Solutions Manual: Company Accounting 10e

Solutions Manual
to accompany
Company Accounting 10e

prepared by
Ken Leo
John Hoggett
John Sweeting
Jeffrey Knapp
Sue McGowan
© John Wiley & Sons Australia, Ltd 2015

Chapter 13: Impairment of assets
Chapter 13 – Impairment of assets
REVIEW QUESTIONS
1. What is an impairment test?

It is a test to determine if an entity’s assets are overstated, that is, whether the carrying amount
of the assets is greater than their recoverable amount.
2. Why is an impairment test considered necessary?
An entity’s balance sheet may overstate the assets, either because the assets’ fair values are
lower than the carrying amounts, or because the accountant’s estimates are wrong eg the
calculation of depreciation requires estimates of residual value, useful life, pattern of benefits.
3. When should an entity conduct an impairment test?
At each reporting date, an entity must assess whether there is any indication of impairment. If
such an indication exists, the entity shall estimate the recoverable amount of the asset [AASB
136 para 9]
4. What are some external indicators of impairment?
AASB 136 para 12:

(a) significant decline in market value
(b) significant changes in the technological, market, economic or legal environment in which
the entity operates
(c) increases in market interest rates
(d) the carrying amount of the entity’s assets exceeds the entity’s market capitalisation
5. What are some internal indicators of impairment?
AASB 136 para 12:

(a) evidence of obsolescence or physical damage
(b) assets becoming idle, plans to discontinue operations, plans to dispose of assets
(c) economic performance is worse than expected
6. What is meant by recoverable amount?
Recoverable amount is the higher of an asset’s value in use and fair value less costs of disposal.
© John Wiley and Sons Australia, Ltd 2015 13.1

Solutions manual to accompany Company Accounting 10e
7. How is an impairment loss calculated in relation to a single asset accounted for?
AASB 136 para 60

Under cost model:
- Recognise loss immediately in profit or loss
- Write down asset – if depreciable, increase accumulated depreciation and impairment
losses account
Under revaluation model: as for a revaluation decrease under that model, the effect being
dependent on whether there have been past revaluation increments.
8. What are the limits to which an asset can be written down in relation to impairment
losses?
An asset must be reduced to its recoverable amount.
9. What is a cash generating unit?
The smallest identifiable group of assets that generates cash inflows largely independent of the
cash flows from other assets or groups of assets.
10. How are impairment losses accounted for in relation to cash generating units?
AASB 136 para 104:

- Reduce the carrying amount of any goodwill allocated to the CGU
- Allocate any balance of loss to the other assets of the CGU pro rata on the basis of their
carrying amounts
11. Are there limits in adjusting assets within a cash generating unit when impairment losses
occur?
AASB 136 para 105:

- An entity shall not reduce the carrying amount of the asset in a CGU below the highest
of:
- Its fair value less costs of disposal;
- Its value in use; and
- Zero.
12. How is goodwill tested for impairment?
AASB 136 para 80:

- Allocate the goodwill to each of the acquirer’s CGUs if possible
- If it cannot be allocated, treat as a corporate asset
- Test goodwill annually, but note para 99 may allow use of a preceding period’s
information.
13. What is a corporate asset?
An asset other than goodwill that contributes to the future cash flows of both the CGU under
review and other CGUs.

14. How are corporate assets tested for impairment?
AASB 136 para 102:

- Allocate if possible to CGUs
- If it cannot be allocated on a reasonable and consistent basis, after testing the separate
CGUs, identify the smallest group of CGUs that includes the CGU under review and to
which the corporate asset can be allocated and test the group of CGUs for impairment.
15. When can an entity reverse past impairment losses?
AASB 136 para 110:

At each reporting date, an entity shall assess whether there is any indication that past impairment
losses – other than for goodwill – may no longer exist or have decreased. If such an indication
exists, the recoverable amount is determined. If the recoverable amount exceeds the carrying
amount, reversal may occur, subject to the para 117 limitations.
16. What are the steps involved in reversing an impairment loss?
1. Test for indication that past losses may no longer exist or have decreased. Testing
involves analysing external and internal sources of information as per para 111.
2. If test is positive, determine the recoverable amount of the asset [or CGU]
3. If the recoverable amount is greater than the carrying amount, determine the carrying
amount that would have been determined had no impairment loss been recognised in prior
years.
4. Subject to the limit in 3. above, if testing an individual asset, write the asset up
recognising income in current period’s profit or loss. Accounting for asset depends on
whether the cost model or the revaluation model is used.
5. If testing a CGU, allocate the reversal amount to the assets of the CGU – except goodwill
– pro rata to carrying amounts, but ensuring that the carrying amounts of the CGU’s
assets are not increased above the lower of:
- Recoverable amount; and
- Carrying amount had no impairment occurred.
6. Adjust depreciation/amortisation charges of assets [para 121]

CASE STUDY QUESTIONS
Case Study 1 Cash – generating units
Fresh Milk Ltd owns a large number of dairy farms in Queensland. It has a number of
factories that are used to produce milk products that are then sent to other factories to
be converted into milk-based products such as yoghurt and custard. In applying AASB
136 Impairment of Assets, the accountant for Fresh Milk Ltd is concerned about
correctly identifying the cash-generating units (CGUs) for the company, and has sought
your advice on such questions as to whether the milk production section is a separate
CGU even though the company does not sell milk directly to other parties, or whether it
should be included in the milk-based products CGU.
Required
Write a report to the accountant of Fresh Milk Ltd, including the following:
1. Define a CGU.
2. Explain why impairment testing requires the use of CGUs, rather than being based
on single assets.
3. Explain the factors that the accountant should consider in determining the CGUs
for Fresh Milk Ltd.
1. Define a CGU
A cash-generating unit is the smallest identifiable group of assets that generates cash flows that are
largely independent of the cash inflows from other assets or groups of assets.
2. Explain why impairment testing requires the use of CGUs
The impairment test requires a comparison of the recoverable amount of an asset with the higher of
the asset’s value in use and fair value less costs of disposal.
Value in use requires:
- an estimate of the future cash flows the entity expects to derive from the asset
- expectations about variety in timing of cash flows
- the price for bearing the uncertainty inherent in the asset
These cash flows are based upon data such as financial budgets and forecasts.
For some assets, there are no cash flows that are generated independently from those of other assets
e.g. the milking machines or the machines used to separate cream from milk etc do not generate
independent cash flows. The eventual cash flows come from the sale of the milk products. These
machines could be sold separately, giving a fair value less costs of disposal. However, as management
have decided to use the machines rather than sell them, management have made the decision that the
value in use is greater than the value via sale.
3. Explain the factors that the accountant should consider in determining the CGUs for Fresh
Milk Ltd
Cash flows must be independent of other cash flows

A CGU must be the lowest aggregation of assets independently generating cash flows.
Factors include (see paras 69-71 of AASB 136):

- how management monitors the entity’s operations: such as product lines, businesses,
individual locations, districts or regional areas. How does management break down Fresh
Milk Ltd – by factory? By dairy district? By product?
- how management makes decisions about continuing or disposing of the entity’s assets and
operations. If management wanted to sell off part of the business but still keep a viable
business remaining, how could the business be broken down into parts that could be sold off?
- the existence of an active market for the output produced even if some or all of the output is
used internally. In this case, the milk produced is not sold to the public or other entities but is
used to make further milk products. However, as there is an active market for milk, the milk
production section is potentially a separate CGU. This is because the assets in that section
could generate cash flows independently of the rest of the entity. Internal transfer prices
should not be used to determine recoverable amount unless these reflect the best estimate of
prices that could be achieved in arm’s length transactions.

Case Study 2 Understanding impairment testing

Read the following information reported by Pacific Brands Ltd on page 65 of its 2010
annual report.
Recoverability of brand names

The carrying amount of intangible assets representing brand names was impaired during the
prior year. The impairment test was triggered by the Consolidated Entity’s brand
rationalisation as part of its ‘Pacific Brands 2010’ transformation plan and certain brand
names have become redundant, been discontinued or identified for retirement. The
recoverable amount was calculated using value in use calculations. The carrying amount of
the brand names was determined to be higher than their recoverable amount and an
impairment loss was recognised against Brand names in the following units; Underwear and
Hosiery $0.4 million, Homewares $24.9 million and Footwear, Outerwear & Sport $27.3
million.
Required
An investor in the company has approached you to explain the meaning of the note as
he does not understand the meaning of impairment tests. Write a note to him to assist
him in understanding this part of the annual report.
Purpose of the impairment test

- to ensure assets are not overstated.
- carrying amounts (CA) must not exceed recoverable amounts
- recoverable amount (RA) is higher of FV less costs of disposal & value in use
Basic steps for individual asset

1. check for indication of impairment: external and internal sources
2. if positive indicator, undertake test; if not no test required
3. determine existence of individual asset
4. measure recoverable amount:
- FV less costs of disposal and/or
- PV of future cash flows
5. if asset impaired, write asset down to recoverable amount
6. testing of indicators may indicate ability to reverse prior impairment loss
Pacific Brands Ltd
The assets in question here are brands. The brands would be carried at cost if acquired
separately or fair value if acquired as part of a business combination.
There is no indication as to whether the brands are amortised or whether they are expected to
have indefinite useful lives.
If the brands are not amortised then they need to be tested annually for impairment.
It appears that Pacific Brands undertook a brand rationalisation scheme – this may have
involved looking for indicators of impairment. Note some of the reasons for impairment:
redundancy, discontinued and identified for retirement.
The company has used a value in use method to measure recoverable amount.
Individual brands have been written down, with an impairment loss recorded (the credit
would be to “Accumulated amortisation and impairment losses” or just “Accumulated
impairment losses” if the brand was not amortised.

