IAS 36IE Estimates CGU Goodwill Intangible assets

Last Updated on 08/02/2020 by 75385885

IAS 36 Impairment of assetsIAS 36IE Estimates CGU Goodwill Intangible assets

IAS 36IE Estimates CGU Goodwill Intangible assets

Example 9 Disclosures about cash-generating units with goodwill or intangible assets with indefinite useful lives

The purpose of this example is to illustrate the disclosures required by paragraphs 134 and 135 of IAS 36.

Background

IE80 Entity M is a multinational manufacturing firm that uses geographical segments for reporting segment information. M’s three reportable segments are Europe, North America and Asia. Goodwill has been allocated for impairment testing purposes to three individual cash-generating units—two in Europe (units A and B) and one in North America (unit C)—and to one group of cash-generating units (comprising operation XYZ) in Asia. Units A, B and C and operation XYZ each represent the lowest level within M at which the goodwill is monitored for internal management purposes.

IE81 M acquired unit C, a manufacturing operation in North America, in December 20X2. Unlike M’s other North American operations, C operates in an industry with high margins and high growth rates, and with the benefit of a 10-year patent on its primary product. The patent was granted to C just before M’s acquisition of C. As part of accounting for the acquisition of C, M recognised, in addition to the patent, goodwill of CU3,000 and a brand name of CU1,000. M’s management has determined that the brand name has an indefinite useful life. M has no other intangible assets with indefinite useful lives.

IE82 The carrying amounts of goodwill and intangible assets with indefinite useful lives allocated to units A, B and C and to operation XYZ are as follows:

Goodwill Intangible assets
with indefinite
useful lives
CU CU
A 350
B 450
C 3,000 1,000
XYZ 1,200
Total 5,000 1,000

IE83 During the year ending 31 December 20X3, M determines that there is no impairment of any of its cash-generating units or group of cash-generating units containing goodwill or intangible assets with indefinite useful lives.

The recoverable amounts (ie higher of value in use and fair value less costs of disposal) of those units and group of units are determined on the basis of value in use calculations. M has determined that the recoverable amount calculations are most sensitive to changes in the following assumptions:

Units A and B Unit C Operation XYZ
Gross margin during the budget period (budget period is 4 years) 5-year US government bond rate during the budget period (budget period is 5 years) Gross margin during the budget period (budget period is 5 years)
Raw materials price inflation during the budget period
Raw materials price inflation during the budget period Japanese yen/US dollar exchange rate during the budget period
Market share during the budget period Market share during the budget period Market share during the budget period
Growth rate used to extrapolate cash flows beyond the budget period Growth rate used to extrapolate cash flows beyond the budget period Growth rate used to extrapolate cash flows beyond the budget period

IE84 Gross margins during the budget period for A, B and XYZ are estimated by M based on average gross margins achieved in the period immediately before the start of the budget period, increased by 5 per cent per year for anticipated efficiency improvements. A and B produce complementary products and are operated by M to achieve the same gross margins.

IE85 Market shares during the budget period are estimated by M based on average market shares achieved in the period immediately before the start of the budget period, adjusted each year for any anticipated growth or decline in market shares. M anticipates that:

  1. market shares for A and B will differ, but will each grow during the budget period by 3 per cent per year as a result of ongoing improvements in product quality.
  2. C’s market share will grow during the budget period by 6 per cent per year as a result of increased advertising expenditure and the benefits from the protection of the 10-year patent on its primary product.
  3. XYZ’s market share will remain unchanged during the budget period as a result of the combination of ongoing improvements in product quality and an anticipated increase in competition.

IE86 A and B purchase raw materials from the same European suppliers, whereas C’s raw materials are purchased from various North American suppliers. Raw materials price inflation during the budget period is estimated by M to be consistent with forecast consumer price indices published by government agencies in the relevant European and North American countries.

IE87 The 5-year US government bond rate during the budget period is estimated by M to be consistent with the yield on such bonds at the beginning of the budget period. The Japanese yen/US dollar exchange rate is estimated by M to be consistent with the average market forward exchange rate over the budget period.

IE88 M uses steady growth rates to extrapolate beyond the budget period cash flows for A, B, C and XYX. The growth rates for A, B and XYZ are estimated by M to be consistent with publicly available information about the long-term average growth rates for the markets in which A, B and XYZ operate. However, the growth rate for C exceeds the long-term average growth rate for the market in which C operates. M’s management is of the opinion that this is reasonable in the light of the protection of the 10-year patent on C’s primary product.

IE89 M includes the following disclosure in the notes to its financial statements for the year ending 31 December 20X3.

