Australian

School of
Business
ACCT 2542 Corporate Financial
Reporting and Analysis


Topic 4

-Business Combinations
-Impairment of Assets

Presented by: Dr Sarowar Hossain
Office: QUAD 3083

8/31/2014 1
Australian
School of
Business
Readings

chapter 10: Businesscombinations

chapter 11: Impairmentofassets

AASB 3: Business Combinations
AASB 136: Impairment of Assets

2
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School of
Business
Lectureobjectives
Chapter 10
explain the basic steps in the acquisition method of accounting for business
combinations (p. 446)
describe how to recognise and measure the assets acquired and liabilities assumed
in a business combination (p. 451)
account for a business combination in the records of the acquirer (p. 457)
prepare an acquisition analysis and account for the recognition of goodwill or gain
from bargain purchase (p. 462)

Chapter 11
describe when to undertake an impairment test (p. 515)
explain how to undertake an impairment test for an individual asset (p. 517)
identify a cash-generating unit, and account for an impairment loss for a cash-
generating unit (p. 525)
apply the impairment model to a cash generating unit and account for impairment of
goodwill (p. 532)



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Thenatureofabusinesscombination
AASB3definesabusinesscombinationas:
atransactionorothereventinwhichanacquirer
obtainscontrolofoneormorebusinesses

Abusinessisnotjustagroupofassets,rather,itisan
entityabletoproduceoutput

Controlexistswhenaninvestorisexposed,orhasrights,
tovariablereturnsfromitsinvolvementwiththe
investeeandhastheabilitytoaffectthosereturns
throughitspowerovertheinvestee.

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Thenatureofabusinesscombination

Fourgeneralformsofbusinesscombinationareasfollows(assumingthe
existenceoftwocompaniesALtdandBLtd):

1. A Ltd acquires all assets and liabilities of B Ltd

B Ltd continues as a company, holding shares in A Ltd
2. A Ltd acquires all assets and liabilities of B Ltd
B Ltd liquidates
3. C Ltd is formed to acquire all assets and liabilities of A Ltd and B
Ltd
A Ltd and B Ltd liquidate
4. A Ltd acquires a group of net assets of B Ltd
B Ltd continues to operate
Refer to figure 10.2 of text for key
steps involved under each of the
above scenarios
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Accountingforbusinesscombinations:
Basicprinciples
AASB 3 prescribes the acquisition method in accounting
for a business combination. The key steps in this
method are:

1. Identify an acquirer
2. Determine the acquisition date
3. Recognise and measure the identifiable assets
acquired, the liabilities assumed, and any non-
controlling interest in the acquiree; and
4. Recognise and measure goodwill or a gain from
bargain purchase.

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School of
Business
Accountingforbusinesscombinations:
Identifyingtheacquirer
Thebusinesscombinationisviewedfromthe
perspectiveoftheacquirer

Theacquireristheentitythatobtainscontrolofthe
acquiree

Inmostcasesthisstepisstraightforward.Inother
casesjudgementmayberequired>egwheretwo
existingentities(A&B)combineandanewentity(C)is
formedtoacquireallthesharesoftheexistingentities

Whoistheacquirer?CannotbeC

IndicativefactorscontainedwithinAppendixBof
AASB3assistinidentifyingtheacquirer

7
acquirer: The entity that obtains control of the
acquiree..
acquiree: The business or businesses that the acquirer obtains control of in
a business combination.
Australian
School of
Business
Accountingforbusinesscombinations:
Determiningtheacquisitiondate
Acquisition date is the date that the acquirer obtains
control of the acquiree

Determining the correct acquisition date is important
as the following are affected by the choice of
acquisition date:
The fair values of net assets acquired
Consideration given, where the consideration
takes a non-cash form
Measurement of the non-controlling interest
(discussed in chapter 18).
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Accountingintherecordsoftheacquirer:
assetsacquiredandliabilitiesassumed
Fairvalueallocationoccursatacquisitiondateand
requirestherecognitionof:
Identifiable tangible and intangible assets
Liabilities
Contingent liabilities
Any non-controlling interest in the acquiree
Goodwill