Case Study 3 Impairment testing and goodwill

At 30 June 2014, Longreach Ltd is considering undertaking an impairment test. Having
only recently adopted the international accounting standards, the management of
Longreach Ltd seeks your advice in relation to this test under AASB 136 Impairment of
Assets.
Required
Write a report to management, specifically explaining:
1. the purpose of the impairment test
2. how the existence of goodwill will affect the impairment test
3. the basic steps to be followed in applying the impairment test.
Purpose of the impairment test
- to ensure assets are not overstated.

- carrying amounts (CA) must not exceed recoverable amounts
- recoverable amount (RA) is higher of FV less costs of disposal & value in use
Effect of goodwill on impairment test
- goodwill should be allocated to each CGU based on internal management monitoring of

goodwill
- if unallocated must be tested at smallest CGU containing the goodwill
- in testing a CGU containing goodwill, if an impairment loss occurs, goodwill is to be
written off first
- once written off, goodwill cannot be written back under a reversal of impairment
process
- CGUs containing goodwill must be tested annually, although some relief is available
- As internally generated goodwill cannot be recognised, any such goodwill will cushion
the impairment of an impairment loss
Basic steps
1. check for indication of impairment: external and internal sources

2. if positive indicator, undertake test; if not no test required
3. determine existence of CGUs [define]
4. allocate corporate assets and goodwill
5. measure recoverable amount:
- FV less costs of disposal
- PV of future cash flows
6. if CGU impaired, allocate loss firstly to goodwill and then to other assets on a pro rata
basis; cannot reduce CA of an asset below highest of FV less costs of disposal, value in
use & zero. Assets may have been measured on cost model or revaluation model
7. testing of indicators may indicate ability to reverse prior impairment loss

Case Study 4 Frequency of impairment test
In setting up its systems to apply AASB 136 Impairment of Assets, management of

Mildura Ltd wants to know how often the company needs to apply an impairment test
on its assets, and what information it needs to generate to determine whether a test is
needed.
Required
Prepare a response to management.
Frequency of test:
For most assets, there is no specific timing for the conducting of impairment tests.
Para 9 of AASB 136 states that an entity shall at each reporting date assess whether there is
any indication that an asset may be impaired.
Para 16 notes that irrespective of any indication of impairment, for

- intangible assets with an indefinite useful life
- intangible assets not yet available for use
- goodwill
annual impairment tests are required.
But see paras 24 and 99 for relief clauses.
Information needed to be generated:
Para 12 outlines sources of information to indicate impairment, both internal and external.
Discuss the need for an entity to install systems to generate this information, specific to that
entity, so that the information is available at balance date for assessment of the need for an
impairment test.

Case Study 5 Impairment losses

Read the following article by Leonora Walet, which was published on 14 December
2011 and reported on www.businessspectator.com.au.
CLP expects $A245m carbon-related impairment loss

Regional power utility CLP Holdings Ltd said it will write down the value of carbon-
emitting assets in Australia, resulting in an expected impairment loss of $A245 million
($US247.13 million) due to a new carbon tax law.
Australia’s parliament last month passed landmark legislation to impose a A$23 per tonne
tax on carbon emissions for 500 of the nation’s biggest polluters across mining, energy and
heavy manufacturing from mid-2012.
Hong Kong-based CLP said in a statement on Tuesday that it had completed a study on
the impact of the legislation on its Australian unit TRUenergy, and would have to write
down the value of the unit’s coal facility in Yallourn, Victoria, by A$350 million, the
company said in a statement.
The writedown would result in a loss that would be recognised in its books this year, it
said.
‘No further writedowns within the TRUenergy portfolio are required as a result of the
passing of the Clean Energy legislation,’ the company said.
Analysts had expected a writedown of as much as $772 million because of the new law.
‘The new carbon tax in Australia will significantly impact the long-term profitability of
this plant,’ said CLSA analyst Rajesh Panjwani in a report released on Monday, adding
that the coal facility accounted for 17 percent of the power utility’s net worth.
TRUenergy is one of Australia’s largest integrated energy companies, providing gas and
electricity to more than 2.5 million households and business customers. TRUenergy owns
and operates a 5469 megawatt (MW) portfolio of electricity generation facilities.
Analysts expect the Australian carbon legislation to have a limited impact on the company
in the near term, as the new law allows CLP to claim up to A$1.5 billion in cash
compensation and free carbon permits, which could boost earnings at TRUenergy by 15
percent yearly before interest, taxes, depreciation and amortisation (EBITDA) from 2013 to
2015.
But there would be less predictability after the first three years as Australia ended the
cash incentive and introduced a carbon-trading scheme under which the market would
determine the price of carbon, said analysts.
Required
Explain what is meant by an ‘impairment loss’ and whether a carbon tax in Australia
could result in companies reporting impairment losses.
An impairment loss arises when the carrying amount of an asset is greater than its
recoverable amount.
The argument in this article is that when a carbon tax is imposed, this decreases the value
of assets associated with carbon emission. Hence the assets may have to be written down.
Note that legislative change is an external indicator of impairment.
The assets in this example relate to assets in the coal industry.
Note the comments re long-term profitability – a reduction in long-term profitability
means that the recoverable amount of assets will decline as the PV of future cash flows
declines.
Profitability may not decline if there are still major markets overseas willing to pay
suitable prices for coal.

Case Study 6 Determination of CGUs
The Rennes City Council contracts out the bus routes in Rennes to various
subcontractors based on a tender arrangement. Some routes, such as the Express to
City routes, are profitable, while others, such as those collecting schoolchildren from
remote areas, are unprofitable. As a result, the city council requires tenderers to take a
package of routes, some profitable, some less so. The Le Bon Bus Company has won the
contract to operate its buses with a package of five separate routes, one of which
operates at a significant loss. Specific buses are allocated by the Le Bon Bus Company
to each route, and cash flows can be isolated to each route because drivers and takings
are specific to each route.
Required
Discuss the determination of cash-generating units for the Le Bon Bus Company.
Note definition of “cash-generating unit” in AASB 136.
It is possible to determine the profitability of each route as costs and revenues can be isolated
to each route.
However, as the council contracts for a package of routes, it is not possible to stop operating
a single route in the package. Hence, the tender for the package is based on the group of
routes as a package.
The lowest level of identifiable cash flows that are largely independent of the cash flows
from other assets is the cash flows of the package of routes. The cash-generating unit is then
the package of routes.

Case Study 7 Impairment of goodwill

As reported by Jennifer Saba on www.reuters.com on 9 February 2012, Thomson
Reuters Corp reported a fourth quarter loss of $2.57 billion after taking a one-time $3
billion goodwill impairment charge to account for the decline in its financial services
business.
Ms Saba reported that ‘Thomson Reuters’ business has suffered in the wake of the
financial crisis, with customers in banking and finance laying off tens of thousands of
employees and slashing costs. The global news and information provider's next
generation flagship desktop product, Eikon, has also posted disappointing sales.’
Required
Explain why the impairment loss was charged to goodwill and not to other assets in the
company.
Goodwill must be assessed annually for impairment. Hence it may be measured for
impairment sooner than other assets that have to rely on an assessment of indicators for
impairment before an impairment test is undertaken.
With a CGU, if an impairment loss occurs, the impairment loss is written off firstly against
any goodwill allocated to the CGU.

