CHAPTER 62

IMPAIRMENT OF ASSET
Cash generating unit

Problem 62-1
(IFRS) At the beginning of current year, Jolo Company acquired all the assets and liabilities of
another entity. The acquiree has a number of operating divisions, including one whose major
industry is the manufacture of toy train. The toy train division is regarded as a cash generating
unit.

In paying P20,000,000 for the net assets of the acquiree, Jolo Company calculated that it had
acquired goodwill of P2,400,000. The goodwill was allocated to each of the divisions, and the
assets and liabilities acquired are measured at fair value at acquisition date. At year-end, the
carrying amounts of the assets of the toy train division were:

Building 2,000,000
Inventory 1,500,000
Trademark 1,000,000
Goodwill 500,000

There is a declining interest in toy train because of the aggressive marketing of computer-based
toys.

The entity measured the value in use of the toy train division at year-end at P3,600,000.

1. What is the impairment loss on goodwill?

a. 140,000
b. 250,000
C. 500,000
d. 0

2. What is the impairment loss to be allocated to the building?

a. 400,000
b. 500,000
c. 900,000
d. 300,000
Solution 62-1
Question 1 Answer c

Carrying amount of cash generating unit 5,000,000

Value in use 3,600,000
Impairment loss 1,400,000
Impairment loss allocated to goodwill 500,000
Remaining impairment loss 900,000

The carrying amount of goodwill is fully recognized as impairment loss.

PAS 36, paragraph 104, provides that when an impairment loss is recognized for a cash
generating unit, the loss is allocated to the assets of the unit in the following order:
a. First, to the goodwill, if any.
b. Then, to all other noncash assets of the unit prorata based on their carrying amount.

Question 2 Answer a
Carrying amount Fraction Loss
Building 2,000,000 20/45 400,000
Inventory 1,500,000 15/45 300,000
Trademark 1,000,000 10/45 200,000
4,500,000 900,000

The remaining loss of P900,000 is allocated to the assets other than goodwill based on carrying
amount.

Problem 62-2 (IFRS)

Bronze Company operates a production line which is treated as a cash generating unit for
impairment review purposes. At year-end, the carrying amounts of the noncurrent assets are as
follows:
Goodwill 1,100,000
Machinery 2,200,000

The value in use of the production line is estimated at P2,700,000 at this time.

1. What is the revised carrying amount of goodwill after recognition of impairment?

a. 1,100,000
b. 900,000
c. 800,000
d. 500,000

2. What is the revised carrying amount of machinery after recognition of impairment?

a. 2,200,000
b. 1,800,000
c. 1,600,000
d. 1,900,000

Solution 62-2
Question 1 Answer d
Carrying amount of cash generating unit 3,300,000
Value in use 2,700,000
Impairment loss 600,000
Goodwill 1,100,000
Impairment loss applied against goodwill only (600,000)
Adjusted carrying amount 500,000

Question 2 Answer a
The machinery is not impaired. The carrying amount remains at P2,200,000.

Problem 62-3 (IFRS)

Palawan Company determined that the electronics division is a cash generating unit. The entity
calculated the value in use of the division to be P8,000,000
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
10,000,000

The entity also determined that the fair value less cost of disposal of the building is P4,500,000.

1. What is the total impairment loss?

a. 2,000,000
b. 4,000,000
c. 3,000,000
2. What is the impairment loss allocated to building?
a. 1,000,000
b. 500,000
c. 750,000
d. 0

3. What is the impairment loss allocated to equipment?

a. 600,000
b. 850,000
c. 900,000
d. 0

4. What is the impairment loss allocated to inventory?

a. 400,000
b. 200,000
c. 600,000

Solution 62-3
Question 1 Answer a Question 2 Answer b
Question 3 Answer c Question 4 Answer c

Carrying amount of cash generating unit 10,000,000

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

Allocation of impairment loss

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
2,000,000

Observe that after allocating the P1,000,000 loss to the building, the carrying amount of the
building would be P4,000,000 which is lower than its fair value of P4,500,000.

