Friday, April 3, 2015

Audit - impairment assessment - identification of cash-generating units within a legal entity

Recently, we came across a interesting observations relating to impairment assessment when we audit a legal entity. The entity, which consist of 3 business divisions, is profit-making from an overall perspective. By looking at the surface, one might conclude that there's no indication of impairment. Is this appropriate and sufficient?

When we dealt with the audit further (which is a new audit client), we noted that one of the three business division is in loss-making and in gross loss position. The assets are not generating return that is within management's expectation. Is this considered an indication of impairment? Yes.

Question: when carrying out impairment assessment , do we have to consider 3 business divisions or just 1 legal entity?

Looking at IAS 36, a principle of identifying a CGU is to identifying the lowest level of cash generating unit that generate independent cash flow. We noted that the cash flow of this loss-making business division is independent of other 2 business divisions (i.e. non-interdependent) and there's a separate management team dealing with this business division.

As a result, we have proposed management to reconsider the impairment assessment and request management to estimate the recoverable amount of CGU for the loss-making business division. A impairment was provided subsequent to management's re-assessment.

Morale of the story: look into details.

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