Case Study 8 Identification of CGUs
Burger Queen is a chain of fast-food restaurants — most reasonably sized towns in the
country have a Burger Queen outlet. The key claim to fame of the Burger Queen
restaurants is that their fried chips are extra crunchy. Also, to ensure that there is a
consistent standard of food and service across the country, the management of the chain
of restaurants conducts spot checks on restaurants. Failure to provide the high standard
expected by Burger Queen management can mean that the franchise to a particular
location can be taken away from the franchisee. Burger Queen management is
responsible for the television advertising across the country as well as the marketing
program, including the special deals that may be available at any particular time.
Each restaurant is responsible for its own sales, cooking of food, training of staff, and
general matters such as cleanliness of the store. However, all material used in the
making of the burgers and other items sold are provided at a given cost from the central
management, which can thereby control the quality and the price.
Required
Identify the cash-generating unit(s) in this scenario. Give reasons for your conclusions.
Each Burger Queen restaurant should be treated as a separate CGU as the cash flows are
largely independent of the other stores. The only exception to this is advertising.
Although the ingredients for making the burgers are supplied at a set cost, the amount of
materials used is specific to an individual restaurant.
Whether a specific restaurant remains in existence is based on an analysis of the performance

of that restaurant – an analysis that is independent of the other restaurants.
Internal management reporting would be organized to measure performance on a restaurant-

by-restaurant basis.
The restaurants are in different neighbourhoods and probably have different customer bases.

Marla Macalister is in the business of making rubber tubing that comes in all sorts of
sizes and shapes. Marla has established three factories in the north, south and east parts
of the city. Each factory has a large machine that can be adjusted to produce all the
varieties of tubing that Marla sells. Each machine is capable of producing around
100 000 metres of tubing a week, depending on diameter and shape. Marla’s current
sales amount to about 250 000 metres a week. Each factory is never worked to full
capacity. However, sales are sufficiently high that Marla cannot afford to shut one of
the factories.
In order to satisfy customer demand as quickly as possible, all orders are directed to
Marla, who allocates the jobs to the various factories depending on the current
workload of each factory. This also ensures that efficient runs of particular types of
tubing can be done at the same time. Each factory is managed individually in terms of
maintenance of the machines, the hiring of labour and the packaging and delivery of the
finished product.
Required
Identify the cash-generating unit(s) in this scenario. Give reasons for your conclusions.
The CGU is the business as a whole.
All three factories are needed to run the business.
The jobs are allocated to a specific factory dependent on Louis’ assessment of efficiencies
and current workload of each factory.
The factories are not run independently

Fad Furniture Ltd has three separate operating divisions. The first, the timber division,
is in charge of producing milled timber. This division manages a number of timber
plantations and timber mills from which the finished timber is produced. The majority
of the timber is sold, at an internal transfer price, to the second area of operations in
Fad Furniture, the parts division. Any excess timber is sold to external parties. The
parts division is responsible for turning the timber into parts for the making of timber
furniture, both indoor and outdoor. These parts are suitable only for the manufacture
of the furniture produced by Fad Furniture. The parts are then transferred at internal
transfer prices to the third area of operations, the furniture division. This division
assembles the furniture and delivers it to the various outlets that retail Fad Furniture’s
products.
Required
A. Identify the cash-generating unit(s) in this scenario, giving reasons for your
conclusions.
B. Would the determination of the cash-generating units be affected if the parts division
was also responsible for kit furniture, where the parts are made available to
customers for self-assembly?
A. There are two CGUs, namely the timber division and the combination of the parts
division and the furniture division.
The parts division is not a separate CGU as it cannot sell its products in an external
market – the parts are only suitable for the manufacture of the furniture produced by
Fad Furniture. Its cash flows are then dependent on the furniture division.
Internal transfer prices do not reflect market prices for outputs. In undertaking an
impairment test for the timber division, arm’s length prices should be used.
In determining whether the timber division is a separate CGU the question is whether
the timber is saleable externally i.e. an ability to generate independent cash flows. Even
if all the timber were used internally, if it could all be sold externally, the timber
division would be a separate CGU.
B. An assessment would have to be made on the viability of the kit furniture industry. If
the kit furniture industry is purely an offshoot of the furniture industry, and is viable
only because it relies on cost savings on manufacturing the parts for the furniture
industry, then there is no change in the CGUs from (A).
If the kit furniture industry was independently viable, then it is possible that the parts
division could be broken down into two parts, one part is combined with the furniture
division while the other is that dedicated to the kit furniture industry. The key question
is whether the kit furniture section is the smallest identifiable group of assets that
generates cash inflows that are largely independent.

Case Study 11 Value in use

Management is assessing the future cash flows in relation to an entity’s assets, and
considers that there are two possible scenarios for future cash flows. The first, for which
there is a 70% probability of occurrence, would provide future cash flows of $5 million.
The second, which has a probability of occurrence of 30%, would provide future cash
flows of $8 million. Management has decided that the calculation of value in use should
be based on the most likely scenario, namely the one that will produce cash flows of $5
million.
Required
Evaluate management’s decision.
Note Appendix A to AASB 136 – an integral part of the Standard.
The Appendix reviews the traditional approach and the expected cash flow approach.
The traditional approach would calculate a present value based on the most likely scenario
using a cash flow of $5m whereas the expected cash flow approach would be based on the
expected cash flow of $5.9m [being 70% x $5m plus 30% x $8m]
Note para A10: The application of the traditional approach requires the same estimates and
subjectivity without providing the computational transparency of the expected cash flow
approach.
Note para A12: the expected cash flow approach is subject to a cost-benefit constraint.
Consider the example in paras A13 and A14.

Case Study 12 Write-down
Mildura Enterprises Ltd acquired a building in which to conduct its operations at a cost
of $10 million. The building generates no cash flows on its own and is considered a part
of the cash-generating unit, which is the firm as a whole. Since the building was
acquired, the value of inner-city properties has declined owing to an overabundance of
office space and the downturn in the economy. The company would receive only $8
million dollars if it decided to sell the building now. However, the company believes the
building is serving its purpose and the profits are high, so there is no current intention
of selling the building.
Required
Discuss whether the building should be written down to $8 million. Provide any journal
entries necessary.
As the building generates no cash flows of its own it is not a separate CGU but is a part of the
CGU being the entity as a whole.
Providing the recoverable amount of the CGU exceeds the carrying amount of the CGU,
there is no impairment in relation to the CGU. There is therefore no need to write the building
down.
The recoverable amount of individual assets is not important. The entity’s expected cash
flows are not from the sale of the building. They are from the operation of the CGU.

Case Study 13 Asset impairment
Parkes Ltd acquired a network facility for its administration section on 1 July 2012.
The network facility cost $550 000 and was depreciated using a straight-line method
over a 5-year period, with a residual value of $50 000. On 30 June 2014, the company
assessed the current market value of the facility given that there was an active market
for such facilities as many companies used a similar network. The value was determined
to be $300 000.
Required
Discuss whether the network facility asset is impaired and whether it should be written
down to $300 000. Provide any journal entries necessary.
The carrying amount of the asset at 30 June 2010 is $350 000.
Whether the asset should be written down depends on whether the asset is a part of a cash-
generating unit. In this example, it appears that the network facility does not independently
generate cash flows from the network. Instead the network is used as a part of the
administration section, itself being a corporate asset.
If the network is a part of a CGU, then there is no need to write individual assets down
outside the CGU incurring an impairment loss.

PRACTICE QUESTIONS
Question 13.1 Impairment loss of individual asset
Arrow Ltd acquired a machine for $250 000 on 1 July 2013. It depreciated the asset at
10% p.a. on a straight-line basis. On 30 June 2015, Arrow Ltd conducted an
impairment test on the asset. It determined that the asset could be sold to other entities
for $154 000 with costs of disposal of $2000. Management expect to use the machine for
the next four years with expected cash flows from use of the machine being as follows:
2016 $80 000
2017 60 000
2018 50 000
2019 40 000
The rate of return expected by the market on this machine is 8%.
Required
Assess whether the machine is impaired. If necessary, provide the appropriate journal
entry to recognise any impairment loss.
At 30 June 2015:
Machine at cost $250 000
Accumulated depreciation (10% x 2 yrs) 50 000
Carrying amount = $200 000
Recoverable amount is fair value less

costs of disposal = $154 000 - $2000
= $152 000
Value in use is calculated at the present

value of future cash flows = $80 000 x 0.9259 + $60 000 x 0.8673
+ $50 000 x 0.7938 + $ 40 000 x 0.7350
= $74 072 + $52 038 + $39 690 + $29 400
= $195 200
The higher of the value in use ($195 200) and the fair value less the costs of disposal
($152 000) is the value in use.
As the value in use of $195 200 is less than the carrying amount of the asset of $200 000, the
asset is considered to be impaired.
The impairment loss is $4 800.
The appropriate journal entry is as follows:
Impairment loss - machine Dr 4 800

Accumulated depreciation and impairment
losses – machine Cr 4 800
(Impairment loss on machine)

Question 13.2 Cash-generating unit
Spear Ltd reported the following information in its statement of financial position at 30
June 2015:
Plant $650 000

