Discuss about the Impairment Loss on Cash Generating Unit for Interest Rates.
An entity must assess the indicators of impairment, if any, on each reporting rate. The information that indicates the chances of impairment could be collected from both internal as well as external sources. The external source of information that indicates impairment possibility can be market interest rates, lowering of market capitalization than the net assets, adverse changes in the technological, economic or market environment. Internal sources of information include evidences of asset obsolescence or damage and internal restructurings. Whenever any information indicates impairment chances of any asset or any cash generating unit, the entity must determine the actual value of impairment loss so that it can be immediately transferred to the Profit and Loss Account of the entity.
Impairment is the loss on asset that arises when the recoverable amount of any asset or cash generating unit (CGU) is lower than the carrying amount of such assets or CGU. AASB 136 sets out the method of determining the recoverable value of an asset or a CGU. As per this standard recoverable value is the asset’s or CGU’s value in use or its fair value less disposal expenses, whichever is higher. There are situations when the determination of the recoverable value of an individual asset is not possible then the entity must determine the recoverable value of the cash generating unit to which such asset belongs (Raubenheimer, 2017). These situations arise when asset’s value in use cannot be determined to be close to the asset’s fair value less disposal costs or when the asset is not generating the cash inflows which are significantly independent of that of other assets. International Accounting Standard- 36 (IAS 36) acknowledges certain specific judgments to identify any division of the entity as a cash generating unit. It suggests that decision of identification of CGU is influenced how are the entity’s operations (like product lines, regional areas, businesses or individual location) are controlled by the management or on the basis of management’s decision making about the continuance or disposal of assets or operations of entity. Though management’s monitoring can help in identification of CGU, it does not overrule the requirement that CGU’s identification is majorly dependent on its cash inflows. Carrying amount of CGU includes the carrying values of the individual assets that are directly attributed or reasonably allocated on a consistent basis to the cash generating unit (such as corporate assets). However, it specifically excludes the carrying value of any liability that is recognized unless the recoverable amount of such CGU is not determinable without taking into account that particular liability.
For the impairment testing purpose, the goodwill that is acquired by the business combination is allocated to the CGU’s or group of CGU’s of the acquirer that are anticipated to benefit from the combination’s synergies. This allocation is done irrespective of assignment of other assets or liabilities to the CGU (Carlin, Finchand Ford, 2008). If the goodwill is not allocable to the individual CGU on a particular basis (non-arbitrary) then it is tested for the impairment at the level which is lowest within the entity where goodwill is monitored the purposes of internal management and may be constituted of group of CGUs. Goodwill allocation to a group of CGUs may cast a requirement of more than one test of impairment. For instance, testing of both individual’s CGU and group of CGUs on which goodwill is allocated.
There are certain assets on which impairment test must be conducted annually. These assets are: goodwill, intangible asset’s having indefinite useful lives or the intangible assets which are not yet available for the purpose of use (Wines, Dagwell, & Windsor, 2007). Every year, the carrying amount of the assets or CGUs must be compared with the recoverable value of those assets so as to determine an impairment loss, if any. The above mentioned assets are to be tested on the yearly basis irrespective of the fact that there exists or not any impairment indications. Moreover, said assets are to be tested even more frequently when the circumstances or events requires so (Petersen & Plenborg, 2010). However for intangible assets that has indefinite useful lives asset and goodwill forming part of CGU or a group of CGUs, an entity may use impairment calculation of previous periods if all the necessary criteria are met. The required for this purpose are: no significant change in the CGU’s assets and liabilities, since the recent most recoverable amount calculations, previously determined recoverable value substantially exceeds the carrying amount and when there is remote likelihood that revised calculation of recoverable amount of CGU or group of CGUs (Linnenluecke, Birt, Lyon & Sidhu, 2015).
Impairment loss on the assets of CGU is recognized to a certain extent i.e. up to the value from which carrying amount exceeds the recoverable amount thereon. For the assets that are carried at historical costs in the books of accounts, loss on impairment is charged directly and immediately to the profit and loss accounts (Impairment Accounting, 2010). However, for those assets that have been revalued and revaluation reserve exists for them, the loss on impairment must be charged to revaluation account considering it as a decrease in value of asset by reducing the surplus in revaluation account of such asset. When the impairment loss is exceeded by the revaluation surplus, then such remaining impairment loss is taken to profit and loss account as an expense. When the CGU to which goodwill is allocated is taken for the impairment test then the impairment loss on that CGU is firstly allocated to goodwill by reducing its carrying value. Then the remaining loss on impairment is taken to the other assets (excluding inventory) on the pro-rata basis of their individual carrying amounts. However, the carrying value of the asset will never be lowered down below the recoverable value and zero. There are certain assets that are specifically kept outside the purview of IAS 136 and AASB 136, Impairment of assets. Inventories are part of such exclusions and hence the loss on impairment is not allocated to it (AASB 136, 2010).