FVINA=fairvalueofidentifiablenetassets(incl.
contingentliabilities)
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Australian
School of
Business
Accountingintherecordsoftheacquirer:
Contingentliabilities
AASB3requiresthatcontingentliabilitieswhichcanbe
measuredreliablyarerecognisedbytheacquirer

Theaboverequirementdoesnotconsiderissuesof
probability

Thereforecontingentliabilitieswhereapresentobligation
existsbutthatdonotqualifyforrecognitioninthe
acquiree'sbooksunderAASB137mayberecognisedby
theacquireraspartofabusinesscombination

Thefairvalueofacontingentliabilityistheamountthata
thirdpartywouldchargetoassumethosecontingent
liabilities.Suchanamountreflectstheexpectations
aboutpossiblecashflows.Thisisnotsimplythe
expectedmaximum/minimumcashflow

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Accountingintherecordsoftheacquirer:
intangibleassets
AASB3requirestheacquirertorecogniseintangible
assetswheretheirfairvaluecanbemeasuredreliably

Figure10.4containsalistofintangiblesthattheAASB
considerwouldmeetthedefinitionofanintangiblefor
thepurposesofaccountingforabusinesscombination

Thefairvalueofanintangiblereflectsmarket
expectationsabouttheprobabilityoffutureeconomic
benefitsflowingtotheentity

Eg>iftheexpectedbenefitsare$1,000andthe
probabilityofreceivingthebenefitsis90%,thefair
valuewillbe$900

Examples include trademarks, customer lists, royalty agreements, patented

technology etc.
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Australian
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Accountingintherecordsoftheacquirer:
measurement
AASB3requiresthatassetsacquiredandliabilitiesand
contingentliabilitiesassumedaremeasuredatFV

Fairvalueisbasicallymarketvalueandisdetermined
byjudgement,estimationandathree-levelfairvalue
hierarchyasdescribedinAASB13anddiscussed
earlier.

Acquirerhas12monthsfromacquisitiondateto
determinefairvalues

Atfirstbalancedateafteracquisitionthefairvaluesmay
onlybeprovisionallydeterminedabestestimate

Finalisationoffairvalueswillresultinadjustmentsto
goodwill

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Accountingintherecordsoftheacquirer:
considerationtransferred
The acquirer measures the consideration transferred
as the fair values at the date of acquisition of

Assets given
Liabilities (including contingent liabilities) assumed
Equity instruments

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The consideration paid by the acquirer may consist of
one or a number of the following forms of consideration:

Cash
Non-monetary assets
Equity instruments
Liabilities undertaken
Cost of issuing debt/equity instruments
Contingent consideration
Accountingintherecordsoftheacquirer:
considerationtransferred
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Cash
Wherethesettlementisdeferred,thecashmustbe
discountedtopresentvalueasatthedateof
acquisition
Thediscountrateusedistheentitysincremental
borrowingrate

Equityinstruments
Whereanacquirerissuestheirownsharesas
considerationtheyneedtodeterminethefairvalueof
thesharesasatthedateofexchange
Iflisted,thefairvalueisthequotedmarketpriceofthe
shares(withafewlimitedexceptions)
Accountingintherecordsoftheacquirer:
considerationtransferred
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Costsofissuingdebtandequityinstruments
Transactioncostssuchasstampduties,underwriting
feesandbrokersfeesmaybeincurredinissuingequity
instruments
Suchcostsareconsideredtobeanintegralpartofthe
equitytransactionandshouldberecogniseddirectlyin
equity

Journal entry required would be:
Dr Share Capital xx
Cr Cash xx

Costsassociatedwiththeissueofdebtinstrumentsare
includedinthemeasurementoftheliability
Accountingintherecordsoftheacquirer:
considerationtransferred
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Contingentconsideration