Accumulated depreciation – plant (150 000)
Intangible assets 300 000
Accumulated amortisation (100 000)
Land 300 000
Total non-current assets 1 000 000
Cash 50 000
Inventory 180 000
Total current assets 230 000
Total assets $1 230 000
Liabilities 150 000
Net assets $1 080 000
At 30 June 2015, Spear Ltd analysed the internal and external sources of information
that would indicate deterioration in the worth of its assets. It determined that there
were indications of impairment.
Spear Ltd calculated the recoverable amount of the assets to be $980 000.
Required
Provide the journal entry for any impairment loss at 30 June 2015.
Carrying amount of assets = $1 230 000

Recoverable amount = $980 000
Impairment loss = $250 000
Assuming the inventory is carried at the lower of cost and net realisable value, the allocation
of the impairment loss will not involve both cash and inventory.
The allocation of the impairment loss is as follows:
Carrying Proportion Allocation Net Carrying

Amount of Loss Amount
Plant $500 000 5/10 125 000 375 000

Intangibles 200 000 2/10 50 000 150 000
Land 300 000 3/10 75 000 225 000
$1 000 000 250 000
The journal entry to record the impairment loss is:
Impairment loss Dr 250 000

Accumulated depreciation and
impairment losses –plant Cr 125 000

Accumulated amortisation and

impairment losses –intangibles Cr 150 000
Land Cr 75 000
(Allocation of impairment loss)

Question 13.3 Cash-generating unit

Bow Ltd reported the following assets in its statement of financial position at 30 June
2015:
Plant $800 000
Accumulated depreciation (240 000)
Land 300 000
Patent 240 000
Office equipment 620 000
Inventory 220 000
Cash and cash equivalents 180 000
$1 780 000
The recoverable amount of the entity was calculated to be $1 660 000. The fair value less
costs of disposal of the land was $280 913.
Required
Prepare the journal entry for any impairment loss at 30 June 2015.

Recoverable amount = $1 660 000
Assuming the inventory is carried at the lower of cost and net realisable value, the allocation
of the impairment loss will not involve both cash and inventory.
The allocation of the impairment loss is as follows:

Plant $560 000 56/138 48 696 511 304

Land 300 000 30/138 26 087 273 913
Patent 240 000 24/138 20 870 219 130
Office equipment 280 000 28/138 24 347 255 653
$1 380 000 120 000
If the fair value less costs of disposal of the land is $280 913, then the land cannot be written
down to an amount below that figure. Hence the maximum impairment loss allocable to land
is $19 087. The extra $7000 must be allocated to the other assets.

Plant $511 304 511 304/986 087 3 630 507 674

Patent 219 130 219 130/986 087 1 555 217 575
Office equipment 255 653 255 653/986 087 1 815 253 838
$986 087 7 000


impairment losses –plant Cr 52 326
Land Cr 19 087
impairment losses – patent Cr 22 425
impairment losses –office equipment Cr 26 162

Question 13.4 Cash-generating unit, goodwill

Crossbow Ltd is an entity that specialises in the manufacture of leather footwear for
women. It has aggressively undertaken a strategy of buying out other companies that
had competing products. These companies were liquidated and the assets and liabilities
brought into Crossbow Ltd.
At 30 June 2015, Crossbow Ltd reported the following assets in its statement of
financial position:
Cash $20 000

Leather and other inventory products 180 000
Brand ‘Crossbow Shoes’ 160 000
Shoe factory at cost 820 000
Accumulated depreciation – factory (120 000)
Machinery for manufacturing shoes 640 000
Accumulated depreciation – machinery (240 000)
Goodwill on acquisition of competing companies 40 000
$1 500 000
Because of the competition from overseas as customers pursue a strategy of buying
online rather than visit Crossbow Ltd’s stores, Crossbow Ltd assessed its impairment
position at 30 June 2015. The indicators suggested that an impairment loss was
probable. Crossbow Ltd calculated a recoverable amount of its company of $1 420 000.
Required
Prepare the journal entry(ies) for any impairment loss occurring at 30 June 2015.

The impairment loss is firstly used to write off the goodwill of $40 000.
The balance of the loss, $40 000, is allocated across the other assets, except for cash and
inventory, assuming it is recorded at the lower of cost and net realisable value:

Brand 160 000 16/126 5 079 154 921

Factory 700 000 70/126 22 222 677 778
Machinery 400 000 40/126 12 699 387 301
1 260 000 40 000

Goodwill Cr 40 000
impairment losses – brand Cr 5 079

impairment losses –factory Cr 22 222

impairment losses –machinery Cr 12 699

Question 13.5 Impairment loss, goodwill, partly owned subsidiary

Round Ltd acquired 60% of the issued shares of Shield Ltd on 1 January 2015 for $426
000. At this date, the net fair value of the identifiable assets and liabilities of Shield Ltd
was $660 000.
At 31 December 2015, the tangible assets and liabilities of Shield Ltd as included in
the consolidated financial statements of Round Ltd were as follows:
Property, plant and equipment $863 000

743 000
Inventory 55 000
Cash 22 000
820 000
(50 000)
Liabilities $770 000
Goodwill had not been written down over the year.

In conducting an impairment test on Shield Ltd as a cash-generating unit, Round Ltd
assessed the recoverable amount of Shield Ltd to be $800 000.
Required
A. Explain how the impairment loss in relation to Shield Ltd should be allocated.
Prepare journal entry(ies) in relation to the assets of Shield Ltd at 31 December 2015
as a result of the impairment test.
B. Explain the accounting for the impairment (if any) if the recoverable amount was
$860 000.
A.
Acquisition analysis:
Fair value of identifiable net assets = $660 000

Net fair value acquired = 60% x $660 000
= $396 000
Consideration transferred = $426 000
Goodwill = $30 000
Goodwill for entity = $30 000/60%
= $50 000
Goodwill to NCI = $20 000
At 31 December 2015, the carrying amount of the assets is $820 000 plus goodwill of
$50,000, namely $870 000. If the recoverable amount is $800 000, then there is an
impairment loss of $70 000
The goodwill of $50 000 is then written off, and the remaining $20 000 impairment loss is
allocated across the other assets of Shield Ltd, excluding inventory.


Property, plant & equipment 743 000 100% 20 000 723 000
The journal entry to record the impairment is:

Goodwill Cr 50 000
impairment losses - PPE Cr 20 000
B.
If the recoverable amount was $860 000, then the impairment loss is $10 000. Goodwill is
reduced from $50 000 to $40 000, of which 60% (ie $24 000) is attributable to the parent
entity. The parent entity’s goodwill is then reduced by $6,000, ie, from $30 000 to $24 000.
The journal entry is:

Accumulated impairment losses –
Goodwill Cr 6 000

Question 13.6 Cash-generating unit, reversal of impairment loss

Mace Ltd manufactures glass and glass products. Mace Ltd has organised itself into a
number of divisions each of which has a different function. For example, one division
deals with the manufacture of glass bottles for containing various drinks such as water
and wine while another division produces bottles associated with the perfume industry.
Each of these divisions is regarded as a separate cash-generating unit (CGU) for
accounting purposes.
One of the divisions of Mace Ltd is associated with the production of glass used for
the bottling of fruit products. At 30 June 2015, the carrying amounts of the assets of this
division were as follows:
Non-current assets
Glass bottling factory $336 000
Accumulated depreciation — buildings (144 000)
Equipment 176 000
Accumulated depreciation — equipment (32 000)
Goodwill 12 000
Current assets
Inventory 64 000
Receivables 28 000
Cash 16 000
At 30 June 2015, Mace Ltd was concerned that the assets of this division were
impaired. Many fruit products were now being bottled in plastic rather than glass
meaning that the demand for glass bottles for bottling fruit had suffered a decline.
Subsequent to assessing the indicators of impairment, Mace Ltd believed that the assets
of the division were impaired. Mace Ltd calculated the recoverable amount of the fruit-
bottling division to be $428 000.
In preparing the financial statements at 30 June 2015 Mace Ltd allocated the
impaired loss to the relevant assets, assuming the receivables were collectable. Mace Ltd
also changed its method of measuring the depreciation of the factory and equipment for
the 2015–16 period, increasing the depreciation charge on the factory from $48 000 to
$52 000 p.a., and from $36 000 to $40 000 p.a. for equipment.
During the 2015–16 period, the market experienced dissatisfaction with the use of
plastic for the bottling of fruit as users were worried about contamination if held for
long periods. As a result the market demand for glass bottles increased. Mace Ltd
believed that it could reverse the previous impairment and assessed the recoverable
amount of the division at $24 000 greater than the carrying amount of the assets of the
unit. For the 2015–16 financial statements, Mace Ltd accounted for a reversal of the
previous impairment loss.
Required
A. Prepare the journal entry(ies) for Mace Ltd at 30 June 2015 for the impairment of
the assets.
B. (i) Prepare the journal entry(ies) for Mace Ltd at 30 June 2016 for reversal of the
prior impairment loss.
(ii) What differences would occur in this entry(ies) if the recoverable amount at 30
June 2016 was $16 000 greater than the carrying amount of assets of the division?
(iii) If the recoverable amount of the factory at 30 June 2016 was $140 000, how

would this change the entry(ies) in B(ii)?
A.
Carrying amount of assets:
Factory $192 000