PAS 36, paragraph 105, provides that the carrying amount of an asset shall not be reduced below
the highest of fair value less cost of disposal, value in use and zero.
The amount of impairment loss that would otherwise have been allocated to the asset shall be
reallocated prorata to the other noncash assets of the cash generating unit.

Accordingly, only P500,000 loss is allocated to the building and the balance of P500,000 is
reallocated to the equipment and inventory prorata.

Building Equipment Inventory

Allocated loss 1,000,000 600,000 400,000
Reallocated loss: ( 500,000)
(3/5 x 500,000) 300,000
(215 x 500,000) _______ ________ 200,000
Impairment loss 500,000 900,000 600,000

Problem 62-4 (IAA)

On January 1, 2018, Revlon Company acquired all of the outstanding ordinary shares of an
acquire for P44,000,000. The fair value of the acquiree's identifiable tangible and intangible
assets totaled P50,000,00 and the fair value of liabilities assured by the acquirer was
P15,000,000. The acquirer performed the required goodwill impairment test on December 31,
2018. Management provided the following data:

Fair value of acquiree's net assets including goodwill 37,000,000

Carrying amount of acquiree's net assets including goodwill 41,000,000

What amount of goodwill should be reported on December 31, 2018 after recognizing any
impairment loss?
a. 9,000,000
b. 4,000,000
C. 5,000,000

Solution 62-4 Answer c

Fair value of acquiree's net assets including goodwill 37,000,000
Carrying amount of acquiree's net assets, including goodwill 41,000,000
Impairment loss 4,000,000
Fair value of acquiree's identifiable assets 50,000,000
Fair value of acquiree's liabilities 15,000,000
Fair value of acquiree's net assets 35,000,000
Acquisition cost 44,000,000
Goodwill 9,000,000
Impairment loss - all charged against goodwill (4,000,000)
Carrying amount of goodwill 5,000,000

Problem 62-5 (IFRS)

Devin Company is testing two reporting units for impairment of goodwill.
Telecommunication Networking
Segment carrying amount including goodwill 2,500,000 3,000,000
Carrying amount of goodwill 500,000 500,000
Estimated total fair value of segment 2,900,000 2,800,000
Estimated total fair value of segment
other than goodwill 2,100,000 2,500,000

1. After properly adjusting the goodwill for impairment, what is the adjusted amount of goodwill
for the reporting unit telecommunication?
a. 400,000
b. 800,000
c. 500,000
d. 0

2. After properly adjusting the goodwill for impairment, what is the adjusted amount of goodwill
for the reporting unit networking?
a. 500,000
b. 200,000
c. 300,000

Solution 62-5
Question 1 Answer c
Segment carrying amount - Telecommunication 2,500,000
Estimated total fair value of segment 2,900,000
No impairment loss -

Question 2 Answer c
Segment carrying amount - Networking 3,000,000
Estimated total fair value of segment 2,800,000
Impairment loss - applied to goodwill only 200,000
Goodwill - Networking (500,000 - 200,000) 300,000
Problem 62-6 (AICPA Adapted)
During the current year, Nicole Company acquired Jones Company in a business combination.
As a result of the combination, the following amounts of goodwill were recorded for each of the
three reporting units of the acquired entity:
Retailing 300,000
Service 200,000
Financing 400,000

Near the year-end, a new major competitor entered the entity's market and the entity was
concerned that this might cause a significant decline in the value of goodwill.

Accordingly, the entity computed the implied value of the goodwill for the three major reporting
units at year-end as follows:
Retailing 250,000
Service 100,000
Financing 600,000

What amount of goodwill impairment should be recorded for the current year?
a. 100,000
b. 250,000
C. 150,000
d. 0

Solution 62-6 Answer c

Goodwill Implied value Loss
Retailing 300,000 250,000 50,000
Service 200,000 100,000 100,000
Financing 400,000 600,000 __ -
Total impairment loss 150,000

Goodwill impairment is determined at the level of the individual reporting unit and not at the
entity level.

