Impairment of goodwill and CGUs
By Graham Holt
Studying this technical article and answering the related questions can count towards your verifiable CPD if you are following the unit route to CPD and the content is relevant to your learning and development needs. One hour of learning equates to one unit of CPD. We'd suggest that you use this as a guide when allocating yourself CPD units. The basic principle of impairment is that an asset may not be carried on the statement of financial position above its recoverable amount, which is the higher of the asset's fair value less costs to sell and its value in use. An asset's carrying value is compared with its recoverable amount and the asset is impaired when the former exceeds the latter. Any impairment is then allocated to the asset, with the impairment loss recognised in profit or loss.
All assets subject to the impairment review are tested for impairment where there is an indication that the asset may be impaired, although certain assets such as goodwill and indefinite-lived intangible assets are tested for impairment annually even if there is no impairment indicator. The recoverable amount is calculated at the individual asset level. However, an asset seldom generates cashflows independently of other assets, and most assets are tested for impairment in groups of assets described as cash-generating units (CGUs). A cash-generating unit is the smallest identifiable group of assets that generates cash inflows that are largely independent of the cash inflows from other assets or groups of assets. Goodwill acquired in a business combination is allocated to the acquirer's CGUs that are expected to benefit from the business combination. However, the largest group of CGUs permitted for goodwill impairment testing is the lowest level of operating segment. Under IAS 36, Impairment of Assets, impairment testing of goodwill must be performed at a level no larger than an operating segment as defined in IFRS 8, Operating Segments. However, complexity is created because IFRS 8 allows operating segments to be aggregated into a higher-level reportable operating segment if certain criteria are met. IAS 36 was not clear as to whether the highest level of aggregation of CGUs for goodwill allocation and impairment testing purposes was to be no larger than an operating segment before or after this aggregation. To deal with this lack of clarity, the International Accounting Standards Board (IASB) has issued an amendment to IAS 36 to clarify that a CGU cannot be larger than an operating segment before aggregation. Entities should ensure their CGUs are aligned with their operating segments. The recoverable amount of a CGU is the same as for an individual asset. The carrying amount of a CGU consists of assets directly and exclusively attributable to the CGU and an allocation of assets that are indirectly attributable on a reasonable and consistent basis to the CGU, including corporate assets and goodwill. Where goodwill has been allocated to a CGU and the entity disposes of an operation within that CGU, the goodwill attributable to the operation disposed of is included in the carrying amount of the operation when calculating the profit or loss on disposal. Similarly, an entity might reorganise its business and change the composition of one or more CGUs to which goodwill has been allocated. In such situations, the goodwill attributable to operations that are moved between CGUs is calculated on the basis of the relative fair values of those operations and the remainder of the CGUs from which the operations are transferred. Liabilities that relate to the financing of the CGU are not allocated to determine the carrying amount of the CGU as the related cashflows will be excluded from the impairment calculations.
An impairment charge calculated for a CGU should be allocated to the CGU's individual assets - first of all to goodwill allocated to the CGU, and then to the other assets of the CGU on a...
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