Equipment 144 000
Goodwill 12 000
Inventory 64 000
Receivables 28 000
Cash 16 000
456 000
Recoverable amount 428 000
Impairment loss $28 000
Goodwill is written down by $12 000, and the balance of the impairment loss, namely
$16,000 is written off across the other relevant assets:

Factory 192 000 192/336 9 143 182 857

Equipment 144 000 144/336 6 857 137 143
336 000 16 000
The impairment journal entry at 30 June 2015 is:

Goodwill Cr 12 000
impairment losses – factory Cr 9 143
impairment losses – equipment Cr 6 857

B (i)
At 30 June 2016, the two assets are reported as follows:
Factory $336 000

Accumulated depreciation
and impairment losses 205 143 [144 000 + 9 143 + 52 000]
130 857
Equipment $176 000

impairment losses 78 857 [32 000 + 6 857 + 40 000]
97 143
The carrying amounts of these assets if no impairment loss had occurred would have been:
Factory $336 000

Accumulated depreciation
and impairment losses 192 000 [144 000 + 48 000]
144 000
Equipment $176 000

impairment losses 68 000 [32 000 + 36 000]
108 000
The differences between the carrying amounts recorded at 30 June 2016 and the carrying
amounts if no impairment losses had been recorded are:
Factory $13 143 [144 000 – 130 857]

Equipment $10 857 [108 000 – 97 143]
$24 000
As the recoverable amount at 30 June 2016 exceeds the carrying amount by $24 000, then the
total differences can be recognised as:

impairment losses – factory Dr 13 143
impairment losses – equipment Dr 10 857
Income: reversal of impairment loss Cr 24 000
(Reversal of impairment loss)

B (ii)
If the excess of the recoverable amount over carrying amounts at 30 June 2016 was only
$16,000, then the reversal would be based on a pro rata allocation based on carrying amounts
at time of reversal:

Amount of Excess Amount
Factory 130 857 130 857/228000 9 183 140 040

Equipment 97 143 97 143/228000 6 817 103 960
228 000 16 000
The entry would be:

Impairment losses – equipment Dr 6 817
B (iii)
If the recoverable amount of the factory at 30 June 2016 was only $140 000, then the reversal
of the impairment for the factory could only be $9 143(i.e. $140 000 less $130 857). Hence
the balance of $40 (i.e. $9 183 - $9 143) could be allocated to equipment.

impairment losses – equipment Dr 6 857
The $6 857 allocated to equipment still does not exceed the carrying amount if the asset had
never been impaired. The equipment will now be shown as:
Equipment $176 000

impairment losses 72 000 [32 000 + 6 857 +40 000 – 6 857]
$104 000

Question 13.7 Reversal of impairment losses

Saxon Ltd conducted an impairment test at 30 June 2015. As a part of that exercise, it
measured the recoverable amount of the entity, considered to be a single cash-
generating unit, to be $217 600. The carrying amounts of the assets of the entity at 30
June 2015 were:
Equipment 200 000
Patent 40 000
Goodwill 6 400
Inventory 32 000
Receivables 1 600
The receivables held by Saxon Ltd were all considered to be collectable. The inventory
was measured in accordance with AASB 102 Inventories.
For the period ending 30 June 2016, the depreciation charge on equipment was
$14 720. If the equipment had not been impaired the charge would have been $20 000.
At 30 June 2016, the recoverable amount of the entity was calculated to be $10 400
greater than the carrying amount of the assets of the entity. As a result, Saxon Ltd
recognised a reversal of the previous year’s impairment loss.
Required
Prepare the journal entry(ies) accounting for the impairment loss at 30 June 2015 and
the reversal of the impairment loss at 30 June 2016.
Impairment loss is $22 400 i.e. $240 000 less $217 600.
The goodwill of $6 400 is written off.
The remaining $16 000 impairment loss is allocated as follows:
Carrying Amount Allocation Net Amount

Patent 40 000 3 200 36 800
Equipment 160 000 12 800 147 200
200 000 16 000 184 000
At 30 June 2015, the journal entry to record the impairment is:

Patent Cr 3 200
Goodwill Cr 6 400
Accumulated depreciation &
impairment losses – equipment Cr 12 800
At 30 June 2016, in relation to the assets previously adjusted for impairment:
CA at 30/6/15 CA – if no impairment Difference

Patent 36 800 40 000 3 200

Equipment 200 000 200 000

impairment losses (67 520*) (60 000) 7 520
10 720
*Accum depn & impairment losses – Equip: $40,000 + 12 800 + 14 720
As the recoverable amount at 30 June 2016 is only $10 400 greater than the carrying amount
of the entity, this is the maximum reversal amount. The $10 400 reversal is allocated as
follows:
CA at 30/6/15 Allocation
Patent 36 800 2 261
Equipment 132 480 8 139
169 280 10 400
However, the equipment can only be revalued upwards by $7 520. The balance of $619 is
allocated to the patent which increases its allocation to $2 880 which is still less than $3 200.
The reversal is then accounted for as follows:
Accumulated amortisation and impairment losses

- patent Dr 2 880
Accumulated depreciation & impairment losses
- equipment Dr 7 520
Income – reversal of impairment loss Cr 10 400

Question 13.8 Cash-generating units, goodwill, corporate assets

One of the largest companies operating in the fashion industry in Australia is Lancelot
Ltd. For accounting purposes, it operates through two cash-generating units referred to
as Holy Division and Grail Division.
At 30 June 2015, information was gathered that suggested that the company’s assets
had suffered impairment losses. Lancelot Ltd conducted an impairment test, calculating
the carrying amounts of the assets of each of the cash-generating units and the head
office as well the recoverable amounts of the two cash-generating units and the entity as
a whole. The assets of the Head office could not be allocated to the two cash-generating
units. This information is shown in the following table:
Grail Head
Holy Division Division Office
Buildings $117 000 $72 000 $135 000
Accumulated depreciation (27 000) (14 400) (45 000)
Fittings 252 000 130 500
Accumulated depreciation (54 000) (27 000)
Plant 144 000 198 000
Inventory 54 000 32 400
Goodwill 18 000 13 500
$468 000 $387 000
Recoverable amount of each CGU $430 200 $378 000

Recoverable amount of Lancelot $875 700
The buildings held by Holy Ltd, located in the central business district, had a fair
value less costs of disposal of $87 300.
Required
Prepare the journal entry(ies) at 30 June 2015 to record the accounting for the
impairment losses.
Holy Unit:
Impairment loss is $37 800, being $468 000 less $430 200.
Write-off goodwill of $18 000

Allocation of $19 800 impairment loss:
Allocation
of loss
Buildings 90 000 4 500 85 500
Fittings 198 000 9 900 188 100
Plant 108 000 5 400 102 600
396 000 19 800 376 200
As buildings has fair value less costs of disposal of $87 300, the $1 800 extra impairment loss
for the land must be allocated to the other two assets:

Fittings 188 100 1 165 186 935

Plant 102 600 635 101 965
290 700 1 800 288 900
Grail Unit:
Impairment loss is $9 000, being $387 000 less $378 000
Write-off $9 000 of goodwill
Corporate Asset - Head Office:
Holy Grail Head Office Entity

Carrying amount 468 000 387 000 90 000 945 000
Impairment loss 37 800 9 000 46 800
898 200
Recoverable amount of entity 875 700
This impairment loss is then firstly used to eliminate the goodwill in the Grail Unit of $4 500
(13 500 – 9 000). The balance of $18 000 is then used to write-down the other assets of the
entity:
Holy Unit: Fittings 186 935 4 674 182 261

Plant 101 965 2 549 99 416
Grail Unit: Buildings 57 600 1 440 56 160

Fittings 103 500 2 587 100 913
Plant 180 000 4 500 175 500
Headquarters Buildings 90 000 2 250 87 750

$720 000 18 000 702 000
The journal entries to record the impairment are:

impairment losses – head office buildings Cr 2250
Impairment loss – Holy unit Dr 45 023

Goodwill Cr 18 000
losses - buildings Cr 2 700
impairment losses – fittings Cr 15 739


impairment losses – plant Cr 8 584
Impairment loss – Grail unit Dr 22 117

Goodwill Cr 13 500
losses- buildings Cr 1 440
impairment losses – fittings Cr 2 587

