Impairment Loss For Cash Generating for Treatment - MyAssignmenthelp

Question: Discuss about theImpairment Loss For Cash Generating Units for Treatment. Answer: Impairment Loss For Cash Generating Units Excluding Goodwill Meaning of Impairment and treatment As per the common parlance the impairment is defined as the term to denote the reduction in the value of an asset. It means whenever the value of an asset is decreased from its book value then it may be called as the Impairment of an asset. As per the International Accounting Standard number thirty six on the Impairment of asset which was re issued in the month of March two thousand and four, the impairment is defined as the amount by which the amount of the carrying value of the asset is in excess of the recoverable amount of that asset. The carrying value of an asset is defined as the value at which the asset is recorded in the balance sheet of the company and is also known as the book value of an asset at the particular point of time. Carrying amount is identified by deducting the accumulated depreciation and the impairment loss from the book value of an asset (AASB 136, 2011). Impairment loss is treated as expenditure. On one hand it is charged to the Statement for Profit and Loss and on the other hand it is deducted from the asset value as shown in the Balance Sheet. Meaning of Recoverable Amount As per the common parlance, recoverable amount is the amount which can be recovered from the asset after selling in the market. In accordance with the provisions of the International Accounting Standard number thirty six, recoverable amount is the amount equivalent to the higher of the following: Net Selling Price and Value in Use Net Selling price is defined as the difference of the fair value of an asset and the cost incurred to dispose of the asset. Fair value of asset is the amount which the asset if sold in the market would be able to fetch. In terms of the International Financial Reporting Standard number 13, the fair value is amount which will be received for selling the asset or the amount which will be paid to set off the related liability in the transactions which normally takes place during the ordinary course of business at the particular point of time. Cost of disposal is the amount is the amount which is incurred to sell or dispose of the asset. Value in Use is defined as the present value of the cash flows which will be expected to be generated from the asset or the cash generating units in the future. Present value is calculated at the rate defined as per the internal rate of return of the company or the cost of capital. The above shall be calculated for each individual asset separately and in case the recoverable amount is not identifiable for the individual asset then it shall be calculated using the concept of cash generating units. Meaning of Cash Generating Unit and its Identification- Cash generating unit is defined as the small group of the asset which can be identified as pertaining to the same class of assets. The cash flows generated by one cash generating unit will be totally independent of the cash flows derived from other group of assets or class of assets. The concept of inclusion of cash generating unit in this standard has been emphasized because of the fact that there are certain assets which are not able to generate the cash flows on their own rather they require the help of other assets to generate the cash flows. Therefore, the individuals assets are grouped into the unit which further helps in identifying the cash flows and thus has been defined as the cash Generating Units. Sometimes also they are clubbed into one cash generating unit when there are chances that the asset cannot be disposed off separately (IAS 36, 2014) . For instance, the colleges of the Australian University have their own canteens and the cafeterias where they give the food and other eatables to the students in the college hours. It is the policy of the university that the contract to operate and run the canteen of all colleges shall be allocated to one contractor. Out of the twelve canteens, seven canteens are profitable and five canteens are non profitable and thus they are clubbed as one cash generating unit. Calculation of Impairment Loss for Cash Generating Units excluding Goodwill: If goodwill of the company cannot be allocated to cash generating units on the basis of reasonableness then the impairment test will be followed and there arises the four situations: Goodwill and corporate assets of the company are not allocable Only goodwill will be allocable Only Corporate Assets will be allocable Only some corporate assets will be allocable. The impairment loss in the first situation will be identified by going through the following steps: First of all the cash generating unit will be identified to which the particular assets is related Indentifying and determining the future cash flows and determine the value in use Identifying the recoverable amount for each cash generating unit Finding out the recoverable amount as the higher of the value as determined in step (b) and step (c). Carrying amount will be mentioned and it will be only of the cash generating units as the goodwill is nit allocable Determining the impairment loss for the cash generating unit only as the difference between the value defined in step (d) and step (e) Determine the revised carrying amount by deducting the impairment loss as defined in step (f) from the value as defined in step (e) Identify the larger cash generating unit with their carrying amount to which the goodwill can be allocated fairly and reasonably. Calculating the recoverable amount of the larger cash generating unit Calculate the carrying amount of the larger cash generating unit and calculate the impairment loss by deducting the carrying amount from the recoverable amount as determined in step (i). The amount of impairment loss will first be allocate to the goodwill and then to the corporate and other assets. For Example ABC Company acquired XYZ Company at 600 million dollar. The company has two cash generating X and Y having the fair value of 240 million dollar and 160 million dollar. Goodwill is recognized at 120 million dollar. Recoverable amount of X and Y has been estimated at 200 and 140 million dollar respectively. Calculate the impairment loss if the carrying amount of X and Y are 260 and 180 million dollar respectively. Answer Particulars X Y Total (Amount in Million Dollar) (Amount in Million Dollar) Net Fair Value 240 160 400 Pro Rate (%) 60 40 Net Carrying Amount 260 180 440 Recoverable Amount 200 140 340 Impairment Loss 60 40 100 References AASB 136, (2011), Impairment of Assets, available on https://www.aasb.gov.au/admin/file/content105/c9/AASB136_07-04_COMPjun09_01-10.pdf accessed on 25-05-2017. IAS 36, (2014), Impairment of Assets available on https://www.iasplus.com/en/standards/ias/ias36 accessed on 25-05-2017.