IAS 36 & Impairment Loss of Cash Generating Units: Gali Limited

This report provides an overview of impairment loss related to cash-generating units (CGUs), excluding goodwill, and references IAS 36. It defines impairment, discusses goodwill and CGUs, and explains the relevant provisions from IAS 36 for impairment calculations. The report covers internal and external indicators of impairment, methods for assessing impairment, and the reversal of impairment losses. It emphasizes the importance of not carrying assets at values exceeding their recoverable amounts. Furthermore, the report includes a solved numerical example for Gali Limited for the year ended June 30, 2015, illustrating the application of impairment principles and providing relevant journal entries, alongside disclosure requirements for financial statements.

1
By student name
Professor
University
Date: 25 April 2018.
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Executive Summary
In a report, we will discuss on the topic of impairment loss of cash generating unit except
goodwill. The introduction on the topic of “Impairment” has also been given in the given
assignment. The main topic discussed here are impairment, and the goodwill and cash generating
unit along with the provision from IAS 36, which deals on impairment calculations. Finally for
the clarity of all concepts of impairment and to give the entire idea of impairment of assets, one
sum has been solved for the company Gali Limited for the year ended 30th June 2015 and
impairment entries have been given.
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Contents
Background..................................................................................................................................................3
Partnership Deed – Features and Analysis..................................................................................................3
Conclusion...................................................................................................................................................4
References...................................................................................................................................................4
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Introduction and concept of cash generating unit
The accounting standard 28 and IAS 36 should be applied for the impairment of all assets
excluding impairment of inventory, financial assets, deferred tax assets, construction contract,
agricultural assets, and non-current assets being held for sale. Impairment means permanent
decline in the value of assets, which means the carrying amount of an assets exceeds its
recoverable amount (Carlin, 2011). The primary objective of impairment of the asset is that the
assets should not be disclosed in the books at a value higher than the recoverable value. The
company need to focus on all those factor which impair the value of assets. In case, they exist,
the company needs to take the impact of impairment on the value of assets. Some assets, which
need to be assessed on annual basis for impairment, like goodwill and intangible assets. However
in case of other assets can be impaired only when the indicators of impairment exists. If a single
assets able to generate revenue on standalone basis and is completely independent of other units
then impairment regarding this assets assessed separately or else the smallest group of assets that
can be recognised and is capable of generating revenue should be assessed. Such smallest group
of assets is called cash generating unit (Alexander, 2016). In case in future some positive
indicator exist regarding those assets, then the earlier impairment cost can be reversed based on
the relevant indicator. However, in case of goodwill, once it is impaired, it cannot be reserved at
any point of time.
Concepts on Impairment of CGU and its reversal
In case indicator of impairment loss or impairment loss already posted in the books do exist, then
the company need to assess the individual assets as well as the CGU for impairment loss. In case
the result is positive, first we need to calculate the value in use and the fair value less cost of
disposal. The higher of the two will be called the recoverable value. Indicators can be either
internal or external (Bromwich & Scapens, 2016). Some of internal indicator are like
obsolescence, physical damage to the assets of the company, being kept idle or held for sale, no
economic benefit in coming future, etc. Apart from all this there are some external indicators like
book value of assets is greater than market capitalization, market value falls down sharply or the
negative change in the tastes and preferences of the customer or due to technology improvement
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in the market existing technology become useless. Due to this entire factor, which is not under
the control of company, they may affect the entity on standalone basis or the entire industry as a
whole. This is just a sample list and not an exhaustive one. The company need to give focus on
many other relevant factor like impairment methods, the estimated useful life and residual life of
the asset.
At the time of the impairment of assets, first we need to allocate the impairment loss towards the
goodwill and after that if any impairment loss exists it should be allocated to other assets. The
next area, which is complex, is how the impairment loss to be reversed is to be determined
(Belton, 2017). The same method applied in impairment assessment is applied here to calculate
impairment loss. If any point of time we realise that positive indicators of impairment do exists,
and the carrying value of the asset is less than fair value less cost of disposal or the value in use,
then the impairment loss posted earlier to the profit and loss account needs to be reversed and if
any amount exists, should be transferred to revaluation account. Sometime, when it is not
possible to calculate the fair value of assets, then the value in use is taken as the recoverable
value. The fair value of the asset is to be determined as per the provision of fair value
measurement under IFRS 13 (Carlin, 2009). The value in use calculated based on variable factors
like time value of money, the discounting factor, present value of estimated future cash flows,
ability of the asset to generate the cash flows and other factors including the amount of
uncertainty. The cash flows are forecasted based on past and current data. The interest rate is
calculated after considering the effect of the time value of money and other market conditions.
