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Recognising and measuring an impairment loss for a cash-generating unit
Extract from FRS102: Section 27.21 – 27.23
27.21 An impairment loss shall be recognised for a cash-generating unit if, and only if, the recoverable amount of the unit is less than the carrying amount of the unit. The impairment loss shall be allocated to reduce the carrying amount of the assets of the unit in the following order:
(a) first, to reduce the carrying amount of any goodwill allocated to the cash- generating unit; and
(b) then, to the other assets of the unit pro rata on the basis of the carrying amount of each asset in the cash-generating unit.
27.22 However, an entity shall not reduce the carrying amount of any asset in the cash- generating unit below the highest of:
(a) its fair value less costs to sell (if determinable);
(b) its value in use (if determinable); and
(c) zero.
27.23 Any excess amount of the impairment loss that cannot be allocated to an asset because of the restriction in paragraph 27.22 shall be allocated to the other assets of the unit pro rata on the basis of the carrying amount of those other assets.
OmniPro comment
See below application of the above guidance
Example 14: Impairment loss for a CGU with goodwill
In year 1 Parent A acquired company X for CU100,000. On acquisition 3 CGU’s were identified called CGU 1, CGU 2 and CGU 3. The fair value of the assets acquired was CU60,000 and goodwill of CU40,000 was recognised on acquisition and set against each CGU. The goodwill was allocated to each CGU based on the synergies expected to be achieved which ultimately was allocated 1/3rd to each CGU.
In year 2, due to a change in the market trends the demand for the product produced by CGU 1 reduced significantly. The value in use calculations indicate a recoverable amount of CU9,000. At that date the carrying amount of the goodwill and identifiable assets were CU10,000 and CU20,000 (split between asset A&B of CU12,000 and CU8,000) respectively. Therefore, the total impairment to be booked is CU21,000 (CU10,000+CU20,000-CU9,000 recoverable amount).
The calculation of the allocation of the impairment loss of CGU 1 is carried out as follows:
|
|
Carrying value |
Impairment |
Carrying amount after impairment |
|
Goodwill |
CU10,000 |
(CU10,000)* |
CUnil |
|
Asset A |
CU12,000 |
(CU6,600)** |
CU5,400 |
|
Asset B |
CU8,000 |
(CU4,400)*** |
CU3,600 |
|
Total |
|
|
|
*impairment set against goodwill first and remaining amount set against all other assets on a pro-rata basis.
**impairment allocated pro-rata to identifiable assets e.g. asset A= (CU21,000-CU10,000 allocated to goodwill) * (CU12,000/(CU12,000+CU8,000)) = CU6,600.
***impairment allocated pro-rata to identifiable assets e.g. asset A= (CU21,000-CU10,000 allocated to goodwill) * (CU8,000/(CU12,000+CU8,000)) = CU4,400.
See below the illustration of the restriction mentioned in Section 27.22 and 27.23.
Example 15: Restriction of reduction of assets as a result of an impairment
In year 1 Parent A acquired company X for CU100,000. On acquisition one CGU was only identified. The fair value of the assets acquired was CU60,000 split between three machines (Machine A: CU10,000, Machine B: CU30,000 and Machine C: CU20,000) and goodwill of CU40,000 was recognised. In year 2, due to a change in the market trends the demand for the product produced by the CGU reduced significantly. Therefore an impairment review was necessary. The value in use of the CGU at that time was estimated at CU25,000. The carrying value of Machine A, B & C was CU7,000, CU25,000 and CU16,000 respectively. The carrying value of goodwill at that time is CU20,000. The fair value less cost to sell of machine C was CU6,000. The fair value of the other machines cannot be determined. See below how the impairment loss of CU43,000 (CU7,000+CU25,000+CU16,000+CU20,000-CU25,000 recoverable amount) should be allocated.
|
|
Carrying value |
Impairment |
Carrying amount after impairment |
|
Goodwill |
CU20,000 |
(CU20,000)* |
CUnil |
|
Machine A |
CU7,000 |
(CU1,000)** |
CU6,000 |
|
Machine B |
CU25,000 |
(CU13,414)*** |
CU11,586 |
|
Machine C |
CU16,000 |
(CU8,586)**** |
CU7,414 |
|
Total |
|
CU43,000 |
|
*impairment set against goodwill first and remaining amount set against all other assets on a pro-rata basis.
