Professional Documents
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Group Accounts
Sample chapter
chapter 7
Impairment review
of goodwill
It
always
a silly thing
Aislittle
sincerity
is to
give advice, but to give
a dangerous thing,
good advice is fatal.
What's new?
Goodwill is subject to an annual impairment review, and where it has been
impaired must be written down. In the examples that we have looked at to date
the goodwill that has arisen at acquisition has either not been impaired and
so remained intact at the reporting date or the question has clearly stated the
amount of the impairment loss. We have also seen that where NCI at acquisition
is measured at fair value then goodwill is in full and so the impairment loss is then
split between the parent's profits (w5) and the NCI (w4). Further we have also
seen that where the NCI at acquisition is measured on a proportionate basis then
goodwill is attributable to the parent only and so the impairment loss is wholly
charged against the parent's profits (w5).
Well now is the time to understand how to measure the impairment loss! First
we shall explore the general principles of impairment, before considering the
impairment of full goodwill and then the impairment of goodwill when it is only
attributable to the parent.
Impairment of an asset
An asset is impaired when its carrying value exceeds its recoverable amount. The
impairment loss is therefore calculated using the following proforma:
(X)
Impairment loss
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Carrying value
100
(80)
Impairment loss
20
Please bear in mind that if the recoverable amount exceeds the carrying value
then the impairment review results in no impairment loss. We do not record
impairment gains!
In all our examples the impairment loss arising from the impairment review will
be used to write down the goodwill. Strictly though, if the cash-generating unit
has another asset that is specifically damaged or otherwise impaired then the
impairment loss would first be allocated to that asset. If the impairment loss
exceeded the goodwill then the remaining balance of the loss will be allocated
against the other assets on a pro-rata basis.
Impairment of goodwill when calculated in full
Where the NCI has been calculated at fair value i.e. there is goodwill in full, the
impairment loss will be split between the parent and the NCI in the proportion
that they normally share profits and losses. In the context of a group statement
of financial position this will mean the parents share of the impairment loss will
reduce the group retained earnings in w5 and the impairment loss attributable to
the NCI will reduce the NCI in w4.
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Example
Four years ago Oman made an acquisition of 80% of the shares in
Muscat when its retained earnings were $50m. Below are the summarised
statements of financial position of the two companies.
Oman
Muscat
$m
$m
Tangible
100
100
Investment in Muscat
175
Non-current assets
Current assets
Inventory
140
200
Receivables
160
100
Cash at bank
125
200
700
600
160
050
Retained earnings
240
100
Equity
400
150
Non-current liabilities
100
250
Current liabilities
200
200
700
600
Additional information
1 At the date of acquisition the fair values of Muscat's assets were equal to
their carrying amounts.
2 Oman has a policy of accounting for any NCI at acquisition at fair value.
The fair value of the NCI at the acquisition date was $25m. No goodwill had
previously been impaired. Muscat is regarded as a cash-generating unit
with a $230m recoverable amount at the year-end.
Required
Prepare the consolidated statement of financial position of Oman.
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W1 Group structure
Oman
Parent's interest 80%
NCI 20%
Muscat
W2 Net assets of the subsidiary
At acquisition
At year-end
$m
$m
Share capital
50
50
Retained earnings
50
100
100
150
$50m
The post-acquisition profits of the subsidiary are $50m ($150m - $100m) and
these will be shared as normal between the parent and the NCI.
W3 Goodwill
$m
FV of the parent's investment
175
25
(100)
Goodwill at acquisition
100
(20)
80
79
$m
Carrying value
Net assets of the subsidiary at year-end
150
Goodwill
100
250
(230)
Recoverable amount
Impairment loss
20
25
(20% x 50)
10
(20% x 20)
(4)
31
240
(80% x 50)
40
(80% x 20)
(16)
264
80
$m
Non-current assets
Goodwill
w3 post impairment
80
Tangible assets
(100 + 100)
200
Inventory
(140 + 200)
340
Receivables
(160 + 100)
260
Cash at bank
(125 + 200)
325
Current assets
1,205
Ordinary shares ($1)
parent only
160
Retained earnings
w5
264
NCI
w4
31
Equity
455
Non-current liabilities
(100 + 250)
350
Current liabilities
(200 + 200)
400
1,205
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If the total amount of impairment loss exceeds the amount allocated against
recognised and notional goodwill, the excess will be allocated against the other
assets on a pro-rata basis. This further loss will be shared between the parent and
the NCI in the normal proportion that they share profits and losses.
