CHAPTER 35

IMPAIRMENT OF ASSET
Cash generating unit
Technical Knowledge

 To understand the concept of a cash generating unit.

 To measure the impairment of a cash generating unit.
 To allocate the impairment loss across the assets of a
cash generating unit.
 To know the impairment of a cash generating unit with
goodwill.
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.
 In practice, a cash generating unit may be a
department, a product line, or a factory for which the
output of product and the input of raw materials, labor
and overhead can be identified.

 As a basic rule, the recoverable amount of an asset shall

be determined for the asset individually.
 An entity shall determine the recoverable amount of the
cash generating unit to which the asset belongs.

 The cash generating unit must be the smallest

aggregation of assets for which cash flows can be
identified and which are independent of cash flows from
other assets or group of assets.
An aggregation that is “too high” is prohibited.
If aggregation is done at the “entity level”, there
would be no impairment to be recognized.
If the impairment testing is done at the
“department or product line level”, then some
“loss-producing assets” would be written down
to recoverable amount.
The “cash generating assets" would continue to
be accounted for at carrying amount.
Illustration 1
An entity has determined that one of its cash generating
units is impared.

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
 Most often, the recoverable amount of a cash
generating unit is equal to the value in use because the
unit is not to be disposed of.

 The entity calculated the value in use of the cash

generating unit to be ₱ 4,500,000.

Carrying amount of CGU 6,000,000

Value in use 4,500,000
Impairment loss 1,500,000
PAS 36, paragraph 104
 When an impairment loss is recognized for a cash
generating unit, this loss shall be 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.
ALLOCATION OF
IMPAIRMENT LOSS
 Since there is no goodwill, the impairment loss is allocated across the asset
based on carrying amount

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 the Impairment Loss

Impairment Loss 1,500,000
Accumulated Depreciation- Building 600,000
Land 450,000
Accumulated Depreciation- Equipment 375,000
inventory 75,000
 Illustration 2
An entity has determined that it's fine China division is a cash generating unit. The
entity calculated the Value in use of the division to be P 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
P 4,500,000
Carrying amount 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 P1,000,000 loss to the building, the carrying amount of the
building would be P 4,000,000 which is lower than the fair value less cost of disposal of P
4,500,000.
Paragraph 105 of PAS 36 provides that the carrying amount of an asset shall not be
reduced below the highest of fair value less cost of disposal, value in used and zero.
The amount if impairment loss that would otherwise have been allocated to the asset shall
be allocated prorata to the other 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 Cost 1,000,000 600,000 400,000
Reallocated loss (500,000)
3/5 x 500,000 300,000
2/5 x 500,000 200,000
Impairment loss 500,000 900,000 600,000
Journal Entry to record the impairment loss
Impairment loss 2,000,000
Accumulated Depreciation- Building 500,000
Accumulated Depreciation-equipment 900,000
inventory 600,000

After adjustment, the carrying amount of the building is P4,500,000 which is equal to it's fair value
less cost of disposal
CASH GENERATING UNIT WITH GOODWILL
 Goodwill does not generate cash flows independently
from other assets or group of assets, and therefore, the
recoverable amount of goodwill as an individual asset
cannot be determined.
 If there is an indication that goodwill may be impaired,
recoverable amount is determined for the cash generating
unit to which goodwill belongs.
 Determination of Impairment
 PAS 36, paragraph 90, provides that a cash generating unit
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.
 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.
Illustration
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 impairment review is required as the cash generating unit contains goodwill.

Carrying amount of CGU 6,000,000

Value in use 4,500,000
Impairment loss 1,500,000
ALLOCATION OF
IMPAIRMENT LOSS
Impairment Loss 1 500 000
Applicable to Goodwill 1 000 000
Excess Impairment Loss 500 000

CARRYING AMOUNT FRACTION LOSS

PPE 3 000 000 3/5 300 000

Patent 2 000 000 2/5 200 000
5 000 000 500 000
Journal Entry to Recognize
the IMPAIRMENT LOSS

Impairment Loss 1 500 000

Goodwill 1000 000
Accumulated Depreciation 300 000
Patent 200 000
 Another Illustration
An Entity has a CGU that has been experiencing significant losses in prior years. There
is objective indication that such CGU 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 gnerating unit is
₱ 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
Less :Value in Use 8 000 000
Good Will 1000 000
Impairment Loss 3 000 000
 Carrying Amount Fraction Loss
Accounts Receivable 2 000 000 20/100 600 000
Inventory 3 000 000 30/100 900 000
Land 1 500 000 15/100 450 000
Plant and Equipment 3 500 000 35/100 1 050 000
10 000 000 3 000 000
Journal Entry to Recognize the IMPAIRMENT LOSS

Impairment Loss 4 000 000

Accounts Receivable 600 000
Inventory 900 000
Land 450 000
Accumulated Depreciation 1 050 000
Goodwill 1 000 000

Reversal of impairment loss on Goodwill

 PAS 36 paragraph 124 , explicitly provides that an impairment loss
recognized for goodwill shall not reversed in a subsequent period
 Carrying amount of CGU
 PAS 36, paragraph 76 “ the 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 CGU.”
 Paragraph 76 “ the carrying amount of CGU does not include the
carrying amount of any recognized liability, unless the
recoverable amount of the cash generating unit cannot be
determined without consideration of this liability.
 WHY?
 Paragraph 43 of PAS 36 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
liabilities by the CGU, such as payables and provisions.
Corporate Assets
 Are assets other than goodwill that contribute to the
future cash flows of both the CGU under review and
other cash generating units.
 are group or divisional assets such as head office
building, EDP, equipment or a research center.
 Are assets that do not generate cash inflows
independently from other assets.
 If there us an indication that a corporate asset may be
impaired, the recoverable amount of the CGU to which
the corpcomparedorate asset belongs is determined
and with the carrying amount of the CGU
Illustration
An entity has two CGUs. There is no goodwill allocated to the CGUs.
The carrying amounts of the CGUs are:
 CGU One 10,000,000
 CGU Two 15,000,000
25,000,000
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’s carrying amount is P5,000,000

Value in Use:
 CGU One 9,000,000
 CGU Two 19,000,000
How to allocate the office building?
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 carrying amount 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 Amount Fraction Loss

Other Assets 10 000 000 10/12 2,500,000
Office Building 15 000 000 15/12 500,000
12,000,000 3,000,000