Question

The Beverages Division is regarded as a cash-generating unit of Beta Ltd. At 30 June 2019, the carrying amounts of the assets of the CGU were as follows: Premises Inventory Machinery Vehicles Goodwill $700,000 90,000 200,000 50,000 50,000 IS Beta Ltd measured the value in use of the Beverages Division at 30 June 2019, determining it to be $1,000,000. The company also determined that the fair value of the premises is $690,000 Required a. Explain why impairment testing requires the use of cash generating units (CGU). b. Prepare the journal entry to account for the impairment loss at 30 June 2019 according to the requirements of AASB 136 Impairment of Assets. Explain the rationale for each working and journal entries.

Answer 1

Beta Ltd. Requirement a: The impairment cost compares the recovery value of an asset with the value in use and fair value. Value in use includes expected estimate of future cashflows, timing in cashflows, price for bearing the uncertainty inherent in the asset. Some assets donot independently generate cashflows.These assets could be sold seperately giving a fair value less costs of disposal .However as management have decided to use the machine rather than sell them, management have made the decision that the value in use is greater than value via sale. Requirement b: Carrying amount (CA) = 1090000 Recoverable amount (RA) = 1000000 Impairment loss = CA - RA = 1090000 - 1000000 = 90000 Step 1 :Reduce goodwill until it gets to zero Impairment Loss 90000 Less:Goodwill -50000 Remaining Impairment 40000

Step 2 :Exclude Current Assets(Assets that are not subjected to Impairment testing) Exclude Inventory Step 3 :Allocate to other NCA on prorata basis However assets cannot be reduced below the higher of (1)Fair value or Value in use or (2) Zero The premises cannot be reduced below the Fair value of $690000, so only $10000 impairment loss can be allocated against premises. Allocate the remaining $ 30000 to Machinery and Vehicles on a prorata basis. Proportion Goodwill Inventory Premises CA 50000 90000 700000 Allocation Net CA 50000 0 0 90000 10000 690000 [Remaining loss to be allocated:30000] Machinery 200000 200/250 24000 Vehicles 50000 50/250 6000 1090000 90000 176000 44000 1000000 90000 Impairment Loss a/c Dr. To Goodwill To Acc Impair loss - Premises To Acc Impair loss - Machinery To Acc Impair loss - Vehicle 50000 10000 24000 6000