For the purpose of fulfilling the disclosure requirements of accounting standard regarding the impairment of loss, certain disclosures are to be made such as: goodwill amount per CGU, impairment amount, method of valuation used for determining value in use and fair value, assumptions used to value the assets and the sensitivity analysis, if any, applied (Carlin & Finch, 2008).
Conclusion:
It is easy to now conclude that the recognition of impairment loss on any CGU requires due compliance with the requirements of IAS 136 and AASB 136 as they sets out the basis of identification of CGU and the impairment loss thereupon. Also, the impairment loss on CGU must be dealt in the manner prescribed by the accounting standard setters. The loss must be immediately charged as an expense to the profit and loss account to account for the sudden fall in the market value of the asset or CGU otherwise the financial statements of the entity would not depict the true picture of its financial position.
Impairment Journal Entries in the books of Alex Ltd as on 30th June, 2015
|
Date |
Particulars |
Dr. |
Cr. |
|
30.06.2015 |
Loss on Impairment |
$ 51,000.00 |
|
|
To Factory |
$ 24,758.44 |
||
|
To Trademarks |
$ 5,664.18 |
||
|
To Vehicle |
$ 3,577.38 |
||
|
To Goodwill |
$ 17,000.00 |
||
|
(Being Impairment Loss charged to individual Asset) |
|||
|
30.06.2015 |
Profit and Loss A/C |
$ 51,000.00 |
|
|
To Impairment Loss |
$ 51,000.00 |
||
|
(Being Impairment Loss transferred to Profit and Loss Account) |
Workings:
|
Account |
Carrying Amount |
|
|
Factory |
$ 332,200.00 |
|
|
Trademark |
$ 76,000.00 |
|
|
Vehicle |
$ 48,000.00 |
|
|
Inventory |
$ 21,000.00 |
|
|
Goodwill |
$ 17,000.00 |
|
|
Total Carrying Amount |
$ 494,200.00 |
|
|
Impairment Loss: |
||
|
Carrying Amount |
$ 494,200.00 |
|
|
Less |
Recoverable Value |
$ 443,200.00 |
|
Impairment Loss: |
$ 51,000.00 |
|
|
Recoverable value= |
$ 443,200.00 |
|
|
Value in Use |
$ 443,200.00 |
|
|
Fair Value less disposable costs |
$ 319,821.00 |
|
|
(Whichever is Higher) |
|
Impairment Allocation |
Factory |
Trademark |
Vehicle |
Inventory |
Goodwill |
Total |
|
|
$ 332,200 |
$ 76,000 |
$ 48,000 |
$ 21,000 |
$ 17,000 |
$ 494,200 |
||
|
Less |
Impairment Loss Allocation |
$ 17,000 |
$ 17,000.00 |
||||
|
$ 332,200 |
$ 76,000 |
$ 48,000 |
$ 21,000 |
$ – |
$ 477,200 |
||
|
Remaining Impairment Allocation |
|||||||
|
Less |
34000 |
$ 24,758.44 |
$ 5,664.18 |
$ 3,577.38 |
$ – |
$ 477,200 |
|
|
Revised Carrying Value |
$ 307,441.56 |
$ 70,335.82 |
$ 44,422.62 |
$ 21,000 |
$ – |
$ 443,200 |
References:
Wines, G., Dagwell, R. and Windsor, C., 2007. Implications of the IFRS goodwill accounting treatment. Managerial Auditing Journal, 22(9), pp.862-880.
Carlin, T.M. and Finch, N., 2008. Advance Australia Fair: The quality of AASB 136 fair value disclosures down under.
Carlin, T.M., Finch, N. and Ford, G.W., 2008. Fair value impairment testing under IFRS: Examining Australia’s disclosure quality. Financial Reporting, Regulation and Governance, 7(1), pp.1-25.
Impairment Accounting, 2010. The basics of IAS 36 Impairment of Asset. Retrieved from: < https://www.ey.com/Publication/vwLUAssets/Impairment_accounting_the_basics_of_IAS_36_Impairment_of_Assets/$FILE/Impairment_accounting_IAS_36.pdf> Accessed on: 02.06.2018
Petersen, C. and Plenborg, T., 2010. How do firms implement impairment tests of goodwill?. Abacus, 46(4), pp.419-446.
AASB 136, 2010. Impairment of Asset. Retrieved from: < https://www.aasb.gov.au/admin/file/content102/c3/AASB136_07-04_ERDRjun10_07-09.pdf > Accessed on: 02.06.2018
Raubenheimer, E., 2017. Recognizing and measuring an impairment loss for a cash-generating unit. Retrieved from: https://accountingweekly.com/recognising-measuring-impairment-loss-cash-generating-unit/ Accessed on: 02.06.2018
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.
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