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Financial Reporting · Module 7: Impairment of assets

Higher of Two, Goodwill First

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Chapters

  1. 0:00Case
  2. 0:17Ceiling
  3. 1:12Value in use
  4. 1:23CGU
  5. 2:01Recap

In short

An asset is impaired when its carrying amount exceeds its recoverable amount, the higher of fair value less costs of disposal and value in use. For a cash-generating unit, the impairment loss reduces goodwill first and the rest is allocated pro rata to the other assets by carrying amount.

  • If either measure already exceeds the carrying amount, there is no impairment.
  • Value in use excludes financing and tax cash flows and uncommitted restructurings.
  • CGU loss: goodwill first, then pro rata.

Transcript

0:00Case

Every asset has a ceiling. It can't sit in the books above what it can recover. Here's how to find that ceiling, and what happens when a whole unit falls below it.

0:17Ceiling

A machine is carried at $400,000, and there are signs it may be impaired. There are two ways to get value out of it: sell it, or keep using it. Selling would bring $330,000, after the costs of disposal. Using it brings cash flows worth $360,000 today. That's value in use. Pause. Which one is the recoverable amount? The higher one, $360,000. A business would take the better option. $400,000 carried, $360,000 recoverable: an impairment loss of $40,000. Shortcut: if either measure already beats the carrying amount, stop.

1:12Value in use

Value in use has its own rules. Take the asset in its current condition. Leave out financing, tax, and restructurings not yet committed.

1:23CGU

Some assets can't be tested alone. So test the whole cash-generating unit. This one carries goodwill of $50,000, plant of $300,000, and a $150,000 building. That is $500,000, but it can recover only $420,000. A loss of $80,000. Goodwill goes first: all $50,000 of it. The other $30,000 is shared by carrying amount: plant $20,000, building $10,000.

2:01Recap

Higher of two. Goodwill first. Then pro rata. Next: revenue, in five steps and one bundle. Subscribe so you catch it.

Try a question on this lesson

From the EstatePass Financial Reporting bank. Answer it, then read the explanation.

Question 1 of 10/0 correct

Cobar Ltd tests a machine with a carrying amount of $400,000. It finds that the machine's fair value less costs of disposal is $430,000. Does Cobar Ltd also need to estimate the machine's value in use?

Sources

  • AASB 136 Impairment of Assets, para 18, 19, 44, 50, 59, 104
  • CPA question bank: cpa-fr-1071, 1072, 1075

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