Insomecasestheagreementwillprovideforan
adjustmenttothecostofthecombinationcontingenton
afutureevent
Example-whereanacquirerissuessharesaspartof
theirconsideration,theagreementmayrequirean
additionalpaymentofthevalueofthesharesfalls
belowacertainamountwithinaspecifiedperiodof
time
Iftheadjustmentisprobableandcanbemeasured
reliably,thentheamountshouldbeincludedinthe
calculationofthecostofacquisition

Accountingintherecordsoftheacquirer:
considerationtransferred
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Acquisitionrelatedcosts

Acquisitionrelatedcoststhataredirectly
attributabletoabusinesscombinationdonotform
partoftheconsiderationtransferred,rathertheyare
expensedasincurred.

Examplesincludefindersfees;advisory,legal
accounting,valuationandotherprofessionalor
consultingfees;[and]generaladministrativecosts,
includingthecostsofmaintaininganinternal
acquisitionsdepartment.
Accountingintherecordsoftheacquirer:
considerationtransferred
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Australian
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Calculatingconsiderationtransferred:
example
On 1 January 2012 A Ltd acquired all the assets and liabilities of B Ltd.
Details of the consideration transferred are as follows:
Cash of $400,000, half to be paid on 1 January 2012, with the
balance due on 1 January 2013. The incremental borrowing rate for A
Ltd is 10%
100,000 shares in A Ltd were issued. The share price on 1 January
2012 was $1.50 per share. This price represented a six-month high.
Costs of issuing the shares was $1,000.
Due to doubts as to whether the share price would remain at or
above the $1.50 level, A Ltd agreed to supply cash to the value of any
decrease in the share price below $1.50. This guarantee was valid for
a period of 3 months (to 31 March 2012). A Ltd believed that there
was a 75% chance that the share price would remain at or above
$1.50 until 31 March 2012 (and a 25% chance that it would fall to
$1.40)
A supply a patent to B Ltd. The fair value of the patent is $60,000. As
the patent was internally generated it has not been recognised in A
Ltds books.
Legal fees and associated with the acquisition totalled $5,000.
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Australian
School of
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Required:
Calculate the consideration transferred


Cash Payable now 200,000
Deferred ($200,000 x 0.909091) 181,818
Shares 100,000 x $1.50 150,000
Guarantee 100,000 x ($1.50-$1.40) x 25% 2,500

Patent

60,000
Total cost of acquisition 594,318
Discounted to PV at rate of 10%
Based on quoted
market price
Based on probability of share price falling below $1.50
FV of patent
Share issue costs, legal fees and stamp duty are excluded from the calculation
Calculating consideration transferred:
example
8/31/2014 20
Australian
School of
Business
Accountingintherecordsoftheacquirer:
Goodwill
When a business combination results in goodwill, AASB 3
requires that the goodwill is:
recognised as an asset
measured at its cost at the date of acquisition

Goodwill = consideration transferred - acquirers interest in
the FVINA

Goodwill is considered to be a residual interest

Goodwill is an unidentifiable asset which is incapable of
being individually identified and separately recognised
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Example

Details of B Ltds assets and liabilities acquired by A Ltd are as follows:
CA FV
Plant & equipment 360,000 367,000
Land 260,000 257,000
Inventory 24,000 30,000
Accounts receivable 18,000 16,000
Accounts payable (35,000) (35,000)
Bank overdraft (55,000) (55,000)
Net assets 572,000 580,000
B Ltd is currently being sued by a previous customer. The expected damages
is $50,000. Lawyers estimate that there is a 20% chance of losing the case.
Accounting in the records of the acquirer: Goodwill
8/31/2014 22
Australian
School of
Business
Required:
a) Calculate the FVINA acquired and determine the
goodwill on acquisition.
b) Prepare the journal entry in the books of A Ltd to
account for the acquisition
Fair value of recorded net assets