**Note 1: impairment allocated pro-rata to identifiable assets e.g. asset A= (CU43,000-CU20,000 allocated to goodwill) * (CU7,000/(CU7,000+CU25,000+CU16,000)) = CU3,354. However as the fair less cost to sell is CU6,000 it cannot be written down below CU6,000. Therefore the adjustment is limited to CU1,000 (CU7,000-CU6,000). The remaining CU2,354 (CU3,354-CU1,000 booked) has to be allocated between the remaining assets.
***Note 2: impairment allocated pro-rata to identifiable assets e.g. asset A= (CU43,000-CU20,000 allocated to goodwill) * (CU25,000/(CU7,000+CU25,000+CU16,000)) = CU11,979. However the CU2,354 in note 1 above has to be allocated to machine B as follows: = CU2,354 * (CU25,000/(CU25,000+ CU16,000))= CU1,435. Therefore total impairment to be booked against Machine B is CU1,435+CU11,979= CU13,414.
***Note 3: impairment allocated pro-rata to identifiable assets e.g. asset A= (CU43,000-CU20,000 allocated to goodwill) * (CU16,000/(CU7,000+CU25,000+CU16,000)) = CU7,667. However the CU2,354 in note 1 above has to be allocated to machine B as follows: = CU2,354 * (CU16,000/(CU25,000+ CU16,000))= CU919. Therefore total impairment to be booked against Machine B is CU919+CU7,667 = CU8,586.
Note we have called the assets machine A, B & C here but any of these could easily have been other intangible asset e.g. customer lists. The treatment would not change.
Allocation of corporate assets
Section 27 does not deal with allocating carrying value of corporate assets e.g. office building for all CGU’s., however this is likely to be allocated on the basis of the carrying value of each CGU. It can also be determined on the basis of turnover or employee numbers. If the fair value less cost to sell of this building on its own is above its carrying amount it would not need to be included in the value in use calculation and therefore would not need to be included in the carrying amount when comparing it to the value in use.
Additional requirements for impairment of goodwill
Extract from FRS102: Section 27.24 – 27.27
27.24 Goodwill, by itself, cannot be sold. Nor does it generate cash flows to an entity that are independent of the cash flows of other assets. As a consequence, the fair value of goodwill cannot be measured directly. Therefore, the fair value of goodwill must be derived from measurement of the fair value of the cash-generating unit(s) of which the goodwill is a part.
27.25 For the purpose of impairment testing, goodwill acquired in a business combination shall, from the acquisition date, be allocated to each of the acquirer’s cash- generating units that are expected to benefit from the synergies of the combination, irrespective of whether other assets or liabilities of the acquiree are assigned to those units.
27.26 Part of the recoverable amount of a cash-generating unit is attributable to the non-controlling interest in goodwill. For the purpose of impairment testing of a non-wholly-owned cash-generating unit with goodwill, the carrying amount of that unit is notionally adjusted, before being compared with its recoverable amount, by grossing up the carrying amount of goodwill allocated to the unit to include the goodwill attributable to the non-controlling interest. This notionally adjusted carrying amount is then compared with the recoverable amount of the unit to determine whether the cash-generating unit is impaired.
27.27 If goodwill cannot be allocated to individual cash-generating units (or groups of cash-generating units) on a non-arbitrary basis, then for the purposes of testing goodwill the entity shall test the impairment of goodwill by determining the recoverable amount of either:
(a) the acquired entity in its entirety, if the goodwill relates to an acquired entity that has not been integrated. Integrated means the acquired business has been restructured or dissolved into the reporting entity or other subsidiaries; or
(b) the entire group of entities, excluding any entities that have not been integrated, if the goodwill relates to an entity that has been integrated.