Impairment Tests for Goodwill and Intangible Assets with Indefinite Lives

Goodwill has been allocated for impairment testing purposes to three individual cash-generating units—two in Europe (units A and B) and one in North America (unit C)—and to one group of cash-generating units (comprising operation XYZ) in Asia. The carrying amount of goodwill allocated to unit C and operation XYZ is significant in comparison with the total carrying amount of goodwill, but the carrying amount of goodwill allocated to each of units A and B is not.

Nevertheless, the recoverable amounts of units A and B are based on some of the same key assumptions, and the aggregate carrying amount of goodwill allocated to those units is significant.

Operation XYZ

The recoverable amount of operation XYZ has been determined based on a value in use calculation. That calculation uses cash flow projections based on financial budgets approved by management covering a five-year period, and a discount rate of 8.4 per cent.

Cash flows beyond that five-year period have been extrapolated using a steady 6.3 per cent growth rate. This growth rate does not exceed the long-term average growth rate for the market in which XYZ operates. Management believes that any reasonably possible change in the key assumptions on which XYZ’s recoverable amount is based would not cause XYZ’s carrying amount to exceed its recoverable amount.

Unit C

The recoverable amount of unit C has also been determined based on a value in use calculation. That calculation uses cash flow projections based on financial budgets approved by management covering a five-year period, and a discount rate of 9.2 per cent. C’s cash flows beyond the five-year period are extrapolated using a steady 12 per cent growth rate. This growth rate exceeds by 4 percentage points the long-term average growth rate for the market in which C operates.

However, C benefits from the protection of a 10-year patent on its primary product, granted in December 20X2. Management believes that a 12 per cent growth rate is reasonable in the light of that patent. Management also believes that any reasonably possible change in the key assumptions on which C’s recoverable amount is based would not cause C’s carrying amount to exceed its recoverable amount.

Units A and B

The recoverable amounts of units A and B have been determined on the basis of value in use calculations. Those units produce complementary products, and their recoverable amounts are based on some of the same key assumptions. Both value in use calculations use cash flow projections based on financial budgets approved by management covering a four-year period, and a discount rate of 7.9 per cent.

Both sets of cash flows beyond the four-year period are extrapolated using a steady 5 per cent growth rate. This growth rate does not exceed the long-term average growth rate for the market in which A and B operate. Cash flow projections during the budget period for both A and B are also based on the same expected gross margins during the budget period and the same raw materials price inflation during the budget period.

Management believes that any reasonably possible change in any of these key assumptions would not cause the aggregate carrying amount of A and B to exceed the aggregate recoverable amount of those units.

Operation XYZ Unit C Units A and B (in aggregate)
Carrying amount of goodwill CU1,200 CU3,000 CU800
Carrying amount of brand name with indefinite useful life CU1,000
Key assumptions used in value in use calculations1(a)
Key assumption Budgeted gross margins  5-year US government bondrate Budgeted gross margins
Basis for \determining
value(s) assigned to key assumption
Average gross margins achieved in period immediately before the budget period, increased for expected efficiency improvements. Yield on 5-year US government bonds at the
beginning of the budget period.
Average gross margins achieved in period
immediately before the budget period, increased
for expected efficiency improvements.
  Values assigned to key assumption reflect past experience, except for efficiency improvements. Management believes improvements of 5% per year are reasonably achievable. Value assigned to key assumption is consistent with external sources of information. Values assigned to key
assumption reflect past
experience, except for
efficiency improvements.
Management believes improvements of 5% per year are reasonably achievable.
Key assumption Japanese yen/US dollar
exchange rate during the budget period
Raw materials price inflation Raw materials price inflation
Basis for determining value(s) assigned to key assumption
Average market forward exchange rate over the budget period. Forecast consumer price indices during the budget period for North American
countries from which raw materials are purchased.
Forecast consumer price
indices during the budget period for European countries from which raw
materials are purchased.
  Value assigned to key assumption is consistent with external sources of information. Value assigned to key assumption is consistent with external sources of information. Value assigned to key assumption is consistent with external sources of information.
Key assumption
Budgeted market
share
Budgeted market
share
 
Basis for determining value(s) assigned to key assumption
Average market share in period immediately before the budget period. Average market share in period immediately before the budget period, increased each year for anticipated growth in market share.  
  Value assigned to key assumption reflects past
experience. No change in market share expected as
a result of ongoing product
quality improvements coupled with anticipated
increase in competition.
Management believes market share growth of 6% per year is reasonably achievable due to increased advertising expenditure, the benefits from the protection of the
10-year patent on C’s primary product, and the expected synergies to be achieved from operating C as part of M’s North American segment.
 

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END of IAS 36

 

Source EU rules on financial information disclosed by companies

 

Last Updated on 08/02/2020 by 75385885

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