1.Explain why impairment testing requires the use of Cash Generating Units (CGUs), rather than being based on single assets.
2.Explain why judgement is required in determining the Cash Generating Unit. Describe the factors considered by the selected company in determining the Cash Generating Unit.
3.Discuss how the existence of goodwill will affect the impairment test.
4.Discuss the problems of measurement of an impairment loss in the context of the present AASB / IASB standards and conceptual framework using your selected annual report to provide examples.
Introduction
Impairment is a condition which all fixed assets including goodwill have to undergo. It happens when the recoverable amount of an asset reduces as compared to its carrying amount. Impairment affects all tangible and intangible fixed assets and goodwill. However, it has a few exceptions. It does not apply to inventories since the valuation of inventories is covered by another standard (Kieso et. al, 2010). For similar reasons, the followings are excluded from being tested for impairment, and their valuations:
Assets arising out of construction contracts
Deferred tax assets
any non-current asset
Financial instruments which are a part of the assets
Nature made or biological assets.
Assets arising out of insurance contracts, including contractual expenses which need to be amortized.
Investment property which needs to be valued at its fair price
Any employee benefits asset
1.The financial statements of a company go into the hands of every person who can be interested in the affairs of business. The stakeholders, investors, customers, legal and statutory bodies. Everyone seems to get their hands on the financial statements. It is important to ensure that everything presented in there shows a true picture of the position if the company. Cash Generating units are the smallest group of assets clubbed together, in order to test for impairment. At times, it is difficult to determine the recoverable value of a single asset, and thus, such assets, whose recoverable value cannot be ascertained independently are clubbed into units. However, this clubbing of assets into one group cannot be done as per the whims of the management. A CGU should be the smallest possible group of assets which can generate cash flows independently (Shoaf & Zaldivar, 2005). Assets which are capable of generating cash flows independently are not grouped into CGUs. The standard, therefore, does not mandate that assets should be valued in groups or CGUs and cannot be valued individually. It’s done only when individual assets are not capable of cash generations independently, ‘smallest’, ‘cash flow generation’, and ‘independently’ being the keywords here. Details of the recoverable amount and fair value of the asset and all details of goodwill, its impairment, charge to CGUs and allocation of the losses are also presented.
2.Determining Cash Generating Units is no easy task. It needs a lot of judgment and skills. So under mentioned are the things to be paid attention to which determining a Cash Generating Unit.
Firstly, the existence of any indication of impairment should be checked.
The carrying amount and recoverable amount should be calculated and checked if impairment exists.
As far as intangibles are concerned, if they are not yet available for use, their recoverable amount and carrying amount should be compared to check for impairment annually. Similar should be the case for intangibles with indefinite useful lives (McKaig, 2011).
Carefully grouping assets belonging to similar cash generating units.
Computation of recoverable amount of a CGU is another risky venture,
Different CGUs belong to different cash generating patterns. Classifying an asset into which of these is where utmost care needs to be taken (Peirson et. al, 2015).
3.Now taking a case where Goodwill in the annual report of Woolworths forms a part of the financial statement of a company. If impairment is tested for the same, and the recoverable value is higher than the carrying value, there is no impairment. But, we should also seek the fact that the goodwill so tested for, is acquired goodwill (McKaig, 2011). And the assets also show acquired profit. The recoverable amounts of the two companies can offset the diminution of one another and show a fabricated recoverable value if they are clubbed into CGUs. For individual assets, they still do not hold good. Hence, the existence of goodwill can at times be misleading to the impairment test.
4.The impairment loss is computed by comparing the carrying amount an asset’s recoverable amount. This recoverable amount is computed by determining the best fair value of the asset, which is the value the asset would fetch if sold in the open market today. Now, this fair value is often construed to be the present value of the future cash flows of the asset, which ignores all other future possibilities (Hamilton et. al, 2011). Determining the cash flows of the future and the calculations are more theoretical than practically viable. Whether the impairment losses for each item, if charged to the statement of profit and loss, to be disclosed along with the item of the comprehensive income statement to which they have been charged (Kieso et. al, 2010). When it comes to Woolworths, the PPE of it is recorded at cost minus the impairment losses and amortization that is accumulated. From the annual report, it can be witnessed that the PPE recording of companies varies from one company to another but the depreciation tend to be the same (Woolworths limited, 2017).
Conclusion
When it comes to impairment, the assets are tested and calculated for the process of impairment. Goodwill cannot be spitted for from other assets that are acquired by the parent company. Even the goodwill that is impaired is always purchased as impairment. Any asset, which is presented at a value it cannot fetch when sold in the statement date, is regarded as false. Hence, assets need to be tested for impairment to ensure that the asset can fetch at least what is being presented in the books of accounts. For companies having good credibility, and long-term business prospects, and market acceptability, they should always go for a Public Offering of shares. IPOs and FPOs are the best way to raise funds. There are no servicing costs attached to them. Neither is there any extra hidden costs attached, unlike debts. However, care should be taken to ensure that the money will not be lost. Due diligence and clearance report from rating agencies are the green signals, which indicate that the company can go for a public offering of share.
References
Hamilton, K., Hyland, B. and Dodd, J. L. (2011). Impairment: IASB-FASB Comparison. Drake Management Review. [online]. 1(1), 55–67. Retrieved from: https://pdfs.semanticscholar.org/8d8f/5fd070193d6fa52e79d1dee9cc6632159d8a.pdf [Accessed 24 May 2018]
Shoaf, V. & Zaldivar, I.P. (2005). Goodwill impairment: convergence not yet achieved. Retrieved from: https://www.freepatentsonline.com/article/Review-Business/133756140.html [Accessed 24 May 2018]
McKaig, T. (2011). Understanding Impairment Accounting: What It Is and When It Is Used. Retrieved from: https://www.financepractitioner.com/accountancy-checklists/understanding-impairment-accounting-what-it-is-and-when-it-is-used [Accessed 24 May 2018]
Peirson, G, Brown, R., Easton, S, Howard, P. & Pinder, S. (2015) Business Finance, 12th ed. North Ryde: McGraw-Hill Australia.
Kieso, D., Weygandt, J., Warfield, T; Young, N. & Wiecek, I . (2010). Intermediate accounting. Toronto: John Wiley & Sons Canada.
Deegan, C. M. (2011) In Financial accounting theory. North Ryde, N.S.W: McGraw-Hill
Parrino, R, Kidwell, D. and Bates, T. (2012) Fundamentals of corporate finance. Hoboken, NJ: Wiley
Woolworths limited. (2017) Woolworths limited Annual Report and accounts 2017. [online] Available from: https://www.woolworthslimited.com.au/icms_docs/182381_Annual_Report_2015.pdf [Accessed 24 May 2018]
