Ind AS 36: Allocating Impairment Loss Across Assets in a CGU
Impairment is one of those topics in CA Final Financial Reporting that looks intimidating at first but becomes completely logical once you understand the sequence of allocation. Let's walk through the entire concept — step by step — as your senior teacher would explain it on a whiteboard.
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What Is a Cash Generating Unit (CGU)?
A Cash Generating Unit is the smallest identifiable group of assets that together generate independent cash inflows. When you cannot estimate the recoverable amount of a single asset in isolation, you test the entire CGU for impairment.
The key question Ind AS 36 then answers is: once you know the CGU is impaired, how do you spread that loss across individual assets?
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The Core Principle: Reduce in Order
Ind AS 36 prescribes a clear priority order for absorbing an impairment loss within a CGU:
- First — reduce the carrying amount of any goodwill allocated to the CGU.
- Then — reduce the carrying amounts of other assets on a pro-rata basis (based on their relative carrying amounts), subject to a floor.
That floor is important: no individual asset can be written down below the highest of its fair value less costs of disposal, its value in use, or zero. If you cannot bring the asset below that floor, the remaining loss is spread across the other assets in the group.
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Scenario A — CGU With Goodwill
Imagine a CGU containing three assets:
| Asset | Carrying Amount (₹ lakhs) | |---|---| | Goodwill | 50 | | Plant & Machinery | 200 | | Building | 150 | | Total | 400 |
Suppose the recoverable amount of the CGU is ₹320 lakhs. The impairment loss = 400 − 320 = ₹80 lakhs.
Step 1 — Wipe Out Goodwill First
Goodwill absorbs ₹50 lakhs. Goodwill balance after impairment = ₹0.
Remaining loss to allocate = 80 − 50 = ₹30 lakhs.
Step 2 — Pro-Rata to Other Assets
The remaining ₹30 lakhs is split between Plant & Machinery and Building in the ratio of their carrying amounts (200 : 150 = 4 : 3).
- Plant & Machinery absorbs: 30 × 4/7 = ₹17.14 lakhs → new carrying amount ≈ ₹182.86 lakhs
- Building absorbs: 30 × 3/7 = ₹12.86 lakhs → new carrying amount ≈ ₹137.14 lakhs
Always check: are either of these below the floor (FVLCD or VIU)? If yes, cap the write-down at the floor and reallocate the excess to the remaining asset.
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Scenario B — CGU Without Goodwill
Now consider the same CGU but without goodwill:
| Asset | Carrying Amount (₹ lakhs) | |---|---| | Plant & Machinery | 200 | | Building | 150 | | Total | 350 |
Recoverable amount = ₹290 lakhs. Impairment loss = 350 − 290 = ₹60 lakhs.
There is no goodwill, so the entire ₹60 lakhs goes directly to the remaining assets pro-rata (200 : 150 = 4 : 3):
- Plant & Machinery: 60 × 4/7 = ₹34.29 lakhs → carrying amount ≈ ₹165.71 lakhs
- Building: 60 × 3/7 = ₹25.71 lakhs → carrying amount ≈ ₹124.29 lakhs
Again, apply the floor check asset by asset. This step is frequently tested in CA Final and many students forget it under exam pressure — don't be one of them!
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The Floor Rule — Why It Matters
Say Plant & Machinery has a recoverable amount on a standalone basis of ₹170 lakhs (your floor). In Scenario B, the pro-rata allocation would bring it to ₹165.71 lakhs — below the floor. So you cap it at ₹170 lakhs. The excess ₹4.29 lakhs is then spread across Building (the only remaining asset in this simplified example).
If even after that reallocation Building hits its floor, any residual loss that cannot be allocated stays unallocated — a fact some students don't know.
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Reversal of Impairment: One Quick Note
If conditions improve, impairment can be reversed for assets other than goodwill — but goodwill impairment is never reversed under Ind AS 36. This distinction is almost always a part of theory questions. Verify specific disclosure requirements in the latest ICAI study material since presentation requirements are updated periodically.
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Common Exam Traps to Avoid
- Forgetting the floor check after pro-rata allocation — always do it.
- Reversing goodwill impairment — you cannot.
- Using net book value vs. gross block — always work with carrying amounts (net of accumulated depreciation).
- Missing corporate assets — if the CGU is part of a group that includes shared corporate assets, those need to be allocated before the impairment test (verify in latest ICAI guidance).
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FAQs
Q1. Can two assets in a CGU both be at their floor, leaving some loss unallocated? Yes. Ind AS 36 acknowledges this. If all remaining assets hit their respective floors and the total impairment loss is still not fully absorbed, the remaining unallocated amount is disclosed but not forced onto assets already at the floor.
Q2. What if goodwill is not formally allocated to a specific CGU? In that case, the standard requires a specific top-down allocation exercise. Goodwill must be allocated to CGUs that are expected to benefit from the business combination synergies. Verify the exact procedure in the latest ICAI study material / announcement.
Q3. Does the pro-rata method apply to intangible assets with finite life too? Yes — all assets in the CGU (tangible and finite-life intangibles) are part of the pro-rata pool after goodwill is exhausted, subject to the floor constraint.
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