Write a brief essay about the following topics:
Loss of impairment for cash generating units, except Goodwill.
“Impairment Loss for Cash Generating Units ExcludingGoodwill”
Impairment Loss – When the carrying value of an asset or cash generator unit exceeds its recoverable value, then there is an impairment loss.
This means that the asset’s carrying value must be reduced by the difference.
This impairment loss will be recognized.
This is the same statement as in the following formula:
Loss of impairment = Carrying amount – recoverable amount
Carrying amount: – The accounting records show the book value of the asset/cash generating unit.
Recoverable amount: The recoverable amount is greater of the following two factors:
V. (Expected price of the asset on sale) less transfer costs (all costs associated with selling the asset).
Value in use (Present value for future cash inflows from assets or cash-generating unit)
A CGU’s impairment loss should be recognized if its carrying amount exceeds its recoverable amount.
CGU impairment loss should be recognized as an expense and charged to profit & loss account. However, it will not be charged when the asset is held at “revalued value”.
First, impairment loss must be allocated to Goodwill. This Goodwill is then allocated to a cash-generating unit and, after that, to each asset on a pro-rata basis.
The impairment loss allocation for an asset should be made to its SP, its use value or 0.
One example is that a bus operator can obtain four licenses to operate buses on four different routes.
Three of the four routes are profitable, while one route is not.
In this instance, the government makes sure that all routes have transportation services.
The government placed restrictions on bus operators, requiring them to use all routes. If he doesn’t, he won’t be permitted to operate his bus. (Roman, 2013).
Organization should determine all assets that are connected to CGU when testing CGU for impairment.
Asset of the organization doesn’t create cash inflows so it is impossible to calculate the recoverable amount. However, it can be calculated when the asset is sold.
If there is any indication that asset of the organisation is being used, then asset will be considered impaired. For CGU, the recoverable amount will be calculated.
The impairment loss will be calculated by comparing the carrying amount.
If it is impossible to determine the recoverable value of an asset, impairment loss will be calculated if the asset’s net selling price is lower than its carrying amount.
If the company has positive indicators that indicate that the impairment loss recorded in previous years may have decreased, then the impairment loss will be reversed.
During reporting periods, business organizations should identify “whether any indications of impairment loss exist”
Organization should consider both internal and external factors when determining whether impairment loss exists.
External factor – These include damage to the asset, poor economic performance, holding the asset for disposal, and so on.
External factor – These are examples of external factors: Changes in economy, obsolete technology and reductions in asset market value, changes in the legal environment, etc.
If there is any indication that an impairment loss will not occur in the future, or it has been identified or recognized in the past, then it is important to balance the useful life of the asset, depreciation, amortization methods, and adjust according to AASB-136. This adjustment will be made even if there is no impairment loss on asset/CGU.
Impairment loss reverse refers to the increase in the serviceable asset for balancing period. This can be from sale or use. It starts from the date that an organization has last assessed impairment loss for asset (Hamilton 2011, 2011).
As future cash flows become closer, the “Present Value” of an asset that is currently in use may be greater than its carrying value.
However, Asset’s service potential cannot be increased.
The time passing cannot reverse impairment loss.
Even if the asset’s recoverable value exceeds its carrying amount (Thomas 2011,)
Reversal of impairment loss for a CGU (also known as cash generating units):
First, the impairment loss due to reversal CGU (also known as cash generating units) will be distributed to “Asset”, rather than to “goodwill” in order to increase the asset’s carrying value. Then it will be assigned to goodwill.
This should be done “pro rata”.
The carrying amount of an asset that increases will be considered “imperative loss reversal” and will be recognized accordingly.
When determining impairment loss reversal CGU allocation, the carrying amount of CGU or asset must not exceed the following:
If the organization can identify it, this is a recoverable amount.
Assets should not be identified as carrying an amount, but should be net depreciation and should not have suffered impairment losses in the past.
The pro-rata allocation of the amount of the reversal in impairment loss to the asset should be made to other assets.
The unit shall receive the reversal amount for impairment loss of asset/CGU on a specified basis, i.e.
Anonymous, “IAS36 — Impairment Assets”, IAS Plus.
Hamilton (2011), “Impairment IASB-FASB Comparation” (PDF), Drake Management Review. America.
Paperback (2009), “Impairment to asset”, Gee publishing London.
L (2013), Financial reporting: An introduction into accounting. United Kingdom.
Ron Degwell (2012), Corporate accounting in Australia”, Pearson publication. Sydney.
Stickney (2010), API Hall, Australia.