Question 13.9 Cash-generating units, reversal of impairment losses

The two cash-generating units of Dark Forest Ltd are referred to as the Lady CGU and
the Lake CGU. At 31 July 2015, the carrying amounts of the assets of the two divisions
were:
Lady CGU Lake CGU
Equipment $9000 $7 200
Accumulated depreciation (3900) (2 250)
Brand 1440 —
Inventory 324 450
Receivables 450 492
Goodwill 150 120
The receivables were regarded as collectable, and the inventory was measured
according to AASB 102 Inventories. The brand had a fair value less costs of disposal of
$1320. The equipment held by the Lady CGU was depreciated at $1800 p.a., and the
equipment of Lake CGU was depreciated at $1500 p.a.
Dark Forest Ltd undertook impairment testing in July 2015, and determined the
recoverable amounts of the two CGUs at 31 July 2015 to be:
Lady CGU $6264

Lake CGU 5940
The relevant assets were written down as a result of the impairment testing affecting
the financial statements of Dark Forest Ltd at 31 July 2015. As a result of the
impairment testing management re-assessed the factors affecting the depreciation of its
non-current asset. The depreciation of the equipment held by the Lady CGU was
increased from $1800 p.a. to $2100 p.a. for the year 2015–16.
By 31 July 2016, the performance in both divisions had improved, and the carrying
amounts of the assets of both divisions and their recoverable amounts were as follows:
Lady CGU Lake CGU

Carrying amounts of assets $7932 $8598
Recoverable amount of CGU 9012 9120
Required
Determine how Dark Forest Ltd should account for the results of the impairment tests
at both 31 July 2015 and 31 July 2016.
Lady CGU Lake CGU

Equipment $5100 4950
Brand 1440 0
Inventory 324 450
Receivables 450 492
Goodwill 150 120
7464 6012
Recoverable amount 6264 5940
Impairment loss (1200) (72)
In relation to the Lake CGU, write goodwill down by $72:

Impairment loss Dr 72
Accumulated impairment losses
- goodwill Cr 72
In relation to the Lady CGU, reduce goodwill by $150 and allocate the remaining $1050
impairment loss to applicable assets:

Equipment 5100 510/654 816 4284
Brand 1440 144/654 234 1206
6540 1050
As the brand has a fair value less costs of disposal of $1320, only $120 of the impairment
loss can be allocated to it, so the equipment must be reduced by a further $114, to $4170.
The journal entry to record the impairment loss at 31 July 2015 is:

Goodwill Cr 150
impairment losses – equipment Cr 930
Accumulated impairment losses – brand Cr 120
At 31 July 2016, the equipment and brand are recorded as follows:
Equipment $9000
impairment losses (6930) [3900 +930 +2100]
2070
Brand $1440
Accumulated impairment losses (120)
1320

At 31 July 2016:
In relation to the Lake CGU, there can be no reversal of the prior goodwill impairment.
In relation to the Lady CGU, the equipment would have had the following carrying amount
if the impairment loss had not occurred:
Equipment $9000
impairment losses (5700) [3900 + 1800]
3300
Hence, the maximum reversal of impairment in relation to equipment is $1230 (ie $3300 -
$2070). The maximum reversal for the brand is $120.
As the recoverable amount for the Lady CGU’s assets exceed the carrying amount by $1080
[ie $9012 – 7932], the whole of this amount can be allocated on a pro rata basis as a reversal
of impairment losses:

Equipment 2070 207/339 660 1410

Brand 1320 132/339 420 900
3390 1080
As the brand can only be reversed to the extent of $120, then $300 can be allocated to
equipment. The adjusted allocation for equipment is now $960 which is less than the
maximum adjustment amount of $1230.
The entry for the reversal of the impairment loss is:

impairment losses – equipment Dr 960
Accumulated impairment losses – brand Dr 120
Income: reversal of impairment loss Cr 1080

Question 13.10 Cash-generating units, corporate assets, goodwill

Camelot Ltd is in the business of manufacturing children’s toys. Its operations are
carried out through three operating divisions, namely the Merlin Division, the Hollow
Division and the Hills Division. These divisions are separate cash-generating units. In
accounting for any impairment losses, all central management assets are allocated to
each of these divisions.
At 31 July 2016, the assets allocated to each division were as follows:
Merlin Hollow Hills
CGU CGU CGU
Buildings $656 $600 $368
Accumulated depreciation (336) (304) (272)
Land 160 240 120
Machinery 240 328 448
Accumulated depreciation (48) (256) (248)
Inventory 96 64 80
Goodwill 32 40 24
Head Office assets 160 120 96
In relation to land values, the land relating to the Merlin and Hills Divisions have
carrying amounts less than their fair values as stand-alone assets. The land held by the
Hollow Division has a fair value less costs of disposal of $234.
Camelot Ltd determined the recoverable amount of each of the cash-generating units at
31 July 2016 as follows:
Merlin $936
Hollow 720
Hills 640
Required
Prepare the journal entry(ies) for Camelot Ltd to record any impairment loss at 31 July
2016.
Merlin Hollow Hills

Buildings $320 $296 $96
Land 160 240 120
Machinery 192 72 200
Inventory 96 64 80
Goodwill 32 40 24
Head office assets 160 120 96
960 832 616
Recoverable amount 936 720 800
Impairment loss (24) (112) 0
Merlin CGU
Write down the goodwill by $24:
Accumulated impairment losses

- goodwill Cr 24
Hollow UCGU
Write off goodwill of $40 and allocate the $72 balance of impairment loss:

Buildings 296 296/728 29 267

Land 240 240/728 24 216
Machinery 72 72/728 7 65
Head Office assets 120 120/728 12 108
728 72
As the land has a fair value less costs of disposal of $234, only $6 of the impairment loss can
be allocated to it. Hence, the remaining $18 must be allocated to the other assets:

Buildings 267 267/440 11 256
Machinery 65 65/440 2 63
Head Office assets 108 108/440 _5 103
440 18
The entry is:

Goodwill Cr 40
impairment losses – buildings Cr 40
Land Cr 6
impairment losses – machinery Cr 9
impairment losses – head office assets Cr 17

Question 13.11 Cash-generating units, corporate assets
Arthur Ltd is a large manufacturing company. Its main operations are concerned with
the production of paper products ranging from the production of paper suitable for
high quality printing for computing purposes to the production of cardboard suitable
for packing many types of products. It has three cash-generating units, Knights
Division, Round Division and Table Division.
At 30 June 2016, the net assets relating to each of the divisions were as follows:
Round
Knights CGU CGU Table CGU
Property, plant and
equipment $294 000 $217 000 $189 000
Patents and trademarks 84 000 98 000 56 000
Inventories 105 000 77 000 70 000
Cash 63 000 56 000 35 000
462 000 378 000 294 000
Liabilities 42 000 35 000 35 000
Net assets $420 000 $443 000 $259 000
Arthur Ltd has its head office in the centre of Perth while its divisions are located in
factories built in Fremantle as the products then have access to both rail and port
facilities. The management of Arthur Ltd believes that the company’s head office
supplies approximately equal service to the three divisions.
In recent years the political climate in Australia has placed more emphasis on global
climate change and the use of factories that are more attune to limiting the effects of
global warming. To assist Arthur Ltd to limit its carbon emissions the company has
built a research centre — the Climate Action Centre (CAC) — to provide information
on how the factories can reduce the emission of carbon gasses. The CAC is also located
in Fremantle. The CAC does not produce any cash flows and the head office supplies an
immaterial amount of service to the CAC. It is not possible to allocate the assets of the
CAC to the three producing CGUs.
At 30 June 2016 the Head Office and the CAC had the following assets:
Head Office CAC

Land $7 000 $3 500
Plant and equipment 28 000 10 500
In the months prior to the end of the 2016 financial year economic indicators have
suggested that the company’s assets may have been impaired, so management has
determined the recoverable amount of each of the producing CGUs. The recoverable
amounts were calculated to be:
Knights Division $504 000

Round Division 350 000
Table Division 280 000
Required
Prepare the journal entry(ies) for Arthur Ltd to record any impairment loss at 30 June
2016.

