An impairment loss can be defined as the amount by which the carrying amount of cash-generating unit’s assets surpasses the fair value amount (Kabir, Rahman and Su, 2017). The recognized loss is revalued at an annual basis, and the accounting of the reverse of the estimated impairment loss recoding is done for the CGU. The present study is based on an evaluation of provisions for impairment loss of cash generating unit including goodwill by considering theoretical as well as practical aspects. The first part of the research described accounting provisions applicable for an accounting of impairment loss of cash generating unit. It further covers, treatment of goodwill, disclosures and steps to be followed for recording impairment loss of cash generating unit including goodwill. The second part of the study shows practical applications of described provisions in the first part for the given case study of Gali Ltd. Journal entries done for an accounting of impairment loss is supported by appropriate working notes.
An impairment loss is considered as the amount by which the asset’s or cash-generating unit’s carrying amount surpasses the recoverable amount. In a situation where there is any sign that impairment of asset is there, then the recoverable amount should be measured or that specific asset. If it is impossible to measure the recoverable amount of that individual asset, then the business enterprise is required to identify the CGUs recoverable amount on which the asset belongs. Further, the CGUs carrying amount should be determined on a constant basis in the similar manner by which the CGUs recoverable amount is identified (Boennen and Glaum, 2014). For the impairment testing intent, the goodwill that is obtained in the business integration should be commenced from the date of acquisition and shall be allotted to the each cash-generating unit or cluster of CGUs of the acquirer, which is likely to advantage from the cooperation of two or more organizations, regardless of fact that other assets or liabilities held by the acquirer are allocated to the same units or the group of units or not.
All of the units or the group of units by which the allocation of goodwill is done should showcase the lowest possible level in the business entity at which the monitoring of goodwill is done for the internal managerial intentions. As well as it must not be higher than the segment of operation. A CGU on which the goodwill allocation is done is required to be done for impairment testing on an annual basis, and if the sign that the unit might be impaired occurs, the comparison of the unit amount, inclusive of the goodwill along with the unit’s recoverable amount is to be done (Hussey and Ong, 2017).
The CGU that should be tested for impairment on an annual basis does not only inclue goodwill available for use; it also comprises goodwill incorporated by transactions held from business combinations.
Under the AASB 36, if the CGU comprise of the goodwill based requirement for accounting, and the impairment loss taking place in regards with the CGU is accessible. Goodwill is stated as a permanent balance, inclusive of assets that are not able to be identified separately (Linnenluecke and et al., 2015). Therefore, it is believable to determine the fair value deducting sale cost in every situation that is the value determined from the sale of an asset at the transaction by reducing the cost held from the disposal or either by ascertaining the cash flow related with the goodwill. It has been specified by the AASB 36 that the goodwill is to be allocated at the lowest possible level, with the considerations of CGU along. Henceforth, the impairment testing of goodwill will be merely done at the CGU level.
The impairment loss of CGU can be asserted as the amount that reflects overly recoverable amount as compared to the written value of the CGU, the impairment loss accounting is concealed under the AASB 136 (Paragraphs 58-64) and intents to evaluate and ascertain the impairment losses. On the other hand, the applicability of these specific provisions is not for goodwill. For this aspect, it has been stated under Paragraphs 12-14, that whether an impairment loss indication incurs or not and in case any of such signs are present then the company should conduct recoverable amount estimation.
Yet, there is the existence of exceptions in such provisions, as provided under paragraph wherein the business entity is not obligatory to consider the recoverable amount estimation formally if there is no indication of impairment loss.
Moreover, according to the paragraph 60, the recording of impairment loss in P&L account is done immediately unless and until the CGU is conducted at the amount on which it is revalued, according to another standard such as AASB 116 which is engaged in addressing with the CGU revaluation, it is also stated under this standard that the impairment loss is related with the revalued CGU and will be cited as a reduction in the revalued amount (Steele, 2015).