580,000
Less: Contingent liability re damages
($50,000 x 20%)
(10,000)
FVINA 570,000
Cost of acquisition 594,318
Goodwill on acquisition 24,318
Carrying amounts in Bs books are irrelevant to A
Based on probability of losing the case
Per Slide 20
Residual interest
Accounting in the records of the acquirer: Goodwill
8/31/2014 23
Australian
School of
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Plant & equipment 367,000
Land 257,000
Inventory 30,000
A/C Receivable 16,000
Goodwill 24,318
A/C Payable 35,000
Bank o/draft 55,000
Provision for damages 10,000
Cash 200,000
Deferred consideration payable 181,818
Share capital 150,000
Provision for loss in value of shares 2,500
Gain on sale of patent 60,000
Journal entries in the books of A Ltd to account for the acquisition



FV
Residual interest
FV
Contingent liability
Components of
cost of acqn
Accounting in the records of the acquirer: Goodwill
8/31/2014 24
Australian
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Journal entries in the books of A Ltd to account for the acquisition (cont.)



Accounting in the records of the acquirer: Goodwill
Legal fee expenses 5,000
Share capital 1,000
Cash 6,000
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Accountingintherecordsoftheacquirer:
Gainfrombargainpurchase
WheretheacquirersinterestintheFVINAexceedsthe
considerationtransferred,negativegoodwillarisesthis
isreferredtoasagainonbargainpurchase

Againonbargainpurchasefortheacquirerarisesfrom:
Errors in measuring fair value
Another standards requirements
Superior negotiating skills

Theexistenceofagainonbargainpurchaseisarare
event

Intheeventofagainonbargainpurchasetheacquirer
isrequiredtorecogniseanygainimmediatelyinthe
profit&loss
Refer to example 10.3 of text
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Australian
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Accountingbytheacquirer:
sharesacquiredinanacquiree
Whensharesareacquiredratherthanthenetassetsthe
investmentisaccountedforinaccordancewithAASB9
FinancialInstruments

AASB9requirestheinvestmenttobeaccountedforatfair
value.

Theaccountingtreatmentintheacquirersbooksat
acquisitionis:
DrSharesinAcquiree XX
CrShareCapital XX
CrCash XX
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Australian
School of
Business
Accountingbytheacquirer:
sharesacquiredinanacquiree
Subsequent to initial recognition the acquirer has the
choice of recognising movements in fair value:
In profit and loss; or
Other comprehensive income (OCI)

Transaction costs (such as stamp duty) are accounted for
as follows
If subsequent movements in FV are accounted for
through profit or loss > transaction costs are expensed
If subsequent movements in FV are accounted for OCI
> transaction costs are included in the measurement of
the cost of investments
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Australian
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Accountingbytheacquirer:
sharesacquiredinanacquireeExample
Assumethaton1January2013SalmonLtdacquiredalltheissuedshares
in Whiting Ltd for $80 000, giving in exchange $10 000 cash and 20 000
shares in Salmon Ltd; the latter having a fair value of $3.50 per share.
Transactioncostsof$500werepaidincash.Shareissuecostswere$1000.
Salmon Ltd does not elect to present subsequent changes in fair value in
other comprehensive income. The journal entries in the records of Salmon
Ltdattheacquisitiondateare
* If Salmon Ltd elected to present fair value changes in other comprehensive income, the debit would be to Shares in
Whiting Ltd, as the financial asset would be measured at fair value plus transaction costs.
Australian
School of
Business
Accountingintherecordsoftheacquiree
Ifacquireedoesnotliquidate,itrecognisesagainor
lossonthesaleoftheassetsandliabilitiesthat
formedthepartofthebusinessbeingsold

Ifacquireeliquidates,itsaccountsaretransferredtoa
liquidationandashareholdersdistributionaccount

