Impairment Loss For Cash Generating Units Excluding Goodwill

Question: Discuss About The Impairment Generating Excluding Goodwill? Answer: Introduction In order for a company to perform its daily operations, it will need to invest in assets such as machinery, property, plant and equipment, factories, land etc. The purpose of these assets is to assist the company to generate revenue. However, as time passes by, an asset can become obsolete or damaged resulting in a change in value. This change in value is referred to as impairment. However, it is rare to find an asset that generates cash flows independent of other assets. For example, an airline company will own planes and licenses which it will list under its assets. If each of these assets is invested in alone, it cannot generate cash flows. In other words, the airline cannot own planes without a license to operating. Similarly, the airline cannot have a license without owning a few planes. This combination of assets is what is referred to as a cash generating unit (CGU). Just like individual assets, a CGU can also be impaired In 2008, one of the scandals witnessed by ABC Learning was related to overvaluation of assets, specifically the improper valuation of its childcare subsidiaries and goodwill (Koch, 2009).Consequently, there has been a lot of attention to the impairment practices of companies (Andersson Wenzel, 2014). In this essay, I discuss how a company should recognize impairment losses and the steps they should take to measure these losses with respect to cash generating units excluding goodwill. Definition of Impairment Losses and Cash Generating Units The amendments on how to treat impairment losses in cash generating units are contained in Australian Accounting Standards Board 136 (also known as AASB 136). AASB 136 defines an impairment loss as follows- carrying amount of CGU less recoverable amount of cash generating unit (AASB, 2015). In general, the recoverable amount is the amount that is obtained via using or selling an asset. AASB 136 is applicable to the following list of assets- land, goodwill, building, machinery, intangible assets, equipment, subsidiaries, joint ventures, and subsidiaries. However, the rules do not apply to the following assets- inventory, contract assets, investment property or insurance contract (AASB, 2015, p. 6). Cash Generating Units are defined as assets/group of assets that are able to generate cashflows independent of another group of assets (AVC Learning, 2017). Measurement of Impairment Losses for a Cash Generating Unit AASB 136 paragraph 9 and 10 requires assessment of assets and CGUs for impairment to be done at end of reporting period and on an annual basis for intangible assets and goodwill (AASB, 2015, p. 8). If there are indicators that indeed a Cash Generating Unit is impaired, then the company must calculate the CGUs recoverable amount and compare it to the CGUs carrying value (AASB, 2015). The carrying amount is the value of the asset as stated in the financial statement less accumulated depreciation and impairment losses (AASB, 2015, p. 7). The CGUs recoverable amount is calculated as the maximum of value in use and fair value less cost to sell. We define the fair value less cost to sell as how much a company will realize from selling the CGU. The value in use is the present value of discounted future cash flows that is attached to using this combination of assets (AASB, 2015). When a CGUs recoverable amount is lower than the carrying value, then the CGU is impaired. Otherwise, when the CGUs recoverable amount is greater than its carrying value and there have been no previous impairments, the CGU is not impaired consequently, the company should do nothing (AASB, 2015). An impairment loss in respect to a CGU is recognized by reducing its carrying amount. The loss will then first be allocated to any goodwill, then next it will be allocated to other assets within the CGU in proportion to their carrying amount (AVC Learning, 2017). It is important to ensure that each assets carrying amount within a CGU does not fall below the maximum of the following numbers: a) zero b) value in use c) and fair value less costs to sell (Holt, 2012 Subject to limits, the unallocated amounts would then be allocated again back to other assets within a Cash Generating Unit (Holt, 2012). Reversal of Impairment Losses in Cash Generating Unit Impairments can be reversed when the conditions which led to its impairment in the first place has been lifted. AASB 136 paragraphs 110 require these conditions to be assessed annually (AASB, 2015, p. 21). If conditions have been lifted, then the company should calculate the recoverable amount. If carrying value is less than the CGUs recoverable amount then impairment reversal can take place subject to a limit of no more than the ceiling. AASB 136 paragraph 117 defines the ceiling as the assets carrying amount, had no impairments taken place (AASB, 2015, p. 22). Conclusion Many assets generate cash flows in a combination as opposed to individually. This group of assets is referred to as cash generating unit or simply a CGU. Similarly to individual assets, a CGU can change in value over time due to damage of individual assets and other factors. Therefore, it is important that the company regularly checks for impairment indicators, to assess if there are changes in values. The purpose of this check is to avoid reporting of overvalued assets which could distort a companys financial statements or forecasts and thus not reflect its true and fair value. References AASB. (2015, August). AASB 136: Impairment of Assets. Retrieved from Australian Accounting Standards Board: https://www.aasb.gov.au/admin/file/content105/c9/AASB136_08-15.pdf Andersson, S., Wenzel, F. (2014). Application of IAS 36- Impairment of Fixed Assets. A qualitative study. University of Gothenburg, School of Business, Economics and Law. AVC auditing. (2017, April 1). CGU and Allocation of Impairment Loss. Standard You Tube management. Holt, G. (2012, March). An amendment to IAS 36 . Retrieved from ACCA GLOBAL: https://www.accaglobal.com/uk/en/member/discover/cpd-articles/corporate-reporting/goodwill-cgus.html Koch, D. (2009, November). The ABC of a Corporate Collapse. CPA Australia. Vogt, M., Pletsch, C., Moras, V., Klann, R. C. (2015). Determinants of Goodwill Impairment Loss Recognition. Sao Paulo: Paper presented at the XV USP Controlling and Accounting Congress.