If the recoverable amount of the CHU is not more than the carrying amount, then following to that recording of the impairment loss is done in books of accounts. The rationale behind doing so is that the carrying value should be decreased to the absolute extent of the recoverable amount. Thus, the difference amid the carrying value amount and the recoverable loss is called impairment loss. Further, this loss is realized as a deficit in the P&L account. If there is a decline in the value of the particular cash-generating unit then the recording of the impairment loss is done by taking the provision of a specified standard into account (Basu, 2017). Furthermore, in the situation of CGU impairment loss, recording and allocation are done in the following way: At first, there is a need to reduce the goodwill’s carrying amount allotting to the CGU. After that, the left loss is allocated to the left CGU unit according to the method of pro-rata with the consideration towards carrying the amount of all units.
In the context of the calculations, it should be assessed that the individual asset’s carrying value within the CGU must not be decreased below to the utmost of the fair value after the cost of disposal, the value in use or nil adjustments are made.
Rules prescribed in regards with the CGU if the impairment loss arises where there is the existence of goodwill:
The goodwill’s carrying value is related to the CGU unit that is required to decrease at nil. The allocation of balance amount left of remaining CGU is conducted at the basis of pro-rata. The recognized loss is revalued at an annual basis, and the accounting of the reverse of the estimated impairment loss recoding is done on the CGU for which the reversal is carried that is if or if not belong to single CGU asset or goodwill (Kabir, Rahman and Su, 2017). The applicability of the sign for the impairment reversal is required to be the same, as used during the application of impairment. Further, the impairment loss associated with the individual asset could be made a reversal in case the rules are met already. It is significant to consider some aspects that the reformed carrying amount is not higher than the existing amount which will be employed in the asset recording if no recognition of impairment loss is done.
The first and foremost step is to determine the recoverable amount, in this primary step is to be identified that the recoverable amount is equivalent to the maximum of either the value in use or fair value (cost of disposal). Fair value is referred to as the amount that is receivable in case the asset is put into a sale on the basis of arm length decreased by the cost of disposal. It is comparatively easy to calculate the asset’s fair value as compared to the value in use.
The value in use means the net present value (NPV) of the cash flows that will be produced by the specific CGU units. Further, the recoverable amount will be the same as the most of the value in use or fair value (cost of disposal) (Glaum, Landsman and Wyrwa, 2018).
The next step is to calculate the recoverable amount with the assets carrying amount. In the situation 1, when recoverable amount is lower than the carrying amount, then it is considered that there is the presence of an impairment loss and it demands to be on the debit side to the revenue account. In situation second, when the recoverable amount is higher than the carrying amount, then no further accounting is required to be conducted.
Disclosures to be given under the financial statements, the impairment loss amount provided in the P&L account as of the year is required to be disclosed (Zhuang, 2016). Further, the disclosure should be conducted with the amount relating to the impairment loss reversal in the accounting books and thereby on the asset revaluation on a direct basis in the income statement.
In the present case scenario, total recoverable value and carrying value cash generated unit is provided from which overall impairment loss will be computed. Further, from the computed loss, amount of goodwill and Impairment loss directly identifiable to factory will be separated and remaining loss will be allocated to remaining assets in cash generating unit of Gali Ltd.