Noentriesneededifacquireeonlypartswithshares
Refer to figures 10.20-10.21 of text
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Subsequentadjustmentstotheinitialaccounting
forbusinesscombinations
Adjustmentsmaybemadesubsequenttoacquisitiondate
inrelationto:

Goodwill
Contingentliabilities
Contingentconsideration

Goodwill

Onanongoingbasisgoodwillissubjecttoimpairment
testing(referchapter11)

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Australian
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Subsequentadjustmentstotheinitialaccounting
forbusinesscombinations
Contingentliabilities

ContingentliabilitiesareinitiallyrecognisedatFV

Subsequenttoacquisitiondatetheliabilityismeasuredas
thehigherof:
(a)thebestestimateoftheexpenditurerequiredtosettle
thepresentobligation;and

(b)theamountinitiallyrecognisedlesscumulative
amortisationrecognisedinaccordancewithAASB
118Revenue.

Subsequentadjustmentsdonotaffectthegoodwill
calculatedatacquisitiondate.

eg, where a liability was recognised in

relation to a court case
eg, where a liability was recognised in relation to a
guarantee
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Australian
School of
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Subsequentadjustmentstotheinitialaccounting
forbusinesscombinations
Contingentconsideration

At acquisition date, the contingent consideration is

measured at fair value, and is classified either:
as equity (for example, the requirement for the
acquirer to issue more shares subject to subsequent
events); or
as a liability (for example, the requirement to provide
more cash subject to subsequent events).

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Business
Subsequentadjustmentstotheinitialaccountingfor
businesscombinations
Contingentconsideration

Subsequent accounting treatment is a follows:

where classified as equity, no remeasurement is required, and the
subsequent settlement is accounted for within equity. This means
that extra equity instruments issued are effectively issued for no
consideration and there is no change to share capital.

where classified as a liability, it will be accounted for under AASB
139 or AASB 137. So, if there were changes in the amount of an
expected cash outflow, the liability would be adjusted and an
amount recognised in profit or loss.

Subsequent adjustments do not affect the goodwill calculated at
acquisition date.

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Disclosures
AASB3containsextensivedisclosurerequirementsin
relationtobusinesscombinations
Figure10.23providesasampleofthedisclosures
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Impairment of Assets

Australian
School of
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IntroductiontoAASB136
Entities are required to conduct impairment tests to
ensure their assets are not overstated

Impairment results when an assets carrying amount
(CA) is more than its recoverable amount (RA)

Not all assets require this test. Notable exclusions
include:
Inventories
Deferred tax assets
Assets held for resale

The specific requirements in
relation to these assets are
covered in the AASBs that deal
with these balances
37
Where assets are recorded at fair value, there is no need to test for
recoverability of the carrying amount of the asset.
Australian
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Whentoundertakeanimpairmenttest
For most assets it is not necessary to conduct
impairment tests every year

Assets must be tested for impairment when there is
an indication (or evidence) of impairment

The following assets must be tested annually for
impairment:
Intangibles with indefinite useful lives
Intangibles not yet available for use
Goodwill acquired in a business combination
Reason annual testing required > the CA of these assets is more uncertain
than that of other assets
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Australian
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Collectingevidenceofimpairment
Minimum indicators contained within AASB 136 are
classified into two groups internal and external

External sources

Decline in market value due to technological
advancements
Adverse changes in entitys environment/ market
eg a competitor may have patented a new product,
resulting in a permanent fall in market share of the
entity
Increases in interest rates affects the PV of future
cashflows
Market capitalisation
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Australian
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Collectingevidenceofimpairment
Internalsources

Obsolescenceorphysicaldamage

Changeinassetusehastheassetbecomeidle?