In applying this paragraph, an entity will need to separate goodwill into goodwill relating to entities that have been integrated and goodwill relating to entities that have not been integrated. Also the entity shall follow the requirements for cash-generating units in this section when calculating the recoverable amount of, and allocating impairment losses and reversals to assets belonging to, the acquired entity or group of entities.
OmniPro comment
See below for illustration of the points mentioned above in the standard.
Example 16: Impairment loss on a CGU with goodwill and non-controlling interests (illustration of section 27.26 above)
At the start of year 1 Parent A acquired 70% of company X for CU100,000. On acquisition one CGU was only identified. The fair value of the assets acquired was CU80,000. Therefore goodwill of CU44,000 (CU100,000-CU80,000) being the fair value of net asset * 70% being the proportion of the net assets acquired) was recognised. The goodwill and identifiable assets are amortised over 10 years. At the date of acquisition; goodwill of CU44,000, CU80,000 of assets was recognised and CU24,000 (CU80,000*30%) was recognised in non-controlling interest.
At the end of year 2, due to a change in the market trends the demand for the product produced by the CGU reduced significantly. Therefore an impairment review was necessary. The value in use of the CGU at that time was estimated at CU50,000. The carrying value of goodwill at that date was CU35,200 (CU44,000/10yrs*8yrs) and the carrying amount of the identifiable assets was CU64,000 (CU80,000/10yrs*8yrs).
In accordance with Section 27.16 when assessing the amount of impairment the notional non-controlling interest needs to be incorporated as per below:
|
|
CU |
|
Carrying Amount of Goodwill at the End of Year 2 |
35,200 |
|
Unrecognised Non-Controlling Interest in Goodwill * |
15,086 |
|
Carrying Amount of Identifiable Assets |
64,000 |
|
Notionally Adjusted Carrying Amount |
114,286 |
|
Recoverable Amount |
(50,000) |
|
Impairment |
64,286 |
The impairment loss of CU64,286 is first allocated against goodwill and the remaining to the identifiable assets assuming they have a nil fair value less costs to sell. The amount to be allocated to goodwill is the total carrying amount of goodwill including the non-controlling notional interest i.e. CU35,200+CU15,086= CU50,286. However only 70% of this CU50,286 relates to Parent A’s interest so the amount to be taken off Parent A’s goodwill is CU35,200.
The remaining CU29,086 (CU64,286-CU35,200) is set against the carrying amount of the identifiable assets. In the consolidated accounts the 30% of the impairment of CU8,726 would be attributed to non-controlling interest. Therefore the carrying amount at the end of year 2 after the impairment would be:
|
|
Goodwill |
Identifiable assets |
Total |
|
Carrying Amount Before Impairment |
CU35,200 |
CU64,000 |
CU99,200 |
|
Impairment loss |
(CU35,200) |
(CU29,086) |
(CU64,286) |
|
Carrying Amount After Impairment |
– |
CU34,914 |
CU34,914 |
*carrying amount notionally adjusted to include goodwill attributable to the non-controlling party which is then compared to the recoverable amount. Non-controlling interest in goodwill = CU44,000/0.7*0.3 = CU18,857 at the date of acquisition. There has been two years since acquisition and this would notionally have been amortised for two years which would mean the NBV would be CU15,086 (CU18,857/10yrs*8yrs).
Integrated entity
Section 27.27 makes it clear that where goodwill cannot be allocated on a non-arbitrary basis where it has been integrated with existing operations then the goodwill of the acquired entity should be added with the existing asset when comparing to the recoverable amount in order to assess if an impairment has occurred. For example Company A acquired Company B in the year. Company A already had a similar business to Company B and in year 2 Company B was subsumed into this business. For the purposes of impairment the goodwill recognised on the acquisition of Company B will be added to the carrying value when carrying out an impairment review for that part of the business.
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