Chapter 35- Impairment of Asset

Cash Generating Unit

Definition

A cash generating unit (CGU) is the smallest identifiable group of assets that generate cash inflows
from continuing use that are largely independent of the cash inflows from other assets or group of
assets.

CGU may be a department, product line or a factory for which the output of product and the input of
raw materials, labor and overhead can be identified.

Example:
 Retail store of a fast food chain
 Bookstore of a school
 Convenient store of a gasoline station
 Supermarket of a mall

-These examples generate cash flows that are independent from the cash flows of the entity as a
whole. If these segments are the smallest identifiable group of assets, then they are considered as
CGUs.

Concepts

 The recoverable amount of an asset shall be determined for the asset individually. If it is not
possible to estimate the recoverable amount of the individual asset, an entity shall determine the
recoverable amount of the cash generating unit to which the asset belongs to.

 Assets whose recoverable amount can be determined reliably are tested for impairment
individually.

 Assets whose recoverable amount cannot be determined reliably (e.g., assets that do not
generate their own cash flows) are included in a CGU. The CGU is the one tested for impairment.
However, when management is committed to sell an individual asset belonging to a CGU, that
individual asset is separately tested for impairment.

Measurement/Principles

 Recoverable Amount of CGU: Higher of the CGU’s fair value less cost of disposal and value in
use.

Note: Most often, the recoverable amount of a CGU is equal to the value in use because the unit
is not to be disposed of.

 Carrying Amount of CGU

-Includes the carrying amount of only those assets that can be attributed directly or allocated on a
reasonable and consistent basis to the CGU and can generate the future cash inflows used in
determining the value in use of the cash generating unit. (PFRS 36, par. 76).
-It does not include the carrying amount of any recognized liability, unless the recoverable
amount of the CGU cannot be determined without consideration of this liability. (par. 76, PFRS 36).
 -The reason is stated in Pas 36, par. 43 which mandates that to avoid double counting,
estimates of future cash flows do not include cash outflows that relate to obligations that have
been recognized as liability by the CGU, such as payables and provisions.

 Impairment Loss: Compare the carrying amount of the asset with the recoverable amount.

Note: An impairment loss shall be recognized for a CGU if, and only if, the recoverable amount of
the unit is less than the carrying amount of the unit. (RA < CA)

Impairment Loss recognized for the CGU shall be allocated to the assets of the unit in the
following order:
1. Goodwill, if any.
2. Noncash Assets of the unit prorata based on their carrying amount.

Remember: When allocating the impairment loss, the carrying amount of an asset belonging to
the CGU shall not be reduced below the highest of:

a. Its fair value less costs of disposal (if determinable);

b. Its value in use (if determinable); and
c. Zero.

Any amount that cannot be allocated to an asset because of the limitation above is allocated to
the other assets of the CGU pro rata based on their carrying amounts.

Additional Concepts

 Goodwill does not generate cash flows independently from other assets or groups of assets, and
therefore, the recoverable amount of goodwill as an individual asset cannot be determined.
Consequently, the recoverable amount is determined for the CGU to which goodwill belongs, if
there is an indication that goodwill may be impaired.

 A CGU to which goodwill has been allocated shall be tested for impairment at least annually by
comparing the carrying amount of the unit, including the goodwill, with the recoverable amount.

Note: (RA < CA)

a. If the recoverable amount of the unit exceeds the carrying amount of the unit, the unit and the
goodwill allocated to that unit shall be regarded as not impaired.
b. If the carrying amount of the unit exceeds the recoverable amount of the unit, the entity must
recognize an impairment loss.

 There is no reversal of impairment loss on goodwill.

 Corporate assets are assets that contribute to the future cash flows of several departments or
divisions within an entity.

E.g. Electronic Data Processing equipment

Head office building
Research center

 Corporate assets do not generate cash inflows independently.

 To test a corporate asset for impairment, it needs to be allocated to the various CGUs using that
asset-quite similar to goodwill.

Illustrations/Application

I. Impairment of CGU-without goodwill

An entity has determined that one of its cash generating units is impaired.

