Question 6.5
Cash-generating unitKEY POINT
KEY POINT
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6: Accounting for non-current assets PART B SINGLE COMPANY FINANCIAL ACCOUNTS(c) Liabilities (eg payables) would be deducted from the net assets of the relevant cash-generating units. (d) The net figure for each cash-generating unit resulting from this exercise would be compared to the
relevant recoverable amount, computed on the same basis.
2.5 Goodwill and the impairment of assets
Goodwill acquired in a business combination (covered in chapter 7) does not generate cash flows independently of other assets. It must be allocated to each of the acquirer’s cash-generating units (or groups of cash-generating units) that are expected to benefit from the synergies of the combination. A cash-generating unit to which goodwill has been allocated is tested for impairment annually. The carrying amount of the unit, including goodwill, is compared with the recoverable amount. If the carrying amount of the unit exceeds the recoverable amount, the entity must recognise an impairment loss. The annual impairment test may be performed at any time during an accounting period, but must be performed at the same time every year.
2.6 Corporate assets
Corporate assets are group or divisional assets such as a head office building, computer equipment or a research centre. Essentially, corporate assets are assets that do not generate cash inflows independently from other assets, hence their carrying amount cannot be fully attributed to a cash-generating unit under review.
In testing a cash-generating unit for impairment, an entity should identify all the corporate assets that relate to the cash-generating unit. Corporate assets will need to be allocated to cash-generating units on a reasonable and consistent basis.
2.7 Accounting treatment of an impairment loss
An impairment loss has occurred if the recoverable amount of an asset is less than its carrying amount in the statement of financial position. This loss should be recognised immediately:
(a) The asset's carrying amount should be reduced to its recoverable amount in the statement of financial position.
(b) The impairment loss should be recognised immediately in profit or loss (unless the asset has been revalued in which case the loss is treated as a revaluation decrease).
After reducing an asset to its recoverable amount, the depreciation charge on the asset should then be based on its new carrying amount, its estimated residual value (if any) and its estimated remaining useful life.
An impairment loss should be recognised for a cash-generating unit if (and only if) the recoverable amount for the cash-generating unit is less than the carrying amount in the statement of financial position for all the assets in the unit. When an impairment loss is recognised for a cash-generating unit, the loss should be allocated between the assets in the unit in the following order.
(a) First, to the goodwill allocated to the cash-generating unit
(b) Then to all other assets in the cash-generating unit, on a pro rata basis
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 to sell (b) Its value in use (if determinable) (c) Zero
PART B SINGLE COMPANY FINANCIAL ACCOUNTS 6: Accounting for non-current assets
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A company that extracts natural gas and oil has a drilling platform in the Caspian Sea. It is required by legislation of the country concerned to remove and dismantle the platform at the end of its useful life. Accordingly, the company has included an amount in its accounts for removal and dismantling costs, and is depreciating this amount over the platform's expected life.
The company is carrying out an exercise to establish whether there has been an impairment of the platform. (a) Its carrying amount in the statement of financial position is $3m.
(b) The company has received an offer of $2.8m for the platform from another oil company. The bidder would take over the responsibility (and costs) for dismantling and removing the platform at the end of its life.
(c) The present value of the estimated cash flows from the platform's continued use is $3.3m. (d) The carrying amount in the statement of financial position for the provision for dismantling and
removal is currently $0.6m.
What should be the value of the drilling platform in the statement of financial position, and what, if anything, is the impairment loss?
Fair value less costs to sell = $2.8m
Value in use = PV of cash flows from use less the carrying amount of the provision/liability = $3.3m – $0.6m = $2.7m
Recoverable amount = Higher of these two amounts, ie $2.8m Carrying value = $3m
Impairment loss = $0.2m The carrying value should be reduced to $2.8m
A company has acquired another business for $4.5m: tangible assets are valued at $4.0m and goodwill at $0.5m.
An asset with a carrying value of $1m is destroyed in a terrorist attack. The asset was not insured. The loss of the asset, without insurance, has prompted the company to estimate whether there has been an impairment of assets in the acquired business and what the amount of any such loss is. The recoverable amount of the business (a single cash-generating unit) without the asset is measured as $3.1m.
There has been an impairment loss of $1.4m ($4.5m – $3.1m).
The impairment loss will be recognised in profit or loss. The loss will be allocated between the assets in the cash-generating unit as follows.
(a) A loss of $1m can be attributed directly to the uninsured asset that has been destroyed. (b) The remaining loss of $0.4m should be allocated to goodwill.
The carrying value of the assets will now be $3m for tangible assets and $0.1m for goodwill.