Anassetseconomicperformancebeingworsethan
expectedcashinflowsmaybelower/cashoutflows
maybehigherthanexpected
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Impairmenttestforanindividualasset
41
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Impairmenttestforanindividualasset
From the previous slide it can be seen that there are
two possible amounts against which the carrying
amount can be tested for impairment
Fair value less costs to sell (FVLCTS)
Value in use (VIU)

Not always necessary to measure both amounts
when testing for impairment

If either one of these two amounts is higher than the
carrying amount, the asset is not impaired

Therefore if the FVLCTS > CA there is no need to
calculate the VIU of the asset

VIU more difficult to calculate than FVLCTS

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Fairvaluelesscoststosell
Defined as




Two parts to the definition:
Fair value
Costs of disposal

the amount obtainable from the sale of an asset in
an arms length transaction less the costs of
disposal

Australian
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Fairvaluelesscoststosell
Fair value is determined using the following value
hierarchy
Price in a binding sale agreement
Market price (current bid price)
Appropriate estimation (eg using NPV
calculations)

Costs of disposal include:
legal fees
stamp duty
costs of removing the asset etc

Finance costs and income tax are not considered to be
costs of disposal
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Valueinuse
Defined as




Five elements when calculating value in use
1. Estimate of future cash flows
2. Expectations about possible variations in amount
or timing of future cash flows
3. Time value of money
4. Price for bearing uncertainty inherent in asset
5. Other factors such as illiquidity

the present value of future cash flows expected
to be derived from an asset or cash-generating unit
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Valueinuse
estimatingfuturecashflows
Objective overall is to
estimate future cash flows; and
apply a discount rate

Projections should be based on managements best
estimates. External evidence should be given greater
weight than reliance on managements expectations

Projections should be based on most recent
budgets/forecasts. Such projections should cover a
maximum period of 5 years

Cash inflows should include those from the continuing
use of the asset as well as those expected on the
disposal of the asset. Cash outflows must also be taken
into account
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Valueinuse
estimatingfuturecashflows

Projectedcashflowsmustbeestimatedfortheasset
initscurrentcondition

Financingandtaxrelatedcashflowsareexcluded
fromthecalculation

Disposalpriceshouldtakeintoaccountanyexpected
futurepriceincrease/decreases

AppendixAofAASB136containstwoapproachesto
computingthepresentvaluethetraditional
approachandtheexpectedcashflow'approach

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Valueinuse
determiningthediscountrate
The discount rate should reflect:
The time value of money
The risks specific to the asset for which future cash
flows have not been adjusted

Discount rates are commonly based on
The entitys WACC
The entitys incremental borrowing rate
Other market borrowing rates

The rate must reflect specific risks relating to:
Country risk
Currency risk
Price risk

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Recordinganimpairmentlossfor
-anindividualasset
AnimpairmentlossisrecognisedwhereCA>RA

Wheretheassetisaccountedforunderthecostmodel
theimpairmentlossisrecognisedimmediatelyinprofit
orloss

Wheretheassetisaccountedforundertherevaluation
modeltheimpairmentlossistreatedasarevaluation
decrement

Anysubsequentdepreciation/amortisationisbasedon
thenewrecoverableamount.

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Australian
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Recordinganimpairmentlossforanindividual
asset-examples
Costmodel

AnassethasaCAof$100(costof$160accumdepn
of$60)andaRAof$90.

Thejournalentrytorecordtheimpairmentlosswould
be:

Dr Impairmentloss 10
CrAccum.Depn&impairmentlosses 10

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Australian
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Recordinganimpairmentlossforanindividual
asset-examples
Revaluationmodel

AnassethasaCAof$100(FVof$120accumdepnof
$20)andaRAof$90.
Thisassetwaspreviouslyrevaluedupwardsby$50(ARS
balance=$35;DTLbalance=$15)
Thejournalentriestorecordtheimpairmentlosswouldbe:

Dr Accumulateddepreciation 20
CrAsset 20

Dr Assetrevaluationsurplus 7
Dr Deferredtaxliability 3
CrAsset 10

(120 100)
30% tax effect
(100 90)
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Cash-generatingunits(CGUs)
WheretheFVLCTS<CAitisnecessarytocalculatethe
VIUofanassettodeterminewhetherornotithasbeen
impaired

