ACC204 Corporate Accounting: Impairment loss for Cash Generating

"Impairment Loss for Cash Generating Units excluding Goodwill"

Impairment Loss: - Impairment loss occurs when carrying amount of asset or cash generating unit exceeds the recoverable value of asset or cash generating unit. Then, carrying value of the asset is required to be reduced by the difference. This reduced amount will be recognized as an Impairment loss. The same statement can be described through the following formula:

Impairment loss = Carrying amount - recoverable amount.

Carrying amount: - Book value of the asset or cash generating unit as per the accounting records.

Recoverable amount: - Recoverable amount is higher of the following 2 factors:-

1. V. (Expected price to be received on sale of the asset) less transfer expenses (all the costs associated with the sale of asset) and
2. Value in use (Present value of the cash inflows expected in future from the assets or cash generating unit)

An impairment loss for a CGU should be recognized when its carrying amount is more than its recoverable amount. Impairment loss on CGU will be should be charged to profit and loss account as an expense, but it will not be charged to profit and loss account when asset is carried at “revalued amount”. Firstly, the impairment loss should be allocated to the Goodwill which is allocated to a particular cash generating unit then after that, to the individual asset on pro-rata basis. The impairment loss allocation to the individual asset must be done to the extent of its SP, its value in use or 0.

For example: There is a bus operator who obtains four licenses for buses in four different routes. Out of four routes, three routes are profitable whereas one is not profitable route. Now, in this case government ensures that transportation service should be available to all routes. So, government imposed restriction upon bus operator that he shall operate his buses on all the routes, otherwise he will not be allowed to operate his bus at any route: (Roman, 2013) 

While testing CGU for impairment, organization should ascertain all its assets which are related to CGU. Since asset of the organization does not create distinct cash inflows, so in that case recoverable amount of an individual asset of the organization cannot be calculated, but it can be calculated when organization decided to dispose the asset. If any indication is present regarding asset of the organsaition then in that case asset of the organization will be impaired and for CGU, recoverable amount is calculated. After doing comparison with carrying amount, impairment loss will be determined. If it is not possible to find out the recoverable amount of individual asset then in that case loss on impairment will be determined for the asset if net selling price of asset is less than carrying amount . 

If company has the positive indicators which indicate that impairment loss booked in the previous years might have reduced, then there will be reversal of Impairment loss. Business organization should determine during reporting period that “whether any indication of impairment loss exist or not”. While determining indicator for impairment loss exist or not, organization should consider internal as well as external factor. Internal factor - Some examples of internal factors are: damage of the asset, economic performance of the asset is not as per expectation, held for disposal, etc. External factor - Some examples of external factors are: Change in economy, obsolete technology, reduction in market value of asset, change in legal environment, etc.: (Stickney, 2010) 

When any indication exist regarding the impairment loss that it will not exist in future, which is identified or recognized in previous years then in that case Balancing useful life of asset, depreciation method, amortization method should be reviewed and adjustment should me made according to the AASB- 136, and it will be done even if no impairment loss on asset or CGU is reversed. 

Impairment loss reversal defines the rise in the potential service of asset for balancing period, which can be either from use or sale, from the date when organization last assessed an impairment loss for asset- (Hamilton, 2011) 

The value of the asset which is in use could be more than carrying amount of asset as “Present value” of future cash flows will increase when they come closer. But, Asset’s potential of service cannot be increased. Thus, impairment loss cannot be reverse due to the time passage

Even if recoverable amount of asset becomes higher than its carrying amount-(Thomas, 2011) 

Impairment loss reversal for a CGU (which is also known as cash generating unit): 

 Firstly, Impairment loss on reversal of CGU (which is also known as cash generating unit) shall be distributed to “Asset” rather than “goodwill” to increase the carrying amount of particular asset, afterwards it will be allocated to goodwill. This process should be done on “pro rata” basis. 

Carrying amount of asset by which it increases shall be treated as” impairment loss reversal” for asset (only individual) and will be recognized accordingly.

While doing allocation for impairment loss reversal for CGU, then in that case Carrying amount of CGU or asset shall not exceed the lower of the following: 

• Amount which is recoverable; if it can identified by the organization or

• Assets carrying amount which is identified, but it should be net of depreciation and no impairment loss on asset should had been identified for the particular asset during previous years.

The amount of the reversal of the impairment loss that would otherwise have been allocated to the asset should be allocated to the other assets of the unit on a pro-rata basis. 

The reversal amount of impairment loss of asset or CGU shall be distributed to the assets of the unit on specified basis i.e. pro rata basis.

References 

Thomas (2011),"Understanding Impairment Accounting: What It Is and When It Is Used", API Press, London.

 Anonymous, "IAS 36 — Impairment of Assets", IAS Plus. Deloitte [Accessed: 22^nd May 2017]

Hamilton (2011), "Impairment: IASB-FASB Comparison" (PDF), Drake Management Review, America.

Paperback (2009), “Impairment of asset”, Gee publishing, London.

John Wiley (2014), “IFRS (International Financial Reporting Standards)”, London.

Roman. L (2013), “Financial reporting: An introduction to accounting”, United Kingdom.

Ron Degwell (2012),” Corporate accounting in Australia”, Pearson publication, Sydney.

Stickney (2010), “AASB-136”, API hall, Australia.