Knights Round Table

Carrying amount of assets $462 000 $378 000 $294 000
Allocation of Head Office assets 10 500 10 500 10 500
472 500 388 500 304 500
Recoverable amount 504 000 350 000 280 000
Impairment loss _____0 (38 500) (24 500)
Total carrying amounts after

adjusting for impairment loss 472 500 350 000 280 000
The carrying amounts of the CGUs after adjusting for the impairment loss add to $1 102 500.
Together with the CAC ($11 200), the total is $1 113 700. This is less than the total
recoverable amount of $1 134 000. Hence there is no need to write down the assets of the
CAC.
However, the assets of the Round and Table CGUs must be written down:
Round CGU:
Head Office 10 500 10.5/255.5 1 582
Patents/trademarks 98 000 98/255.5 14 767 83 233
PPE 147 000 147/255.5 22 151 124 849
255 500 38 500

Patents and trademarks Cr 14 767
impairment losses – PPE Cr 22 151
Table Division:
Head Office 10 500 10.5/199.5 1 289
Patents/trademarks 56 000 56/199.5 6 878 49 122
PPE 133 000 133/199.5 16 333 116 667
199 500 24 500

Patents and trademarks Cr 6 878

The total impairment loss allocated to the head office is $2 871 (i.e. $1 582 + $1 289).
This is allocated across the assets of the head office:
Head Office
Land 7 000 7/31.5 638 6 362
Plant and equipment 24 500 24.5/31.5 2 233 22 267
31 500 2 871

Land Cr 638

Question 13.12 Goodwill, corporate assets

A large manufacturing company, St. George Ltd, has its operations in Newcastle. It has
two cash-generating units, Red Unit and Dragon Unit. At 30 June 2015, the
management of the company decided to conduct impairment testing. It calculated that
the recoverable amounts of the two divisions were $1 245 000 (Red Unit) and $930 000
(Dragon Unit). In considering the assets of the cash-generating units the company
allocated the assets of the corporate area equally to the units.
The carrying amounts of the assets and liabilities of the two cash-generating units and
the corporate assets at 30 June 2015 were as follows:
Dragon
Red Unit Unit Corporate
Equipment 960 000 —
Accumulated depreciation (Equipment) (360 000) —
Land 270 000 450 000
Buildings 330 000 420 000 630 000
Accumulated depreciation (Buildings) (120 000) (180 000) (150 000)
Furniture & fittings — 90 000
Accumulated depreciation (Furniture & — (30 000)
fittings)
Goodwill — — 42 000
Cash 36 000 24 000
Inventory 90 000 120 000
Receivables 60 000 24 000 ______
Total assets 1 266 000 918 000 522 000
Provisions 60 000 120 000
Debentures 90 000 198 000
Total liabilities 150 000 318 000
Net assets $1 016 000 $600 000
In relation to these assets:

• the receivables of both units were considered to be collectable
• the land held by the Dragon Unit had a fair value less costs of disposal of $405 000.
Required
Prepare the journal entry(ies) required at 30 June 2015 to account for any impairment
losses.
Red Unit:
Total assets = $1 266 000 + $21 000 goodwill + $240 000 buildings
= $1 527 000
Dragon Unit:
Total assets = $918 000 + $21 000 + $240 000
= $1 179 000
Recoverable amount = $930 000

RED UNIT: ALLOCATION OF IMPAIRMENT LOSS
Write-off goodwill of $21 000

Allocate $261 000 to all assets except cash, inventory and receivables.
Equipment $600 000 118 636

Land 270 000 53 386
Buildings 210 000 41 523
Corporate Building 240 000 47 455
1 320 000 261 000
DRAGON UNIT: ALLOCATION OF IMPAIRMENT LOSS
Write off goodwill of $21 000

Allocate $228 000 to relevant assets
Land 450 000 103 636

Buildings 240 000 55 273 184 727
Furniture 60 000 13 818 46 182
Corporate Building 240 000 55 273 184 727
990 000 228 000
However land can only be written down by $45 000, hence need to allocate $58 636 to other
assets:
Buildings 184 727 26 060

Furniture 46 182 6 515
Corporate Building 184 727 26 061 (rounded)
415 636 58 636
Journal entries are:

Goodwill Cr 42 000

Accumulated depreciation and impairment losses:
corporate building Cr 128 789
(47 455 + 55 273 + 26 061)
Impairment loss (Red Unit) Dr 213 545

Land Cr 53 386
equipment Cr 118 636
buildings Cr 41 523
Impairment loss (Dragon Unit) Dr 146 666

Land Cr 45 000


buildings * Cr 81 333
furniture ** Cr 20 333
* $55 273 + $26 060
** $13 818 + $6 515

Question 13.13 Corporate assets

At 31 July 2015, Enchantment Ltd conducted an impairment test of its two cash-
generating units, referred to as Crystal CGU and Cave CGU. In conducting this
impairment review the goodwill that was recorded by Enchantment Ltd was allocated
to each of the cash-generating units as well as to the Head Office. The assets of the Head
Office were not allocated to the individual cash-generating units.
As a result of the impairment review it was determined that both cash-generating
units had suffered impairment losses and relevant assets were written off or had their
carrying amounts reduced. The carrying amounts of the assets of the cash-generating
units and the Head Office after the allocation of the impairment losses to the two cash-
generating units were as follows:
Head
Crystal CGU Cave CGU Office
Equipment $256 000 $240 000 —
Accumulated depreciation (96 000) (96 000) —
Land 64 000 40 000 —
Buildings 88 000 80 000 $160 000
Furniture & fittings 32 000 24 000 80 000
Goodwill — — 20 800
Accumulated impairment — — (9 600)
losses
Cash 4 000 6 400 —
Inventory 24 000 32 000 —
Receivables 16 000 6 400 —
Total assets 344 000 276 800 195 200
Provisions 16 000 32 000
Borrowings 24 000 52 800
Total liabilities 40 000 84 800
Net assets $304 000 $192 000
As the final step in the impairment process, Enchantment Ltd conducted an
impairment test of the entity as a whole. It calculated the recoverable amount of that
entity to be $760 000.
Required
A. Calculate any impairment loss for Enchantment Ltd
B. Prepare the journal entry(ies) to record the adjustments made for this impairment
loss.
A. Determination of impairment loss
Assets: Crystal CGU $344 000

Assets: Cave CGU 276 800
Corporate including goodwill of $11 200 195 200
$816 000
Recoverable amount $760 000

Goodwill written off $11 200
Amount to be allocated $44 800
B. Preparation of journal entry for impairment loss
Allocation:
Carrying amount Allocation
Crystal CGU:
Equipment $160 000 $10 011
Land 64 000 4 005
Buildings 56 000 3 504
Furniture & fittings 20 000 1 251
Cave CGU:
Equipment 144 000 9 010
Land 40 000 2 503
Buildings 32 000 2 002
Head Office:
Building 120 000 7 508
$716 000 $44 800
The required journal entry is:

Accumulated impairment losses – goodwill Dr 9 600
Goodwill Cr 20 800
losses – equipment Crystal CGU Cr 10 011
Land – Crystal CGU Cr 4 005
losses – buildings Crystal CGU Cr 3 504
losses – F&F Crystal CGU Cr 1 251
losses – equipment Cave CGU Cr 9 010
Land – Cave CGU Cr 2 503
losses – buildings Cave CGU Cr 2 002
losses – F&F Cave CGU Cr 1 001
losses – buildings Head Office Cr 7 508
losses – F&F Head Office Cr 4 005

Question 13.14 Impairment loss

Excalibur Ltd operates in the Swan Valley in Western Australia where it is involved in
the growing of grapes and the production of wine. In June 2015, it anticipated that its
assets may be impaired due to a glut on the market for grapes and an impending tax
from the Australian government seeking to reduce binge drinking of alcohol by teenage
Australians.
Land is measured by Excalibur Ltd at fair value. At 30 June 2015, the entity revalued
the land to its fair value of $120 000. The land had previously been revalued upwards by
$20 000. The tax rate is 30%.
As a result of its impairment testing, Excalibur Ltd calculated that the recoverable
amount of the entity’s assets was $1 456 000.
The carrying amounts of the assets of Excalibur Ltd prior to adjusting for the
impairment test and the revaluation of the land were as follows:
Non-current assets
Buildings $ 850 000
Land (at fair value 1/7/14) 128 000
Plant and equipment 1 454 000
Goodwill 60 000
Accumulated impairment losses (44 000)
Trademarks – wine labels 80 000
Current assets
Cash 7 000
Receivables 9 000
Required
A. Prepare the journal entries required on 30 June 2015 in relation to the measurement
of the assets of Excalibur Ltd.
B. Assume that, as the result of the allocation of the impairment loss, the plant and
equipment was written down to $640 000. If the fair value less costs of disposal of the
plant and equipment was determined to be $600 000, outline the adjustments, if any,
that would need to be made to the journal entries you prepared in part A of this
question, and explain why adjustments are or are not required.
A.
Assets $1 592 000 [$1 600 000 - $8 000 write-down of land]

Recoverable amount 1 456 000
Impairment loss 136 000
Goodwill written off 16 000

Balance to be allocated 120 000
Buildings 656 000 54 667 601 333

Plant and equipment 704 000 58 667 645 333
Trademarks 80 000 6 666 73 334

1 440 000 120 000
Asset revaluation surplus Dr 5 600

Deferred tax liability Dr 2 400
Land Cr 8 000
Accumulated impairment losses Dr 44 000

Goodwill Cr 60 000

Accumulated depreciation and impairment losses
– buildings Cr 54 667
Accumulated depreciation and impairment losses
- plant and equipment Cr 58 667
Accumulated amortisation and impairment losses
- trademarks Cr 6 666
B.
P&E written down to $640 000

FV less costs of disposal $600 000
No adjustment required.
Cannot write down below fair value but can be carried at an amount greater than fair value.
The impairment is calculated on the CGU not on individual assets.