Thus, no loss is recognized for the Financing unit because the implied value of goodwill exceeds
the carrying amount.
Problem 62-7 (IFRS)
One of the cash generating units of Sanmig Company is the production of liquor. The entity
believed that the assets of the cash generating unit (CGU) are impaired based on an analysis of
economic indicators.
The assets and liabilities of the cash generating unit at carrying amount at year-end are:
Cash 4,000,000
Accounts receivable 6,000,000
Allowance for doubtful accounts 1,000,000
Inventory 7,000,000
Property, plant and equipment 22,000,000
Accumulated depreciation 4,000,000
Goodwill 3,000,000
Accounts payable 2,000,000
Loans payable 1,000,000

The entity determined that the value in use of the cash generating unit is P30,000,000. The
accounts receivable are considered collectible, except those considered doubtful.

1. What is the impairment loss on goodwill?

a. 3,000,000
b. 1,500,000
c. 2,000,000

2. What is the impairment loss on inventory?

a. 3,500,000
b. 1,000,000
C. 1,120,000

3. What is the impairment loss on property, plant and equipment?

a. 4,000,000
b. 2,880,000
C. 2,400,000
d. 4,200,000

Solution 62-7
Question 1 Answer a
Question 2 Answer c
Question 3 Answer b
Cash 4,000,000
Accounts receivable -- net 5,000,000
Inventory 7,000,000
Property, plant and equipment - net 18,000,000
Goodwill 3,000,000
Carrying amount of CGU 37,000,000
Value in use 30,000,000
Impairment loss 7,000,000
Impairment loss allocated to goodwill 3,000,000
Remaining impairment loss 4,000,000

Carrying amount Fraction Loss

Inventory 7,000,000 7/25 1,120,000
Property, plant and equipment 18,000,000 8/25 2,880,000
25,000,000 4,000,000

The impairment loss is not allocated to the accounts receivable because the accounts are
considered collectible except those doubtful.

Carrying amount of CGU

Observe that the liabilities of the cash generating unit are ignored in determining the carrying
amount of the CGU.

PAS 36, paragraph 76, provides that the carrying amount of a cash generating unit includes the
carrying amount of only those assets that can be attributed directly or allocated on a reasonable
and consistent basis to the cash generating unit and shall generate the future cash inflows used
in determining the value in use of the cash generating unit.

Paragraph 76 further provides that the carrying amount of the cash generating unit does not
include the carrying amount of any cognized liability unless the recoverable amount of the cash
generating unit cannot be determined without consideration of this liability.

Problem 62-8 (IFRS)

Brandy Company has two cash generating units. At year-end, the carrying amounts of the assets
of one cash generating unit are:
Inventory 200,000
Accounts receivable 300,000
Plant and equipment 6,000,000
Accumulated depreciation 2,600,000
Patent 850,000
Goodwill 100,000

The accounts receivable are regarded as collectible.

The fair value less cost of disposal of the inventory is equal to the carrying amount

The patent has a fair value less cost of disposal of P750,000.

At year-end, the entity undertook impairment testing of the cash generating unit and determined
the value in use of the unit at P4,050,000.

1. What is the impairment loss allocated to the plant and equipment?

a. 800,000
b. 700,000
c. 600,000
d. 560,000

2. What is the impairment loss allocated to patent?

a. 140,000
b. 100,000
c. 40,000

Solution 62-8
Question 1 Answer c
Question 2 Answer
Inventory 200,000
Accounts receivable 300,000
Plant and equipment 6,000,000
Accumulated depreciation (2,600,000)
Patent 850,000
Goodwill 100,000
Carrying amount of CGU 4,850,000
Value in use 4,050,000
Impairment loss 800,000
Impairment loss allocated to goodwill 100,000
Remaining impairment loss 700,000
 Plant Patent
Allocated loss 560,000 140,000
Reallocated loss 40,000 ( 40,000)
600,000 100,000

Carrying amount Fraction Loss

Plant and equipment 3,400,000 3,400/4,250 560,000
Patent 850,000 850/4,250 140,000
Total 4,250,000 700,000

The patent shall not be reduced to an amount below the fair value less cost of disposal of
P750,000.

No impairment loss is allocated to accounts receivable because the accounts are considered
collectible.

