed will be managed in the remaining assets with the
help of pro rata basis. (Schroeder, 2014)
If in any situation the recoverable amount of the individual assets is not being determined,
then the impairment for such assets will be assessed on the basis of the carrying amount
exceeding the fair value of the net impairment loss, as stated above. The cash generating unit
of a particular asset if is not impaired, then there is no requirement for the adjusting the
carrying amount even if the asset has been individually impaired.
If there is an asset that does not generate cash then such asset should not form part of the cash
generating unit and hence the carrying amount should also be included. Only the part of the
asset that helps in providing any kind of service to the company should form part of that
cash-generating unit (Scott, 2014). The carrying amount of the non-cash generating unit will

have an impact on the impairment loss procedure as on the reporting date of the financial
statement.
It is very important for the organization to calculate the impairment losses and record it in the
books of accounts in order to carry out the impairment test successfully. If the test that has
been carried out in order to assess the impairment losses is successful, then the steps that
have been mentioned above should be considered for moving forward. The organization is
also said to state any of the impairment loss that has been incurred by it during the last fiscal
year, so as to work in accordance with the principle of proper disclosure of the financial
statements. Any type of reversal of losses should also be reported as it should also be
allocated among the cash generating units by the using the pro rata basis. The fair value of the
assets should also reflect changes if there are any reversal of losses observed. (Taillard, 2013)
Hence, it should be noted that the organization is carrying out all the calculations in a proper
manner, so that the statements can be maintained by keeping in mind the principle of
disclosure in order to evaluate the impairment of the cash generating units.

Bibliography
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Kingdom: Pearson.
Paul, K. (2014). Managing extreme financial risk. Oxford: Academic Press, Elsevier.
Pratt, J. (2009). Financial Reporting for Managers: A Value-Creation Perspective. Hoboken:
John Wiley & Sons, Inc.
Schroeder, R. G. (2014). Financial Accounting Theory and Analysis: Text and Cases.
Hoboken: John Wiley & Sons.
Scott, W. R. (2014). Financial Accounting Theory. Toronto: Pearson.
Taillard, M. (2013). Corporate finance for dummies. Hoboken, N.J.: Wiley.