Business Accounting For Cash Generating Units – Impairment Loss

Discussion

Discuss about the Business Accounting for Cash Generating Units.

Introduction

Impairment loss is a difference between carrying amount and recoverable amount with respect to the assets and cash generating units. Carrying amount is determined by deducting the depreciation amount from the value of the asset to recognize in the statement of financial position of the organization. Besides, recoverable amount is determined by deducting the cost of sale of the asset from the fair value. It is also determined by using value in use that is expected future cash flows to be derived from the sale of asset. AASB 136 regulates nature of impairment loss, measurement of the value of impairment loss and required disclosures (Song, Zhang and Wang 2015).

Discussion                               

Profit making companies are required to comply with the principles of AASB 136 as well as IAS 36 for recognizing and recording impairment loss. On the contrary, companies that are non-profit company may avoid the compliance of IAS 36 for recognizing the impairment loss of the assets. The principles of accounting on impairment loss are applicable to all the fixed assets of the organizations including goodwill (Martínez-Vega et al. 2015). The assets should be in the nature of cash generating unit that excludes inventories, deferred tax assets, investments. Assets or cash generating units are required to be impaired by the companies if the annual assessment reflects any indication for the impairment. Such indicators can be derived from external sources, internal sources or any relevant indicators from subsidiary or associate companies. Indicators from external sources include significant decline in the market value of the asset. In case, there are negative modifications in the equipment technology, industrial market, economic conditions and corporation laws then the companies are required to impair the assets. Additionally if there is increase in rates of interest or rates of return then also companies should recognize the impairment loss for assets and cash generating units (Ballas, Panagiotou and Tzovas 2015). Indicators from internal sources that require the organizations to impair the assets that include the financial performance or condition of the asset is bad than the same was expected. If the asset has been damaged physically or if the same has been obsolete then the impairment loss should be recognized. Another internal impairment indicator is that if the asset is in not in operating condition or if the asset has been discontinued from working then the organizations have to recognize the impairment loss. Besides, if the amount of investments reflected in the separate balance sheet is higher than it is disclosed in the consolidated balance sheet then the parent company is required to analyze and recognize impairment loss. Further, if the amount of dividend is higher than the “total comprehensive income of the subsidiary company” then the organization is required to measure the impairment loss as per AASB 136 (Morris and Shin 2016).

Conclusion

At the time of determining the impairment loss, the organization is required to estimate the recoverable value of the impaired asset. However, in case of intangible assets that has useful life for indefinite period should be examined for impairment in each accounting year. Further, in case of goodwill, impairment should be examined in each financial year whether its useful life is limited or unlimited (Zhuang 2016). Higher of the amount of value in use and fair value reduced by sales expense is regarded as recoverable value. Further, the value of impairment loss is determined by deducting the carrying amount of the asset from its recoverable amount. If the carrying amount is higher than the recoverable amount then the amount of difference is regarded as impairment loss. It is recorded in the books of accounts in the income statement for the assets that have been revalued. Moreover, the amount of impairment loss should also be adjusted with the amount of depreciation or amortized value of the asset (Beauchamp et al. 2015).

Impairment loss should be determined for the assets, the recoverable of which is not possible to measure. In such case, the recoverable amount can be measured by considering the cash-generating unit for the similar class of asset (Linnenluecke, et al. 2015). For instance, goodwill that is purchased by the organizations as a result of merger and acquisition should be allocated to cash-generating unit. Valuation of impairment loss for the assets under cash-generating unit is similar to that in case of other fixed depreciable assets. After measuring the amount of impairment loss, it is required to be allocated to the assets in cash- generating unit on the proportionate basis (Mannâ€ÂJiles, Thompson and Lester 2015).