Table 1: Statement showing the calculation of impairment loss for Gali Ltd
|
Particulars |
Amount |
|
Asset Carried Value in books of account |
$430,700 |
|
Less: Value in use of assets |
$481,700 |
|
Impairment loss |
$51,000 |
Table 2: Statement showing the computation of impairment losses to the remaining assets
|
Particulars |
Amount |
|
|
Impairment loss |
$51,000.00 |
|
|
Less: Goodwill |
$17,000.00 |
|
|
Less: Impairment loss allocated to factory |
=(323700-311326) |
$12,374.00 |
|
Impairment losses to the remaining assets |
$21,626.00 |
Total loss to be allocate $34000
Table 3: Statement showing the apportionment of Impairment loss to the other assets in division
|
Asset |
Value in Use |
Allocable Impairment loss |
Value to be carried in Balance Sheet |
|
|
Factory |
$323700.00 |
$34000*( $323700/ $444,700) |
$ 24749 |
$323700-$24749=$298951 |
|
Trademark |
$74,000.00 |
$34000*( $74000/ $444,700) |
$5658 |
$74000-$5658=$68342 |
|
Vehicle |
$47,000.00 |
$34000*( $47000/ $444,700) |
$3593 |
$47000-$3593=$43407 |
|
Inventory |
$ 20,000.00 |
0 |
$20000-0= $20000 |
|
|
Goodwill |
$17,000.00 |
$17,000.00 |
$17,000.00-$17,000.000 |
=$24749-12374
=$12375
Reallocation of loss 12374
|
Asset |
Allocable Impairment loss |
Value to be carried in Balance Sheet |
|
|
Trademark |
$12374*( $68342/ $111,749) |
$ 7568 |
$68342-$7568=$60774 |
|
Vehicle |
$12374*( $43407/ $111,749) |
$4806 |
$43407-$806=$38601 |
Table 4: Journal entries for accounting of impairment loss
|
Date |
Particulars |
Dr Amount |
Cr. Amount |
|
|
30.06.2015 |
Impairment loss |
Dr. |
$51,000.00 |
|
|
Goodwill |
Cr. |
$17,000.00 |
||
|
Accumulated Losses for amortisation and Impairment (Trademark) |
Cr. |
$13227 |
||
|
Accumulated Losses for amortisation and Impairment (Vehicle) |
Cr. |
$8399 |
||
|
Accumulated amortisation Losses for and Impairment (Factory) |
Cr. |
$12,374 |
||
|
(Being impairment loss adjusted to different assets in the division) |
||||
|
30.06.2015 |
Profit and Loss Account A/c |
Dr. |
$51,000.00 |
|
|
Impairment loss |
Cr. |
$51,000.00 |
||
|
(Being impairment loss charged to Profit and Loss Account A/c) |
For this impairment loss Gali Ltd is required to following disclosure:
Conclusion
In accordance with the present study, it can be concluded that impairment loss of cash generated unit is made as per provisions described under AASB 36. For recording an overall impairment loss of cash-generating unit, the initial value of goodwill and value loss of specific assets is separated. Further, remaining loss is allocated on the proportionate basis of separate asset value in comparison value of CGU except for goodwill or assets on which loss is separately recognisable. The recognised loss is charged from profit and loss account, and fair value is recorded in cash generating units. As per the described provisions, the company is further required to provide appropriate disclosure for an accounting of impairment loss supported by workings.
References
Basu, A., 2017. Impairment of Intangible Assets-An Effort to Convergence. International Journal of Engineering and Management Research (IJEMR), 7(5), pp.210-214.
Boennen, S. and Glaum, M., 2014. Goodwill accounting: A review of the literature. Sage.
Glaum, M., Landsman, W.R. and Wyrwa, S., 2018. Goodwill Impairment: The Effects of Public Enforcement and Monitoring by Institutional Investors. The Accounting Review. 2(5), pp.10-14.
Hussey, R. and Ong, A., 2017. Corporate Financial Reporting. Macmillan International Higher Education.
Kabir, H., Rahman, A. and Su, L., 2017. The Association between Goodwill Impairment Loss and Goodwill Impairment Test-Related Disclosures in Australia.
Linnenluecke, M.K., Birt, J., Lyon, J. and Sidhu, B.K., 2015. Planetary boundaries: implications for asset impairment. Accounting & Finance, 55(4), pp.911-929.
Steele, N., 2015. Accounting: Get the numbers right. Company Director, 31(5), p.41.
Zhuang, Z., 2016. Discussion of ‘An evaluation of asset impairments by Australian firms and whether they were impacted by AASB 136’. Accounting & Finance, 56(1), pp.289-294.
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