The main principles relating to the impairment is that an asset is not allowed to be carried into the financial report further than its recoverable value which is more than the assets fair value less its cost of sales and its usable value (Chen, Shroff and Zhang 2017). The carrying amount of the asset is then matched with the recoverable sum and then the asset is tested for impairment when the carrying value goes pas the recoverable amount. Any kind of impairment is later assigned to the asset and the loss from impairment is identified in profit or loss.
Every asset is considered for impairment evaluation. For the purpose of impairment testing where there is a sign that the asset might be tested for impairment even though some assets such as the goodwill and indeterminate life intangible assets is tested for the purpose of impairment yearly despite there is no sign of impairment.
The asset recoverable sum is computed based on the separate level asset. Nevertheless, an asset produces cash flows individually from the new asset and majority of the asset is tested for impairment under the group of assets which is described as the cash generating units (Majid and Jamaliah 2019). The CGU is regarded as the smallest recognized cluster of assets which produces inflow of cash which is mainly dependent on the inflow of cash from the other group of assets.
A business is acquired by the business and it is allocated to the cash generating unit of the acquirer that is anticipated to help the corporate combination. The highest level of cash generating unit is allowed for impairment testing of goodwill which represents the lowermost level of the operational section (Detzen et al. 2016). According to IAS 36, impairment of goodwill should be carried out at the certain level which is not bigger than the operating segment as stated under the IFRS 8 of operating segments.
As per the IAS 36 to clear that the cash generating unit should not bigger than the operating section prior to aggregation. Business entities must assure that the Cash Generating Unit are allied with the operational sections (Devalle, Rizzato and Pisoni 2017). The recoverable worth of the CGU is similar for the individual asset. The carrying worth of the CGU comprises of the assets that are exclusively and directly attributable to the cash generating unit and the allocation of the assets which is indirectly attributable based on practical and consistent basis to the cash generating unit together with the business assets and goodwill.
Where the goodwill has already been assigned to the CGU and a company disposes the operation inside the CGU the goodwill that is attributed to the operative segments disposal is included into the carrying value operational segment when computing the profit or on sale. Similarly, a company may reorganize their business and alter their composition of one or more CGU where the goodwill is assigned (Huikku, Mouritsen and Silvola 2017). Under such circumstances the goodwill which is attributed to the operative segments is moved between CGU and it is computed based on the fair value of the operating segment and the remaining part of the CGU is shifted to the operations. Liabilities associated to the financing of the CGU is not assigned to ascertain the carrying sum of the CGU as the associated cash flow would be executed from the impairment computations.
An impairment costs that is computed for the cash generating unit must be assigned to the CGU of the individual asset. At first the goodwill is distributed to the CGU and later the remaining part of assets of the CGU based on the pro rate basis in respect of the carrying value of every asset in the CGU (Filip, Jeanjean and Paugam 2015). While assigning the impairment loss to the CGU every assets carrying amount in the CGU must not be lowered lower than the fair value and value in use of assets.
Any kind of undistributed impairment must be reassigned to the other assets of CGU which is subjected to similar restrictions. This may lead to a procedure that remains till the loss from impairment is completely assigned or till every CGU assets is lowered to highest of fair value of every asset’s after deducting the costs to sell, value in use or zero. The impairment loss must lead to acknowledgement of liability till it satisfies its meaning.
As per the IFRS 3, corporate firms that brings the new methods for computing the losses from impairment at the time of dealing with the goodwill (Stenheim and Madsen 2016). A business that obtains a fractional interest in the subsidiary can select the acquisition based on how the non-controlling interest of the business is measured. The choice of method for every business would impact the value of goodwill that would be identified in the combined financial statements.
Using the partial goodwill computation method, only the share of holding business’s goodwill is identified. Whereas, using the full method of goodwill calcuation, the goodwill comprises of both the holding business’s as well as the non-controlling share of interest on the goodwill of the subsidiary (Sun 2016). The gross-up value is matched with the recoverable value of the CGU and then the loss from impairment is calculated. It should be noted that only the share of holding corporation relating to the loss from impairment is identified in the profit and loss account.
Goodwill is not existent under the vacuum, instead it originates under the accounts of groups for the reason that it is inseparable from the net subsidiary assets that is acquired. The impairment assessment relating to goodwill happens at the CGU level. The CGU is usually expected to be subsidiary. In this manner when performing the impairment assessment, the carrying value would be the net assets and the subsidiary’s goodwill in comparison to the recoverable amount of subsidiary.
At the time of assigning the impairment loss to any assets in the CGU, goodwill is initially written off and any additional balance is allotted based on the pro rata basis. An asset such as Goodwill cannot be revalued therefore any kind of loss from impairment is routinely charged alongside the profit or loss. Goodwill is not considered as systematically consumed or worn out and hence there is no such requirement of systematic amortisation unlike majority of the intangible assets.
Chen, W., Shroff, P.K. and Zhang, I., 2017. Fair value accounting: Consequences of booking market-driven goodwill impairment.
Detzen, D., Stork genannt Wersborg, T. and Zülch, H., 2016. Impairment of Goodwill and Deferred Taxes Under IFRS. Australian Accounting Review, 26(3), pp.301-311.
Devalle, A., Rizzato, F. and Pisoni, P., 2017. Impairment of goodwill, IAS 36 and determinants of mandatory disclosure in Italian listed companies. African Journal of Business Management, 11, pp.456-463.
Filip, A., Jeanjean, T. and Paugam, L., 2015. Using real activities to avoid goodwill impairment losses: Evidence and effect on future performance. Journal of Business Finance & Accounting, 42(3-4), pp.515-554.
Huikku, J., Mouritsen, J. and Silvola, H., 2017. Relative reliability and the recognisable firm: Calculating goodwill impairment value. Accounting, Organizations and Society, 56, pp.68-83.
Majid, A. and Jamaliah, J., 2019. Zero goodwill impairment: Sustainable firms’ performances or non-impairment of goodwill?. Revista Publicando, 5(18), pp.75-88.
Stenheim, T. and Madsen, D.Ø., 2016. Goodwill impairment losses, economic impairment, earnings management and corporate governance.
Sun, L., 2016. Managerial ability and goodwill impairment. Advances in accounting, 32, pp.42-51.
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