The assets of the cash generating unit at carrying amount are:

Building 2,400,000
Land 1,800,000
Equipment 1,500,000
Inventory 300,000
Carrying amount of CGU 6,000,000

The entity calculated the value in use of the

Carrying amount of CGU 6,000,000 cash generating unit to be Php 4,500,000.
Value in use 4,500,000
Impairment loss 1,500,000 Computation of Impairment Loss

Compare carrying amount with recoverable

amount.

Allocation of impairment Loss

Since there is no goodwill, the impairment loss is allocated

across the assets based on carrying amount- Pro rata allocation.

Carrying Amount Fraction Loss

Building 2,400,000 24/60 600,000
Land 1,800,000 18/60 450,000
Equipment 1,500,000 15/60 375,000
Inventory 300,000 3/60 75,000
6,000,000 1,500,000

Journal Entry to record Impairment Loss

Impairment loss 1,500,000

Accumulated Depreciation-building 600,000
Land 450,000
Accumulated Depreciation-equipment 375,000
Inventory 75,000
Remember to apply the concepts and guidelines for measurement!
II. Fair value less cost of disposal of one of the assets determinable

An entity has determined that its fine china division is a cash generating unit. The entity calculated the
value in use of the division to be Php 8,000,000.

The assets of the cash generating unit at carrying amount are as follows:

Building 5,000,000
Equipment 3,000,000
Inventory 2,000,000
Carrying amount of CGU 10,000,000

The entity has also determined that the fair value less cost of disposal of the building is
Php 4,500,000.

Carrying amount of CGU 10,000,000

Value in use 8,000,000
Impairment loss 2,000,000

Allocation based on carrying amount

Building (5/10 x 2,000,000) 1,000,000

Equipment (3/10 x 2,000,000) 600,000
Inventory (2/10 x 2,000,000) 400,000
Total impairment loss 2,000,000

Observe that after allocating the Php 1,000,000 loss to the building, the carrying amount of the
building would be Php 4,000,000 which is lower than the fair value less cost of disposal of Php
4,500,000.

Take note that the carrying amount of an asset shall not be reduced below the highest of fair value
less cost of disposal. The amount of impairment loss that would otherwise have been allocated to the
asset shall be allocated prorata to the other assets of the CGU.

Accordingly, only Php 500,000 loss is allocated to the building and balance of Php 500,000 is
reallocated to the equipment and inventory prorata.
Remember to apply the principle on the allocation of impairment loss!

Building Equipment Inventory

Allocated loss 1,000,000 600,000 400,000
Reallocated loss (500,000)
3/5 x 300,000
500,000
2/5 x 200,000
500,000
Impairment loss 500,000 900,000 600,000 Journal Entry to record Impairment
Loss

Impairment loss 2,000,000

Accumulated Depreciation-building 500,000
Accumulated Depreciation-equipment 900,000
 Inventory 400,000

After the adjustment, the carrying amount of the building is Php 4,500,000 which is equal to its fair
value less cost of disposal.

III. Impairment of CGU-with goodwill

The assets of a cash generating unit at carrying amount at year-end are as follows:

Property, plant and equipment 3,000,000

Patent 2,000,000
Goodwill 1,000,000
Carrying amount of CGU 6,000,000

An annual impairment review is required as the cash generating unit contains goodwill.

The most recent review assesses the value in use of the cash generating unit to be Php 4,500,000.

Carrying amount of CGU 6,000,000

Value in use 4,500,000
Impairment loss 1,500,000

Allocation of impairment loss

Allocate first the impairment loss to goodwill and then the excess to the noncash assets prorata
based on carrying amount.
Take note of the order of priority!

Impairment loss 1,500,000

Applicable to goodwill 1,000,000
Excess impairment loss 500,000

Carrying Fraction Loss

Amount
Property, plant and 3,000,000 3/5 300,000
equipment
Patent 2,000,000 2/5 200,000
5,000,000 500,000
Journal Entry to record impairment loss

Impairment loss 1,500,000

Goodwill 1,000,000
Accumulated Depreciation-PPE 300,000
Patent 200,000

IV. CGU with assets and liabilities

An entity has a cash generating unit that has been experiencing significant losses in prior years.
There is objective indication that such cash generating unit is impaired.
At current year-end, the cash generating unit is tested for impairment with the following assets and
liabilities:

Cash 1,000,000
Accounts receivable 2,000,000
Inventory 3,000,000
Land 1,500,000
Plant and equipment 6,500,000
Accumulated depreciation 3,000,000
Goodwill 1,000,000
Accounts payable 2,500,000
Accrued liabilities 500,000

It is reliably determined that the value in use of the cash generating unit is Php 8,000,000.