No impairment loss is allocated to inventory because the fair value less cost of disposal of
inventory is equal to carrying amount.

Problem 62-9 (IFRS)

Uranus Company had various cash generating units. At year-end, one cash generating unit had
the following carrying amount of assets:
Cash 600,000
Inventory 1,400,000
Land 2,500,000
Plant and equipment 9,000,000
Accumulated depreciation (1,500,000)
Goodwill 1,000,000
Carrying amount 13,000,000

The management determined the value in use of the cash generating unit at P8,500,000.

The fair value less cost of disposal for the inventory is greater than the carrying amount.

What is the impairment loss allocated to plant and equipment?

a. 3,500,000
b. 4,500,000
c. 2,625,000
d. 3,375,000
Solution 62-9 Answer c
Carrying amount of CGU 13,000,000
Value in use 8,500,000
Impairment loss 4,500,000
Impairment loss allocated to goodwill 1,000,000
Remaining impairment loss 3,500,000

Carrying amount Fraction Loss

Land 2,500,000 25/100 875,000
Plant and equipment 7,500,000 75/100 2.625,000
10,000,000 3,500,000

No impairment loss is allocated to inventory because the fair value less cost of disposal of
inventory is higher than car.

Problem 62-10 (IAA)

On December 31, 2018, Zernice Company acquired the following three intangible assets:
* A trademark for P3,000,000. The tradeinark has 4 years remaining in its legal life. It is
anticipated that the trademark will be renewed in the future indefinitely.
* Goodwill for P500,000.
* A customer list for P2,100,000. By contract, the entity has exclusive use of the list for five years.
However, it is expected that the list will have an economic life of 3 years.

On December 31, 2019, before any adjusting entries for the year were made, the following
information was assembled:

a. Because of a decline in the economy, the trademark is now expected to generate cash flows of
just P105,000 per year.
b. The cash flow expected to be generated by the cash generating unit to which the goodwill is
related is P200,000 per year for the next 20 years. The carrying amounts of the assets and
liabilities of the cash generating unit are:
Identifiable assets 3,500,000
Goodwill 500,000
Liabilities 1,100,000

It is reliably determined that the cash flows of the cash generating it cannot be computed
without consideration of the liabilities.
c. The cash flows expected to be generated by the customer list are P800,000 in 2020 and
P500,000 in 2021.

d. The appropriate discount rate is 6%. The present value of 1 at 10% is .94 for one period
and .89 for two periods. The present value ordinary annuity of 1 at 10% for 20 periods is 11.45.

1. What is the impairment loss on trademark?

a. 3,000,000
b. 1,750,000
c. 1,250,000
d. 0

2. What is the impairment loss on goodwill?

a. 610,000
b. 500,000
c. 110,000
d. 0

3. What is the impairment loss on customer list?.

a. 178,000
b. 243,000
c. 203,000
d. O
d.

Solution 62-10
Question 1 Answer c
Trademark 3,000,000
PV of cash flows 1,750,000
Impairment loss on trademark 1,250,000

The present value of indefinite cash flows is simply computed by dividing the annual cash flow by
the discount rate. Thus, P105,000 divided by 6% equals P1,750,000.

Question 2 Answer b
Identifiable assets 3,500,000
Goodwill 500,000
Total assets 4,000,000
Liabilities (1,100,000)
Carrying amount of net assets 2,900,000
Present value of cash flows (200,000 x 11.45) 2,290,000
Impairment loss on CGU 610,000
Impairment loss on goodwill 500,000
Impairment loss on other assets 110,000

The amount of liabilities is deducted from the amount of total assets because the cash flows
cannot be determined without consideration of the liabilities.

Question 3 Answer c
Customer list - January 1, 2019 2,100,000
Amortization for 2019 (2,100,000/3) ( 700,000)
Carrying amount -- December 31, 2019 1,400,000
Present value of cash flows 1,197,000
Impairment loss on customer list 203,000

Present value of cash flows:

2020 (800.000 x .94) 752,000
2021 (500,000 x .89) 445,000
Total present value of cash flows 1,197,000