IAS 36

[israrhere]

Please explain rules for allocating impairment loss for CGU as given in para 104 and 105 of IAS 36 with an example.
thanks

[Muhammad Amir]

First set off Impairment loss of Cash Generating unit to the Goodwill of that unit then apportion these losses pro rata on other assets in CGU...

<b>Lets See this Example</b>

<b>GoodWill-------------600
Prpperty--------------2000
Equipment-----------1500
Fixtures---------------500
_____________________
Total-------------------4600
Recoverable
Amount of CGU----(3500)
______________________
Impairment Loss----1100</b>

Now First Write Off the GoodWill fully of this CGU then apportion remaining losses prorata to other assets of CGU.
Apportionment at 2000+1500+500=> 4000
Losses to be apportioned 1100-600(of Goodwil)500(Remaining loss to be apportioned on other assets)

GoodWill-------------600-600====0
Prpperty--------------2000-250===1750
Equipment-----------1500-187.5==1312.5
Fixtures---------------500-62.5===437.5
__________________________________
Total------------------4600-1100==3500
Recoverable
Amount of CGU---(3500)
______________________
Impairment Loss----1100

Remember that book value must not exceed the apportion able amount of particular asset

<b>See another Illustration below

A CGU’s Book value is 7500 its Recoverable amount is 6000 then Impairment loss would be 1500..

Example # 1
GoodWill-------------500
Prpperty--------------4000
Machine-------------2000
Fixtures---------------1000
_____________________
Total-------------------7500
Recoverable
Amount of CGU----(6000)
______________________
Impairment Loss----1500



a)Here Machine can be sold individually for 2100
b)Here Machine can be sold individually for 1900
c)Here Machine can be sold individually for 1500</b>

<b><u>SOLUTION OF (a)</u></b>

a)Here Machine can be sold individually for 2100

First Write Off the Good will then apportion remaining(1500-500=1000) loss prorata to remaining assets, but machine which has a book value of 2000 can be sold for 2100 this implies that machine is an asset than can be realized fully and hence the loss should not be apportioned to it so we will apportion loss as

Property 4000
Fixtures 1000
____________
======5000

So, 4000/5000*1000=> 800
And 1000/5000*1000=>200

GoodWill-------------500-500===0
Prpperty--------------4000-800===3200
Machine--------------2000-0====2000(because it can be fully realized)
Fixtures---------------1000-200==800
_________________________________________________
Total-------------------7500-1500==6000
Recoverable
Amount of CGU----(6000)
______________________
Impairment Loss----1500

<u><b>SOLUTION OF (b)</b></u>
b)Here Machine can be sold individually for 1900

First Write Off the Good will then apportion remaining(1500-500=1000) loss prorata to remaining assets, but machine which has a book value of 2000 can be sold for 1900 this implies that machine is an asset than can only absorb (2000-1900)100 amount of loss that is we can only set of 100 loss against Machine…

Now losses are set off(1500-500-100=>900) this remaining loss of 900 can be set off against Machine and Fixtures

Property 4000
Fixtures 1000
____________
======5000

So, 4000/5000*900=> 720
And 1000/5000*900=>180




GoodWill-------------500-500====0
Property--------------4000-720===3280
Machine--------------2000-100===1900(because it can be realized upto 1900 only)
Fixtures---------------1000-180===820
_________________________________________________
Total-------------------7500-1500==6000
Recoverable
Amount of CGU----(6000)
______________________
Impairment Loss----1500


<u><b>SOLUTION OF (c)</b></u>
a)Here Machine can be sold individually for 1500

First Write Off the Good will then apportion remaining(1500-500=1000) loss prorata to remaining assets, but machine which has a book value of 2000 can be sold for 1500 this implies that machine can absorb the loss of 500(2000-1500) Maximum…


Property 4000
Machine 2000
Fixtures 1000
____________
====== 7000

So, 4000/7000*1000=> 571
And 2000/7000*1000=> 286(Hence this 286 is less than 500 we will write off fully)
And 1000/7000*1000=>143

GoodWill-------------500-500===0
Prpperty--------------4000-571===3429
Machine--------------2000-286====1714(because it can be fully realized)
Fixtures---------------1000-143==857
_________________________________________________
Total-------------------7500-1500==6000
Recoverable
Amount of CGU----(6000)
______________________
Impairment Loss----1500


Remember That <b>Recoverable Amount</b> is

<b>Higher of Fair Value Less Cost to Sell
OR
Value In Use (this can be computed by present values of future benefits droved to company by a CGU)</b>

[israrhere]

Amir Bhi thanks a lot for your helpfull examples

[kamranACA]

Keep it up Amir !

Regards,

[Muhammad Amir]

Thanks Dear Kamran Sahib and You are most welcome dear Israr