Impairment of Cash Generating Units for Assets - MyAssignmenthelp

Question: Discuss about theImpairment of Cash Generating Units for Fixed Assets. Answer: Impairment Loss of Cash Generating Units Impairment loss occurs if the amount recoverable is less than the carrying amount shown in the books. Impairment loss is calculated only of cash generating units which are capable of generating revenue to the company. It is not calculated for every individual asset, it is calculated only those assets which are capable of generating revenue to the company. Impairment loss is only calculated if some conditions which we will discuss later on arise. As per IAS 36, the carrying amount of cash generating unit should not be higher than its recoverable amount. Recoverable amount is higher of the value in use and fair value less cost incurred. It is necessary to record the Cash Generating Units at a recoverable amount because if CGUs are recorded at carrying amount which is higher than recoverable amount then it will give wrong report in the mind of readers of financial statements. As per IAS-36, there can be assets which together form Cash Generating Units and individually they are not capable of generating revenue to the company. So, valuation should be done of all assets together which form part of CGUs. 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. It all depends upon the revenue generation to the company. In other words, If some assets together can generate revenue for the company, then that all assets together are known a s 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. There can be reversal of the impairment of assets. That can only be possible if the reverse of conditions which are necessary for the impairment of assets occurs but reversal of impairment loss of goodwill is prohibited. IAS 36 does not allow impairment of goodwill because goodwill is an intangible asset. 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: Goodwill should also be tested for impairment on the reporting date if some benefit is expected from the combination. Impairment should be tested atleast annually if the recoverable amount of the cash generating unit to which it is allocated gets lower than carrying amount. 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. In other words, impairment should first be allocated to goodwill then to any other assets. So, this is the only reason of impairment of goodwill other as goodwill is an asset it should be impaired. If goodwill get combined with any other asset, in other words it is combined with any other Cash Generating Unit then impairment can be allocated first to goodwill and then balance if any to the rest of assets. In other words, 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: Market value has declined. There is some negative change in the technology. Increase in the market rate. The net assets of the company are higher than market capitalization. Internal Sources: Premises get damaged. Non-working asset and ready to be disposed of. Worst economic conditions Apart from above some more factors can be added as they are only inclusive factors. Now we will learn how to calculate recoverable amount, value in use and fair value less cost of disposal. Determining Recoverable Amount: i) If carrying amount is less than that of fair value less cost of disposal or the value in use, then there is no impairment loss. ii) If fair value less cost of disposal cannot be determined then recoverable amount will be the value in use amount. For the assets which are to be disposed of, fair value less cost of disposal is recoverable amount. Fair Value less cost of disposal: Fair value is to be determined as per IFRS 13 and cost of disposal is the direct added costs. Value in Use: value in use can be calculated as below: The amount which an entity believes that it will earn in future Company should also consider time value of money. The future cash flows which are used in calculating above value in use should be based on realistic terms and should be achievable. 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 is recognized in the profit or loss unless it relates to a revalued asset. There can be chances that there is reversal of impairment loss due to reversal of conditions that existed at the time of impairment like lowering of market rates, improve in government policies etc. But one thing which should be considered while reversal of impairment of loss is that the reversal should not be more than depreciation amount already deducted from the asset. Reversal of impairment loss for goodwill is prohibited. 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.