ACCA Strategic Business Reporting (SBR) Practice Exam

What is the initial accounting entry for recognizing impairment of a CGU?

1. Debit goodwill, credit profit and loss

2. Debit the profit and loss account and credit goodwill

3. Debit PPE and credit goodwill

4. Debit profit and loss, credit cash

The correct answer is: Debit the profit and loss account and credit goodwill

When recognizing impairment of a Cash-Generating Unit (CGU), the initial accounting entry involves debiting the profit and loss account to reflect the loss in value of the CGU. This impairment loss is recorded as an expense, which reduces the profit for the period. At the same time, an appropriate asset is credited to represent the reduction in value. In cases where goodwill is part of the CGU, the impairment will specifically reduce the goodwill allocated to that CGU. Therefore, the correct accounting treatment requires that you debit the profit and loss, signifying the expense from the impairment, and credit goodwill, which reflects the decrease in its carrying amount. This treatment aligns with the principles of accounting for intangible assets and the recognition of impairment as outlined in relevant accounting standards, which stipulate that when the recoverable amount of a CGU falls below its carrying amount, an impairment loss must be recognized.