Allocation of impairment loss

Cash 1,000,000
Accounts receivable 2,000,000
Inventory 3,000,000
Land 1,500,000
Plant and equipment 6,500,000
Accumulated depreciation (3,000,000)
Goodwill 1,000,000
Carrying amount of CGU 12,000,000
Value in use 8,000,000
Impairment loss 4,000,000
Applicable to goodwill 1,000,000
Applicable to noncash assets 3,000,000

The remaining impairment loss of Php 3,000,000 is allocated to other noncash assets based on
carrying amount:

CA Fraction Loss
A/R. 2,000,000 20/100 600,000
Inv. 3,000,000 30/100 900,000
Land 1,500,000 15/100 450,000
P&E-net 3,500,000 35/100 1,050,000
10,000,000 3,000,000

Journal entry to record impairment loss

Impairment loss 4,000,000

Goodwill 1,000,000
Accounts receivable 600,000
Inventory 900,000
Land 450,000
Accumulated depreciation-PPE 1,050,000

Observe that the liabilities of the CGU are ignored in determining the carrying amount of the CGU.
Take note that only the carrying amount of those assets directly attributable to the CGU are included
in the computation of the CGU’s carrying amount. The carrying amount of any recognized liability is
not included, unless the CGU’s recoverable amount cannot be determined without consideration of
this liability.

V. CGU Impairment: corporate assets

An entity has two cash generating units, CGU one and CGU Two. There is no goodwill allocated to
the cash generating units. The carrying amounts of the cash generating units are:

CGU One 10,000,000

CGU Two 15,000,000

The entity has an office building that has not been included in the carrying amounts of the cash
generating units and can be allocated to the units on the basis of carrying amount. The office building
has a carrying amount of Php 5,000,000.

The entity calculated the value in use of the cash generating units as follows:

CGU One 9,000,000

CGU Two 19,000,000

The carrying amounts of the units including an allocated portion of the office building are determined
as follows:

CGU One CGU Two

Carrying amount 10,000,000 15,000,000
Office building:
10/25 x 5,000,000 2,000,000
15/25 x 5,000,000 3,000,000
Total CA 12,000,000 18,000,000
Value in use 9,000,000 19,000,000
Impairment loss 3,000,000 -

CGU Two is not impaired because the value in use is higher than the carrying amount. The
impairment loss on CGU One is allocated as follows:
Carrying Fractio Loss
Amount n
Other Assets 10,000,000 10/12 2,500,000
Office Building 2,000,000 2/12 500,000
12,000,000 3,000,000

Journal entry to record impairment loss

Impairment loss 3,000,000

CGU #1’s other assets 2,500,000
Corporate Asset-office building 500,000
Summary

 If an asset’s recoverable amount can be determined reliably, it is tested for

impairment on its own. If its recoverable amount cannot be determined reliably,
the CGU to which that asset belongs is the one tested for impairment.

 For purposes of impairment, goodwill and corporate assets are allocated to CGUs.

 The impairment loss on a CGU is allocated first to any goodwill in the CGU. The
excess is allocated to the other assets of the CGU prorata based on their carrying
amount.

 In allocating an impairment loss, the carrying amount of an asset should not be

reduced below the highest of:

a) Its fair value less costs of disposal (if determinable);

b) Its value in use (if determinable); and
c) Zero.

The amount of the impairment loss that would otherwise have been allocated to
the asset shall be allocated prorata to the other assets of the unit.

 Impairment loss on goodwill is never reversed.