The rate should be that the investor would expect to earn while investing their money.
Conclusion and Disclosure requirements
Based on all the factors, it is concluded that difference between the recoverable value of the
CGU and the carrying value should be charged to the profit and loss account. The carrying
amount of the assets should not be reduced below zero and in case of CGU; the value of
goodwill should be proportionately allocated among other assets and after that assessed for
impairment. Future depreciation on assets needs to be adjusted based on all this factors on a
prospective manner (Dumay & Baard, 2017). As per the financial reporting framework, these are
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the mandatory factors, which are compulsory to disclose in financial statement for the true and
fair view of financial statement, are:
 The impaired assets
 The value of impairment Loss
 The method of calculating value in use and the fair value (Dichev, 2017)
 Impairment loss is presented or reversed through the profit and loss account
 Internal and external factors which indicate existence of impairment loss existing in the
market
 The cash-generating unit and the classes of asset held by entity.
Solution to Part B
In the given question, an entity Gali Limited has been given where a cash-generating unit –
China Division has been identified and the same has been assessed for the purpose of impairment
as on June 30th, 2015. The carrying amount details of the assets of the company as given in the
question has been listed below:
Account Carrying amount
Plant 212,200
Patent 49,000
Building 31,000
Inventory 13,000
Goodwill 11,000
Total carrying amount 316,200
Value in Use of division 283,200
Fair value less cost of disposal of
plant 204,212
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The value in use has been given as $ 283200 and the fair value less cost of disposal has been
given only for the plant as $ 204212.
 In the given question, since total fair value less cost of disposal has not been given for the
entire division therefore value in use will be considered as the recoverable value
(Visinescu, et al., 2017).
 On the basis of that the impairment will be $ (316200-283200) = $ 33000
 Out of the total impairment loss of $ 33000, $ 11000 will be first allocated towards
goodwill and the then the remainder $ 22000 will be allocated towards the other assets of
the division.
 Inventory will not be considered for impairment purposes since it falls in the list of
exception being a current asset
 The apportionment working has been shown below in the table.
Accoun
t Carrying Amount Pro rata Impairment loss allocated Adjusted CA
Plant 212200 0.73 15,977 196,223
Patent 49000 0.17 3,689 45,311
Building 31000 0.11 2,334 28,666
Total CA 292200 1.00 22,000 270200
 In the given question, since fair value less cost of disposal for the plant is already given to
be $ 204212. Therefore, the plant cannot be impaired below this value. Hence, the
maximum impairment amount which can be allocated to plant is $ 7988 and the
remainder $ 7989 will be allocated to the rest of the assets in the division.
 The revised apportionment table has been prepared below:
Account Adjusted
CA Pro rata Impairment loss
allocated
Total impairment
loss allocated
Plant 7,989
Patent 45,311 0.61 4,893 8,582
Building 28,666 0.39 3,096 5,430
Total CA 73,977 1.00 7,989 22,001
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 The final apportionment is Plant: $ 7989, Patent: $ 8582, Building: $ 5430 and Goodwill:
$ 11000
 The requisite journal entry to give effect to this transaction is shown below:
Impairment Loss Dr 33000
Goodwill Cr 11000
Accumulated depreciation and
Impairment loss – Plant Cr 7988
Accumulated amortisation and
Impairment loss –Patent Cr 8582
Accumulated amortisation and
Impairment loss –Building Cr 5430
(Allocation of impairment loss being made)
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References
Alexander, F., 2016. The Changing Face of Accountability. The Journal of Higher Education, 71(4), pp.
411-431.
Belton, P., 2017. Competitive Strategy: Creating and Sustaining Superior Performance. London: Macat
International ltd.
Bromwich, M. & Scapens, R., 2016. Management Accounting Research: 25 years on. Management
Accounting Research, Volume 31, pp. 1-9.
Carlin, T. a. F. N., 2011. Goodwill impairment testing under IFRS: a false impossible shore. Pacific
Accounting Review, 23(3), pp. 368-392.
Carlin, T. F. N. a. L. N., 2009. Goodwill accounting in Malaysia and the transition to IFRS – a compliance
assessment of large first year adopters. Journal of Financial Reporting & Accounting,, 7(1), pp. 75-104.
Dichev, I., 2017. On the conceptual foundations of financial reporting. Accounting and Business
Research, 47(6), pp. 617-632.
Dumay, J. & Baard, V., 2017. An introduction to interventionist research in accounting.. The Routledge
Companion to Qualitative Accounting Research Methods, p. 265.
Visinescu, L., Jones, M. & Sidorova, A., 2017. Improving Decision Quality: The Role of Business
Intelligence. Journal of Computer Information Systems, 57(1), pp. 58-66.
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