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Can you please explain the difference of when to use either. I have read the lecture notes and watched the tutorials and to be honest an impairment decrease and an revaluation decrease sound the exact same to me. I would never an idea which one to use? Also could you please explain Cash generating units? I don’t understand the definition and its explanation.
Many thanks
Until the tutor answers…
An asset is impaired when its recoverable amount is lower than its net book value. When impairing the asset, you must Dr the revaluation reserve first, if the asset has been revalued prior, and then Dr the remainder to the I/S as an expense. When you say, “revaluation decrease” I think it is referring to the Dr of the revaluation reserve; and an impairment is the complete charge, albeit going to the RR and/or I/S account.
A CGU is a group of assets that you impair together; instead of deducting a single asset separately, you group assets together, and charge the impairment to the whole. The assets, which are grouped, should generate cash inflows independently.
e.g A pizza oven in a restaurant:
Does the oven generate cash inflow independently? Of course not I hear you say! Then you would group the oven with the restaurant because they are dependent on each other to generate cash, so this would be a CGU.
Thanks Daniel, that’s the best uncomplicated explanation of a CGU I’ve gotten. Although I’m still not getting the revaluation and impairment. I understand what they are and what to do with them. I just don’t know which one is appropriate to use at times.
Eg a building being damaged by 100,000. Do I impair it or revalue it? Am I missing the point which is the dead giveaway to know whether to impair or revalue. It’s just confusing.
Thanks again for your help
A revaluation of an asset, means it has INCREASED in value. An impairment, means the asset has DECREASED in value.
Your building has been damaged, so we will decrease the value i.e impair the value by £100,000.
However, if previously the building has been revalued, there must be a revaluation reserve account. So we deduct the impairment charge from the revaluation reserve account, and then the remainder goes to the I/S. If no revaluation account exists, the charge goes straight to the I/S.
I would suggest having a look at paper F3 again, as this is assumed knowledge from that paper.
Thanks Daniel.
If an asset has fallen in value, we can say it is impaired. How do we account for the impairment – we measure by how much its value has fallen. That act of re-measuring is the act of revaluing.
So a revaluation ( downwards ) is the process of measuring an impairment.
But I wouldn’t get hung up on the niceties of the precise meaning of the words and I doubt very much that a marker will fail to give you a mark where you have written “impair” where “revalue” was more appropriate
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