As P&E are included in the CGU, they do not independently generate cash flows. Therefore
it is impossible to determine value in use for P&E.
Hence cannot determine the recoverable amount.
So cannot conduct an impairment test on P&E as an asset. Hence use a CGU in relation to the
P&E
No need to write down.

Question 13.15 Corporate assets

One of the largest companies in Australia involved in the growing and processing of
apples is Uther Ltd, located in Stanthorpe, Queensland. Uther Ltd is organised into
three divisions which are regarded as separate cash-generating units of the company.
Information on the carrying amounts of the cash-generating units at 30 June 2015 is as
follows:
Cador CGU Duke Cornwall
CGU CGU
Land $352 000 $224 000 $128 000
Plant & equipment 672 000 496 000 432 000
Accumulated depreciation (192 000) (160 000) (128 000
Inventories 192 000 144 000 112 000
Accounts receivable 96 000 80 000 48 000
1 120 000 784 000 592 000
Liabilities 96 000 80 000 80 000
Net assets 1 024 000 704 000 512 000
Uther Ltd also had a head office and a research centre, also located in Stanthorpe.
The research centre is used by all the cash-generating units to improve the quality of the
handling and processing of the apples and related products. The assets of these
operations at 30 June 2015 were as follows:
Head Office Research
Centre
Land $88 000 53 600
Fixtures and fittings 64 000 36 000
144 000 80 000
In June 2015 the management of Uther Ltd undertook an impairment test of the
assets of the entity. Some of the information used in that process was as follows:
 As the Head Office interacts equally with the three cash-generating units, the assets of
the Head Office were allocated equally to the three units, but not to the research
centre. In relation to the research centre, there was no reasonable way to allocate its
assets to the cash-generating units. Only cash-generating units produce cash flows.
 The recoverable amounts of the cash-generating units were assessed to be:
Cador CGU $1 240 000
Duke CGU 800 000
Cornwall CGU 600 000
 The land held by Cador Ltd was measured at fair value under AASB 116 Property,
Plant and Equipment. At 30 June 2015, the fair value was $352 000.
 The land held by Duke Ltd was measured at cost. At 30 June 2015, it had a fair value
less costs of disposal of $216 211.
Required
Prepare the journal entry(ies) for accounting for any impairment loss incurred by
Uther Ltd at 30 June 2015.
3 divisions are CGUs
Head office and research centre are not CGUs

Allocate head office assets to each division

Determine impairment of research centre with entity as a whole
Step 1: Calculate impairment loss
Adjust the carrying amounts of the CGUs for the allocable corporate asset (head office) and
compare with recoverable amounts to determine impairment loss.
Cador Duke Cornwall

Carrying amounts of assets 1 120 000 784 000 592 000
Allocation of head office assets 48 000 48 000 48 000
1 168 000 832 000 640 000
Recoverable amount 1 240 000 800 000 600 000
Impairment loss ______0 (32 000) (40 000)
Step 2: Allocate impairment loss
Duke Division
Carrying Proportion Allocation Adjusted
Amount of loss carrying
Amount
Head office 48 000 48/608 2 526
Land 224 000 224/608 11 789 212 211
Plant 336 000 336/608 17 685 318 315
608 000 32 000
As the fair value less costs of disposal of the land is $216 211, then only $7 789 can be
allocated to this asset. The other $4 000 must be allocated across the other assets:

Amount
Head office * 45 474 45474/363789 500
Plant 318 315 318315/363789 3 500 314 815
$363 789 $4 000
* $48 000 - $2 526

Land Cr 7 789
impairment losses – plant ** Cr 21 185
(Impairment loss – Duke division:
** $17 685+ $3 500)

Cornwall Division

Amount
Head office 48 000 48/480 4 000
Land 128 000 128/480 10 667 117 333
Plant 304 000 304/480 25 333 278 667
480 000 40 000

Land Cr 10 667
(Impairment loss – Cornwall division)
Step 4: Impairment losses for head office assets
Total loss is $7 026, being $2 526 + $500 + $4 000

Amount
Land 88 000 88/144 4 294 83 706
Fixtures and fittings 56 000 56/144 2 732 53 268
$144 000 $7 026

Land Cr 4 294
impairment losses – F&F Cr 2 732
(Impairment loss – head office)
Step 5: Research centre assets are $80 000
Carrying amount (after allocation of impairment loss):

Cador CGU $1 168 000
Duke CGU 800 000
Cornwall CGU 600 000
Research centre 80 000
2 648 000
Recoverable amount of entity 2 640 000
Impairment loss _(8 000)


Amount
Cador:
Plant 480 000 480000/1407789 2 727 477 273
Duke:
Plant 314 815 1 789 313 026
Cornwall:
Land 117 333 667 116 666
Plant 278 667 1 583 277 084
Head office:
Land 83 706 476 83 230
F&F 53 268 303 52 965
Research Centre
Land 53 600 305 53 295
F&F 26 400 150 26 250
$1 407 789 $8 000

impairment losses – plant [Cador] Cr 2 727
impairment losses – plant [Duke] Cr 1 789
Land: Cornwall Cr 667
impairment losses – plant [Cornwall] Cr 1 583
Land: head office Cr 476
impairment losses – F&F [HO] Cr 303
Land: research centre Cr 305
impairment losses: F&F [RC] Cr 150

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Company Accounting 10e

© John Wiley & Sons Australia, Ltd 2015

Chapter 13 – Impairment of assets

1. What is an impairment test?

2. Why is an impairment test considered necessary?

3. When should an entity conduct an impairment test?

4. What are some external indicators of impairment?

AASB 136 para 12:

5. What are some internal indicators of impairment?

AASB 136 para 12:

6. What is meant by recoverable amount?

© John Wiley and Sons Australia, Ltd 2015 13.1

7. How is an impairment loss calculated in relation to a single asset accounted for?

AASB 136 para 60

An asset must be reduced to its recoverable amount.

9. What is a cash generating unit?

AASB 136 para 104:

AASB 136 para 105:

12. How is goodwill tested for impairment?

AASB 136 para 80:

13. What is a corporate asset?

© John Wiley and Sons Australia, Ltd 2015 13.2

14. How are corporate assets tested for impairment?

AASB 136 para 102:

15. When can an entity reverse past impairment losses?

AASB 136 para 110:

16. What are the steps involved in reversing an impairment loss?

© John Wiley and Sons Australia, Ltd 2015 13.3

CASE STUDY QUESTIONS

Case Study 1 Cash – generating units

2. Explain why impairment testing requires the use of CGUs

Cash flows must be independent of other cash flows

© John Wiley and Sons Australia, Ltd 2015 13.4

© John Wiley and Sons Australia, Ltd 2015 13.5

Case Study 2 Understanding impairment testing

Recoverability of brand names

Purpose of the impairment test

Basic steps for individual asset

Pacific Brands Ltd

© John Wiley and Sons Australia, Ltd 2015 13.6

Case Study 3 Impairment testing and goodwill

Purpose of the impairment test

- to ensure assets are not overstated.

Effect of goodwill on impairment test

- goodwill should be allocated to each CGU based on internal management monitoring of

1. check for indication of impairment: external and internal sources

© John Wiley and Sons Australia, Ltd 2015 13.7

Case Study 4 Frequency of impairment test

In setting up its systems to apply AASB 136 Impairment of Assets, management of

Para 16 notes that irrespective of any indication of impairment, for

Information needed to be generated:

© John Wiley and Sons Australia, Ltd 2015 13.8

Case Study 5 Impairment losses

CLP expects $A245m carbon-related impairment loss

© John Wiley and Sons Australia, Ltd 2015 13.9

Case Study 6 Determination of CGUs

Note definition of “cash-generating unit” in AASB 136.

© John Wiley and Sons Australia, Ltd 2015 13.10

Case Study 7 Impairment of goodwill

© John Wiley and Sons Australia, Ltd 2015 13.11

Case Study 8 Identification of CGUs

Whether a specific restaurant remains in existence is based on an analysis of the performance