ItmaynotbepossibletoidentifyanindividualassetsVIU
whentheassetonlyhasavalueduetoitsrelationship
withotherassets.Egamachineinafactoryworksin
conjunctionwiththerestoftheassetsinthefactory

InsuchcasestheVIUoftheassetmustbedetermined
inthecontextoftheassetscash-generatingunit(CGU)

CGU-Definedasthesmallestidentifiablegroupof
assets(generatingcashflowsfromcontinuinguse)that
areindependentofthecashinflowsfromotherassetsor
groupsofassets

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IdentifyingCGUs
Identification of CGUs requires consideration of
How management monitors the entitys operations (such as product
lines, individual locations, district or regional area);
How management makes decisions about continuing or
disposing of the entitys assets and operations

If an active market exists for the output of a group of assets (even if
some of the output of the group of assets is used internally), this
group of assets is classified as a CGU

CGUs must be identified consistently from period to period

AASB 136 allows a segment (determined in accordance with AASB
8 Operating Segments) to be used as a CGU where the segment
equates to the smallest group of assets generating independent
cash flows.
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ImpairmentlossesandCGUs
nogoodwill
Where an impairment loss arises in a CGU with no
goodwill the loss is allocated across all of the assets in
the CGU on a pro-rata basis based on the CA of each
asset relative to the total CA amount of the CGU

Losses are accounted for in the same way as for
individual assets discussed earlier

The CA of an individual asset cannot be reduced below
the highest of:
FVLCTS (if determinable);
VIU (if determinable); or
Zero

Corporate assets (such as headquarter building) should try to
allocate these across CGUs on a reasonable and
consistent basis if possible
.
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ImpairmentlossesandCGUs
nogoodwill:example
A Ltd has identified an impairment loss of $12,000 on one
of its CGUs

The CGU consists of the following assets (stated at current
carrying amounts):
Buildings 500,000
Equipment 300,000
Land 250,000
Fittings 150,000

The FVLCTS of the building is $497,000

Required:
Calculate the allocation of impairment loss against all
assets in the CGU
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Australian
School of
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Impairment losses and CGUs
no goodwill: example
As the FVLCTS of the building is $497,000, the
maximum impairment loss that can be allocated to the
building is $3,000. The remaining $2,000 must be
allocated across the other assets in the CGU
CA Pro-
rata
Impairment
loss
allocated
Adjusted CA
Buildings 500,000
Equipment 300,000
Land 250,000
Fittings 150,000
5/12 5,000 495,000
3/12 3,000 297,000
2.5/12 2,500 247,500
1.5/12 1,500 148,500
1,200,000 12,000
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Impairment losses and CGUs
no goodwill: example
Adjusted
CA
Pro-rata Impairment
loss
allocated
Total
impairment
loss allocated
Buildings
Equipment
Land
Fittings
297,000 297/693 857 3,857
247,500 247.5/693 714 3,214
148,500 148.5/693 429 1,929
693,000 2,000 12,000
From last
column of
previous
slide
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Australian
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ImpairmentlossesandCGUs
withgoodwill
WhereaCGUincludesgoodwill,AASB136contains
specificrequirementsforaccountingfortheallocationof
impairmentlossesarisinginrelationtotheCGU

Goodwillisaresidualbalance,consistingofassetsthat
cannotbeindividuallyidentifiedorseparately
recognised

ThereforeitisnotpossibletodetermineaFVLCTSfor
goodwill,ortoidentifycashflowsrelatingspecificallyto
goodwill

Rather,goodwillcanonlybetestedforimpairmentatthe
CGUlevel
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Australian
School of
Business
ImpairmentlossesandCGUs
withgoodwill
AASB 136 requires that goodwill be allocated to the
lowest level at which management monitors the goodwill

Recall that goodwill is required to be tested for
impairment annually (or more frequently if there is an
indication that the CGU may be impaired)

