Impairment of Asset for Cash Generating Units - MyAssignmenthelp

Question: Discuss about theImpairment of Asset for Cash Generating Units. Answer: Loss On Impairment Of CGUS Impairment loss is the difference between the carrying amount and recoverable amount, if carrying amount exceeds recoverable amount. Recoverable amount means the amount which a company can recover by selling its Cash generating units. So, if recoverable amount is less than the carrying amount which is shown in the financial statements of the company. As per IAS 36, every reporting entity should assess the value of its cash generating units so that it should not be more than recoverable amount because it gives wrong impact on the readers of financial statements if recoverable amount is lesser then carrying amount in financial statements. So, it is necessary for the companies to assess their Cash generating units (CGUs) on every reporting date so that the requirements of IAS get fulfilled. An asset cannot be a Cash generating unit if it alone cannot generate revenue for the company. If some assets together can generate revenue for the company, then that all assets together are known as cash generating units. In other words, a single asset can be or cannot be a Cash Generating Unit. It all depends upon the revenue generation to the company. If there is any indication that the value of Cash Generating units has increased then the reversal of impairment of loss is there except goodwill. In other words reversal of impairment loss of goodwill is prohibited. IAS 36 does not allow to impair goodwill because goodwill is an intangible asset. Impairment of Goodwill: On every reporting period value of goodwill should be calculated for impairment purposes.. For testing purpose value of goodwill should be allocated to Cash Generating Units which are expected to benefit from the synergies of the combination. A cash generating unit to which the value of goodwill has been allocated should be tested for impairment atleast annually with the recoverable amount of the unit and if recoverable amount of unit is more than carrying amount then there is no impairment. On the other hand if it is less than carrying amount then impairment is there. For allocating impairment loss of goodwill to the cash generating units, firstly allocation should be made to goodwill and after that other remaining assets of cash Generating units should be impaired. As per IAS 36, if the following indication arises then only impairment should be there: External Sources: Declining of market value Changes in technology which will have negative impact on the working of the company. Rate of interest of market increases Net Assets of the company are more than market capitalization. Internal Sources: There is some damage in the working area of the company. The assets of the company are not been utilized efficiently and are idle. The government conditions got changed which have negative impact on the company. Apart from the above, more factors can be included in the above as they are inclusive factors not exhaustive factors. For calculating impairment loss, we need to calculate recoverable amount. Recoverable amount is that amount which can be realized from the market, if sold. SO, carrying amount in the books should not be art any cost higher than the recoverable amount. Recoverable amount is higher of the Fair market value less cost of disposal and Value in use. Calculating recoverable amount: i) Impairment loss arises if the carrying amount in the books is less than the fair market vaIue and for calculating fair market value we also deduct cost of disposal, if any, then there is impairment loss and it should be recorded in the books. ii) If we cannot calculate fair market value, then recoverable amount will be the value in use. iii) For the assets which are to be disposed of, fair value less cost of disposal is recoverable amount. Fair Value less cost of disposal: As per IFRS 13, fair value has to be calculated and cost of disposal to be deducted. Cost of disposal is the direct assed costs. Value in Use: The method to estimate value in use is as follows: The amount which entity expects that it will be able to earn in the coming future. It is just an expectation. Company has to consider the present value. i.e. The future benefits should be discounted one. The expected future cash flows which company is expected should be realistic one and should also be achievable one. Reversal Of Impairment Loss: The criteria for the reversal of impairment loss are the same as of identifying impairment loss. The reversing conditions are the indications of reversal of impairment loss. The reversal should not be more than what after depreciation value if impairment loss would not be there. Reversal of impairment loss for goodwill is prohibited but as discussed it can be combined with other Cash generating Units for impairment purposes. References: Accounting explained, Impairment of fixed assets, viewed on 21st May 2017, https://accountingexplained.com/financial/non-current-assets/impairment-of-assets. IFRS, IFRS Interpretation committee, viewed on 21st May 2017, https://www.ifrs.org/Current-Projects/IASB-Projects/IFRS-5-Reversal-of-impairment-loss-relating-to-goodwill/Pages/Home.aspx. Investing Answers, Goodwill Impairment, viewed on 21st May 2017 https://www.investinganswers.com/financial-dictionary/financial-statement-analysis/goodwill-impairment-3614. ACCA, Impairment of Goodwill, viewed on 21st May 2017 https://www.accaglobal.com/in/en/student/exam-support-resources/fundamentals-exams-study-resources/f7/technical-articles/impairment-goodwill.html. Deloitte, IAS- Impairment of Assets, viewed on 21st May 2017 https://www.iasplus.com/en/standards/ias/ias36.