Impairment loss for cash generating unit including goodwill
Impairment of assets is covered under IAS 36. As per this the asset in the books should not be more than the recoverable value of the assets. There are various factors that need to be accessed to judge whether the assets mentioned in the balance sheet needs impairment or not. The various internal factors include great obsolence of the assets, or if the asset is lying idle or the asset is not being used. The external factors include the decline in the overall market value, change in the overall market rates, or in case the net assets is valued more than the capitalization (kabir, et al., 2017). The asset’s fair value is generally the total direct cost that can be associated with the quantifiable asset and is determined as per the IFRS 13. The value in use is calculated using a number of factors like estimated future cash flows that can be generated from asset, the variations in the timing of cash flows, the other uncertainties if any, the time value of money, and several other factors. There may be cases where the impairment loss needs to be reversed. There are few standard guidelines which needs to be ensured that no reversal should be there to unwind the discount, and in no case the impairment reversal should be more than the overall cost of the impaired asset (Fay & Negangard, 2017). The future depreciation needs to be adjusted with this impairment loss. On the basis of above assessment and after taking into account all the above factors, impairment loss needs to be recognised in the books for the differential between the carrying value and the recoverable value of the assets (Mahapatra, et al., 2017). This cost of impairment is generally recognized and recorded in the profit and loss account, and simultaneously, the remainder depreciation needs to be adjusted in the books on prospective basis. The valuation for all the other assets as per this IAS is same, only in case of Goodwill the assessment is different and the same is stated below (Meroño-Cerdán, et al., 2017).
Goodwill needs to be accessed for impairment on an annual basis whether or not the internal or external factors exsists or not. It needs to be trued up or trued down based on the evaluation. In case the mpairment loss is recognized first of all the allocation is done to goodwill and then to the remainder of the assets. In case CGUs are being accessed for impairment, then also impairment needs to be allocated firstly to the goodwill and then to remainder of the assets. Further more once the goodwill is impaired, it cannot be reversed back in the succeeding years (Das, 2017). Thus the companies need to provide special attention when calculating the impairment loss in case of goodwill and recording the same.
As per the given data set, the carrying values of Gali Limited has been given as on 30th June, 2015. Its fine China division has been identified as one of the CGU’s and the impairment assessment needs to be done for the company, the details of which are as follows:
- In the above mentioned table, the fair value of all assets less cost of disposal has not been given and only value in use has been given , so we will consider the same to be the recoverable value i.e., 582000.
- Therfore, total amount to be impaired will be (648000-582000) = 66000
- Out of this 66000, amount of 22000 first needs to be allocated to Goodwill and then the rest of the assets can be impaired based on the apportionment.
- Since inventory is a current asset held for sale, the same will not be considered for impairment purpose.
- The apportionment workings is as shown below:
- Now since the fair value less cost of disposal of the plant is already given, the plant can only be impaired till 419987 i.e., maximum by 16013 and the remainder 16014 needs to be apportioned to other assets.
- The 2ndallocation summary is as below:
- Thus, post all the apportionment, the final allocation of impairment to Goodwill is 22000, Plant is 16013, equipment is 17170 and Fittings is 10817.
- The journal entry to record the above transaction of impairment loss is:
Impairment loss Dr 66000
Goodwill Cr 22000
Accumulated depreciation and
impairment losses –Plant Cr 16013
Accumulated amortisation and
impairment losses –Equipment Cr 17170
Accumulated amortisation and
impairment losses –Fittings Cr 10817
(Being allocation of impairment loss made)
The topic of impairment is judgemental and depends a lot on the recoverable value and its calculations, what are the assumptions and estimates being used and therefore all the management estimates and assumptions should be properly recorded and should be justifiable and finally be disclosed in the financial statements (Michaely & Jacob, 2017). The disclosures include
- Amount of impairment
- Basis of impairment
- Type of internal and external factors that existed for impairment
- Any reversal of impairment loss
- Other considerations.
Das, P., 2017. Financing Pattern and Utilization of Fixed Assets - A Study. Asian Journal of Social Science Studies, 2(2), pp. 10-17.
Fay, R. & Negangard, E., 2017. Manual journal entry testing : Data analytics and the risk of fraud. Journal of Accounting Education, Volume 38, pp. 37-49.
kabir, H., Rahman, A. & Su, L., 2017. The Association between Goodwill Impairment Loss and Goodwill Impairment Test-Related Disclosures in Australia. 8th Conference on Financial Markets and Corporate Governance (FMCG) 2017, pp. 1-32.
Mahapatra, S., Levental, S. & Narasimhan, R., 2017. Market price uncertainty, risk aversion and procurement: Combining contracts and open market sourcing alternatives. International Journal of Production Economics, pp. 34-51.
Meroño-Cerdán, A., Lopez-Nicolas, C. & Molina-Castillo, F., 2017. Risk aversion, innovation and performance in family firms. Economics of Innovation and new technology, pp. 1-15.
Michaely, R. & Jacob, M., 2017. Taxation and Dividend Policy: The Muting Effect of Agency Issues and Shareholder Conflicts. Review of Financial Studies, 30(9), pp. 3176-3222.