Where an impairment loss arises in a CGU with goodwill
the following allocation rules apply:
To reduce the carrying amount of the CGUs goodwill
to zero
To the other assets of the CGU on a pro rata basis (on
the same basis as discussed on slide 54)

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Australian
School of
Business
ImpairmentlossesandCGUs
withgoodwill:example
A Ltd has identified an impairment loss of $300,000 on
one of its CGUs

The CGU consists of the following assets (stated at
current carrying amounts):
Buildings 500,000
Equipment 300,000
Land 250,000
Goodwill 150,000

Required:
Calculate the allocation of impairment loss against all
assets in the CGU.
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Australian
School of
Business
Impairment losses and CGUs
with goodwill: example
CA Pro-rata Impairment
loss allocated
Adjusted
CA
Goodwill
150,000
Buildings
500,000
Equipment
300,000
Land
250,000

150,000* -
500/1,050
71,429** 428,571
300/1,050 42,857
257,143
250/1,050 35,714
214,286
1,050,000
300,000
* Remaining impairment loss still to be allocated = $150,000
** 500/1,050 x $150,000 = 71,429
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8/31/2014
Australian
School of
Business
Reversalofanimpairmentloss
Recognisedlossesarereassessedannually

Indicatorsforreversalsofimpairmentlossesarethesame
asthoseusedforinitiallyrecognisingaloss

Abilitytorecogniseareversalofanimpairmentlossand
theaccountingforthatreversalisdependentonwhether
thereversalrelatestoanindividualasset,aCGU,or
goodwill

Previouslyrecognisedimpairmentlossesinrelationto
individualassetsareabletobereversed.

ThenewCAcannotbehigherthantheCAthatwould
havebeendeterminedhadnoimpairmentlossbeen
previouslyrecognised(iefordepreciableassets,the
impactofdepreciationneedstobeconsidered)

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Australian
School of
Business
Reversalofanimpairmentlossindividual
assets
Costmodel

Thejournalentrytorecordthereversalofthe
impairmentlosswouldbe:

DrAccumdepn&impairmentlossesxx
Cr Income-impairmentlossreversalxx

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Australian
School of
Business
Reversalofanimpairmentlossindividual
assets
Revaluationmodel

WheretheimpairmentlosswastakentotheP&Lthe
journalentrywouldbethesameasthatshownabove
underthecostmodel

WheretheimpairmentlosswastakenagainsttheARS
thejournalentrytorecordthereversalofthe
impairmentlosswouldbe:

Dr Asset xx
Cr Deferredtaxliability xx
Cr Assetrevaluationsurplus xx

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Australian
School of
Business
ReversalofanimpairmentlossCGUs
Impairmentlossesrelatingtogoodwillcannotbe
reversed

ThereversalofanyimpairmentlossrelatingtoaCGU
isallocatedacrosstheassetsoftheCGU(excluding
goodwill)onapro-ratabasis

Thereversalsforspecificassetswillbeaccountedfor
inthesamewayasoutlinedaboveforindividual
assets

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Australian
School of
Business
ReversalofanimpairmentlossCGUs
The CA of an asset cannot be increased above the
lower of:
its RA (if determinable)
the CA that would have been determined had no
impairment loss been recognised in prior periods

Any excess from the above situation is allocated
across the remaining assets in the CGU on a pro-rata
basis (consistent with the example on slide 57)
66
Australian
School of
Business
Disclosures
Keydisclosuresinclude:

Theamountofimpairmentlossesrecognisedinprofit
orlossduringtheperiodandlineonincome
statement
Theamountofreversalsofimpairmentlosses
recognisedinprofitorlossduringtheperiodandline
onincomestatement
Theamountofimpairmentlossesonrevaluedassets
recogniseddirectlyinequityduringtheperiod
Theamountofreversalsofimpairmentlosseson
revaluedassetsrecogniseddirectlyinequityduring
theperiod

67
Australian
School of
Business

THANKYOU!
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