Example
At the year-end an impairment review is being conducted on the 80%
owned subsidiary David Leigh. At the date of the impairment review the
carrying value of the subsidiarys net assets were $600m and the goodwill
$80m (based on NCI at acquisition being a proportion of net assets) and the
recoverable amount of the subsidiary $640m.
Required
Determine the outcome of the impairment review.
Grossed up
$80m x
100/80 =
Now for the purposes of the impairment review, the goodwill will be $100m and
together with the net assets of $600m forms the carrying value of the cashgenerating unit - the subsidiary.
Impairment review
Carrying value
$m
600
100
$m
700
(640)
Recoverable amount
Impairment loss on the gross goodwill
82
60
(80% x 60)
48
$m
Goodwill attributable to the parent at acquisition
80
(48)
32
The impairment loss of $60m is less than the recognised and notional goodwill of
$100m, so only goodwill has been impaired. The parent's share of the impairment
loss (80% x $60m) $48m is recognised in group retained earnings (w5) thus
reducing the proportionate goodwill that has been recognised from $80m by $48m
to $32m. The NCI (w4) is not charged with any of this impairment loss, after all
the goodwill that is being impaired is wholly attributable to the parent. There is no
actual recording of either the notional unrecognised goodwill of $20m nor of its
impairment.
If the impairment loss had been say $110m i.e. $10m more than recognised and
notional goodwill of $100m, then in addition to writing off all of the recognised
goodwill there would have been a further actual impairment loss of $10m to
recognise. This would relate to other assets of the subsidiary and be charged
between the parent's profits (w5) and the NCI (w4) in the ratio of 80/20 being the
proportion that profits and losses are shared.
83
Mind Map
Annual impairment
review of goodwill
is required
Goodwill together
with the net assets of
the subsidiary form a
cash-generating unit
When NCI at
acquisition is at fair
value so there is full
goodwill
An impairment loss
arises when the
carrying value of
the cash-generating
unit exceeds the
recoverable amount
When NCI at
acquisition is a
proportion of net
assets so goodwill
is attributable to the
parent only
Impairment losses on
full goodwill are charged
against retained earnings
w5 and NCI w4
84
Impairment losses on
the goodwill attributable
to the parent only are
wholly charged against
retained earnings w5
Double entry
16
DR
NCI (w4)
04
CR
Goodwill (w3)
$m
20
CR
Goodwill (w3)
$m
48
48
85
Technical corner
Determining the recoverable amount
There are two ways of recovering cash from an asset or collection of net
assets (cash-generating unit).
One way of recovering cash from an asset is to sell it. The measurement of
the recoverable amount can therefore be the fair value less costs to sell i.e.
sale proceeds less any costs necessary to achieve the sale.
The other way of recovering cash from an asset is to keep and use the
asset so that it generates a cash flow in the future. This second way is
termed the value in use. When measuring the future cash flows it will be
necessary to discount the figures to a present value.
The recoverable amount is the higher of the net sale proceeds and the
value in use. It is the higher because that is what the standard1 says but
actually also to reflect the common sense that losses will always try to be
minimised.
For example if an asset could be sold for $230m net of selling costs, but
has a value in use of $150m, the recoverable amount will be $230m (the
higher) as the sensible decision will be to sell the asset. But if the asset
could be sold for $125m net of selling costs and has a value in use of
$200m, then the asset will be kept, making the recoverable amount $200m.
The recoverable amount will always be the higher of the two figures on offer.
The measurement of the recoverable amount is of course subjective since
the sale proceeds are an estimate as indeed are the future cash flows in the
value in use calculation.
86
Net
assets at
acquisition
Net
assets at
year-end
Fair value
of the
NCI at
acquisition
Parent's
investment
Recoverable
amount at
year-end
$m
$m
$m
$m
$m
500
600
250
800
1,000
Question Singapore
Required
(i)
(ii)
87