1. It is the smallest identifiable group of assets that generate cash inflows from continuing use that
are largely independent of the cash inflows from other assets or group of assets.

a. Cash generating unit

b. Goodwill
c. Corporate Asset
d. The entity as a whole

Answer: A

Reference: Theory of Accounts, C. Valix, 2012, p.826

2. These are assets other than goodwill that contribute to the future cash flows of both the cash
generating unit under review and other cash generating units.

a. Corporate assets
b. Property, plant and equipment
c. Group
d. Cash generating unit

Answer: A

Reference: Theory of Accounts, C. Valix, 2012, p.828

3. Which of the following statements is incorrect concerning corporate assets?

a. Corporate assets are group or divisional assets such as head office building, EDP, equipment
or a research center.
b. Essentially, corporate assets generate cash inflows independently from other assets.
c. The recoverable amount of an individual corporate asset cannot be determined unless
management has decided to dispose of the asset.
d. If there is an indication that a corporate asset may be impaired, the recoverable amount of the
cash generating unit to which the corporate asset belongs is determined and compared with
the carrying amount of the cash generating unit.

Answer: B

Reference: Theory of Accounts, C. Valix, 2012, p.828

4. When impairment testing a cash generating unit, any corporate assets shall

a. Be allocated on a reasonable and consistent basis.

b. Be separately impairment tested.
c. Be included in the head office assets or parent’s assets and impairment tested along with that
cash generating unit.
d. Not be allocated to cash generating units.
Answer: A

Reference: Theory of Accounts, C. Valix, 2012, p.829

5. When an entity is considering whether to apply an impairment test to an individual asset or to the
cash generating unit to which that asset belongs, which of the following statements is true?

I. If the individual asset does not generate cash inflows that are largely independent of those from
other assets, the cash generating unit shall be identified.
II. If the individual asset generates an insignificant proportion of the cash inflows of the entity as a
whole, the cash generating unit shall not be identified.

a. I only
b. II only
c. Both I and II
d. Neither I nor II

Answer: C

Reference: Theory of Accounts, C. Valix, 2012, p.832

6. Which of the following statements is incorrect?

a. Goodwill arising from business combination can only be tested for impairment in conjunction
with the cash generating unit to which the goodwill is allocated.
b. Impairment loss recognized on goodwill shall never be reversed.
c. The impairment loss on a cash generating unit (CGU) is allocated to goodwill and the other
assets belonging to the CGU on a prorata basis.
d. Impairment losses on goodwill are never recognized in other comprehensive income.

Answer: D

Reference: Intermediate Accounting I-B, Z. Millan, 2019, p.526

7. Which of the following impairments should never be reversed?

a. Impairment loss on goodwill

b. Impairment loss on a machinery measured under the revaluation model
c. Impairment loss on an investment property measured under the fair value model
d. Impairment loss on an investment property measured under the cost model

Answer: A

Reference: Intermediate Accounting I-B, Z. Millan, 2019, p.533

8. What is the allocation of an impairment loss recognized for a cash generating unit?

a. Across the assets of the unit based on carrying amount.

b. Across the assets of the unit based on fair value.
c. First, to any goodwill, and the balance to the other assets prorata based fair value.
d. First, to any goodwill, and the balance to the other assets prorata based on carrying amount.

Answer: D
Reference: Conceptual Framework and Accounting Standards, C. Valix et al, 2018, p.496

9. If the recoverable amount of an individual asset cannot be estimated, the impairment test is
instead applied to:

a. The share price of the entity.

b. The cash reserves of the entity.
c. The cash generating unit to which the asset belongs.
d. The fair value of all other assets of the entity.

Answer: C

Reference: Australian Accounting Standards, R. Picker, 2006, sec. 13.4

10. The impairment test for goodwill must be conducted:

a. Annually, at the same time every year.

b. Annually, at the end of the reporting period.

c. Once every three years at the end of reporting period.

d. Only if it is reasonable to expect that goodwill has been impaired.

Answer: A

Reference: Australian Accounting Standards, R. Picker, 2006, sec. 13.5

11. The recoverable amount of a cash generating unit is

a. The selling price lest cost to sell.

b. The discounted cash flow from the use and disposal of the unit.

c. The higher between the selling price less cost to sell and the discounted cash flow from the
use and disposal of the unit.

d. The lower between the selling price less cost to sell and the discounted cash flow from the use
and disposal of the unit.

Answer: C

Reference: Intermediate Accounting, P. Empleo, 2010, p.360