Apart from the assessment on indicators for impairment of the assets, the organizations also required to analyze the indicators for reversing the loss of impairment. Such assessment is required to be carried at the date of reporting except the analysis on goodwill.  If the factors to determine the impairment condition is seemed to have altered then only recognition of reversal impairment can be applied to the assets. The organization is required to measure the amount of reversal and eliminate the same that have been recording previously (Bond, Govendir and Wells 2016).

Considering the principles and rules of AASB 136, organizations are required to disclose the facts on impairment loss as per paragraph 126. Disclosure with respect to the class of each assets, amount of impairment loss and amount of reversal is required to be mentioned in the financial statements. The companies also required to disclose the events and indicators that enabled to impair the assets along with the facts about the nature of the asset. Further, the entities are also required to disclose the measures of estimate for the tangible and intangible assets with the disclosure on the useful life of such assets (Knauer and Wöhrmann 2015).

Journal Entries

Conclusion

Based on the discussion on impairment loss it can be concluded that impairment loss reflects the significant economic efficiency of the assets of the companies. Since the efficiency and effectiveness of the asset declines with the constant use in business activities, it is important to measure such value. Accordingly, “AASB 136 on impairment of asset” regulates the valuation of impairment loss and the principles to recognize the accounting of impairment loss. Companies should analyze and disclose the indicators of impairment loss considering the external and internal sources during the accounting year.

Journal entries
in the books of Crossbow Ltd as at 30 June 2015
		Dr.	Cr.
		Amount $
1	Impairment Loss A/c                             Dr.	29,000.00
	To Land A/c		29,000.00
	(Being amount of impairment loss on land has been recognized in the income statement of the company)
2	Impairment Loss A/c                             Dr.	20,000.00
	To Goodwill A/c		20,000.00
	(Being amount of impairment loss on cash generating units have been allocated to Goodwill of the company)

Table 1: Journal entries

(Source: Created by author)

Workings

1	Impairment Loss valuation for Land	Amount $
	Carrying amount of Land	200,000.00
	Less: Fair value as deducted by cost of disposal	(171,000.00)
	Impairment Loss	29,000.00

Table 2: Impairment loss on Land

(Source: Created by author)

2	Impairment Loss valuation for CGU	Amount $
	Total carrying amount of the business asset	1,680,000.00
	Less: carrying amount of Land	(200,000.00)
	Less: Goodwill	(40,000.00)
	Total value of Cash- generating unit	1,440,000.00
	Less: Recoverable amount	(1,420,000.00)
	Impairment Loss	20,000.00

Table 3: Impairment loss on CGU

(Source: Created by author)

Notes

As per AASB 136 on “Impairment on assets” loss on impairment is computed is there are indicators of impairment. In the present case, Crossbow Ltd analyzed indicators impairment as at 30 June 2015 therefore, principles of ASSB 136 are applicable to measure and recognize the impairment loss on assets.

According to the AASB 136, impairment loss is determined by deducting the recoverable value from the carrying amount. Further, the recoverable amount is computed as higher of value in use or fair value reduced by the cost of disposal (Buratti et al., 2015).

In case of Crossbow Ltd., value in use of land is not provided therefore the fair value reduced by the cost of sale has been considered as recoverable value. Moreover, the carrying amount of land at 30 June 2015 is higher than the recoverable value hence, the impairment loss is required to be recognized.

The principles on AASB 136 states the impairment loss to be recognized for cash generating unit and the amount of loss is required to be allocated on proportionate basis. However, the amount of loss shall be allocated to Goodwill first and then the balance amount to be allocated to the other class of assets based on their carrying value (Füchtemeier et al. 2015).

Total carrying amount of the asset of the company Crossbow Ltd at 30 June 2015 amounted to $1,680,000 that should be reduced by the amount of Land and Goodwill. The loss on impairment would be calculated on the balance value of cash generating unit, which is higher than the recoverable value as estimated by the company. Additionally, the amount of impairment loss $20,000 would be allocated to Goodwill first but as the entire loss on impairment has been allocated to Goodwill, allocation for other class of asset cannot be done.

Reference List

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