What about impairment of goodwill

What about impairment of goodwill – Goodwill must be tested annually for impairment in accordance with IAS 36 10(b). Goodwill must be allocated to one or more CGUs for the purpose of impairment testing because it does not generate independent cash inflows. Goodwill is commonly allocated to groups of CGUs for the purpose of impairment testing.

In accordance with IAS 36 80, goodwill is allocated to the CGUs that are expected to benefit from the synergies of the combination, both existing and acquired CGUs. The group of CGUs to which goodwill is allocated shall represent the lowest level at which the goodwill will be monitored and managed. The group of CGUs cannot be larger than an operating segment as defined in IFRS 8.

It is possible that goodwill recognized in a less-than-100% acquisition will be allocated to a CGU or group of CGUs in which the non-controlling interest does not have an interest. This will have an impact on the impairment testing of goodwill and the allocation of any impairment loss to the controlling and non-controlling interests. See Allocating goodwill impairment losses to controlling and non-controlling interests below for further information. What about impairment of goodwill

Goodwill is the residual in a business combination after all of the identifiable assets, liabilities, and contingent liabilities of the acquiree have been recognized. Goodwill may include:

  • The fair value of expected synergies from the combination What Costsabout impairment of goodwill
  • Assets that are not capable of recognition (e.g., skilled workforce, non-contractual customer relationships) What about impairment of goodwill
  • Assets and liabilities that are not measured at fair value, such as deferred tax and employee benefits What about impairment of goodwill

Identification of the constituent parts of goodwill (a qualitative discussion is a required disclosure of IFRS 3) may assist in allocating the goodwill to the CGUs or groups of CGUs that are expected to benefit from the synergies, or to which the unrecognized assets have been deployed. What about impairment of goodwill

The allocated goodwill forms part of the CGU’s carrying amount. Potential impairment of the CGU is measured by comparing its carrying value, including any allocated goodwill, to its recoverable amount. What about impairment of goodwill

The goodwill forms part of the total carrying amount of the group of CGUs for impairment testing purposes when goodwill is allocated to a group of CGUs rather than an individual CGU.

The fair values of identifiable net assets recognized in a business combination may be based on the provisional fair values available at the time of the acquisition. The fair value of these assets and liabilities and the resulting amount of any goodwill must be finalized no later than 12 months from the acquisition date. Goodwill, as the residual, is not finally determined until the fair value exercise is complete. A change to goodwill arising from the completion of the fair value exercise is not an impairment. What about impairment of goodwill

Goodwill acquired in a business combination during the period may not have been allocated to a CGU or group of CGUs at the reporting date. In accordance with IAS 36 133, the reasons why a portion has not been allocated, and the amount of unallocated goodwill, should be disclosed. What about impairment of goodwill

Goodwill must be allocated to CGUs by the end of the year following the year of the business combination. Entities should not avoid an impairment charge as a result of goodwill not being allocated. Entities should allocate the goodwill, even if provisionally, and perform impairment testing if indications of impairment exist. What about impairment of goodwill

Goodwill and the valuation choice for non-controlling interests

A parent company that has done only 100% acquisitions does not need to apply the gross-up method or the allocation method described in this section because the parent does not have non-controlling interest in its consolidated financial statements. A parent company that has acquired goodwill and has any non-controlling interest needs to consider carefully the calculation and allocation of any impairment loss. What about impairment of goodwill

The allocation methodology in IAS 36 C5–9, must be applied if an entity has acquired goodwill and there are non-controlling interests in the CGU or groups of CGUs that goodwill has been allocated. The application of the gross-up method interacts with the allocation of any impairment loss. What about impairment of goodwill

IFRS 3 (2004) required an entity to record non-controlling interest as the proportionate share of the recognized amount of the acquiree’s identifiable net assets at the acquisition date (proportionate share method). IFRS 3 (2008) allows an entity the choice of measuring the non-controlling interest at fair value (fair value method) or the proportionate share method.

Something else -   Common control business combinations

The discussion that follows applies to any situation where the proportionate share method was applied in a business combination of less than 100%, whether it was required under IFRS 3 (2004), or a choice under IFRS 3 (2008). A number of factors will impact the impairment testing of goodwill, potentially increasing or decreasing the complexity of the process. The factors that will impact how goodwill is tested for impairment include: What about impairment of goodwill

  • The existence of any non-controlling interests What about impairment of goodwill
  • One or more business combinations of less than 100% using the proportionate share method for measurement of non-controlling interest
  • One or more business combinations of less than 100% using the fair value method for measurement of the non-controlling interest
  • How the entity groups CGUs for the testing of goodwill What about impairment of goodwill

IFRS 3 19 allows the accounting choice of proportionate share method or fair value method can be elected on a transaction-by-transaction basis and does not require an entity to make an accounting policy choice. An entity that chooses the fair value method recognizes goodwill relating to both the controlling and the non-controlling interests. The valuation method chosen will have ongoing consequences for the impairment testing of goodwill and the associated record-keeping. What about impairment of goodwill

An acquisitive group with one or more non-controlling interests will face significant challenges. The challenges increase if the entity tests goodwill with groups of CGUs that include controlling and non-controlling interests. See Definition and classification of the non-controlling interest for further information on the measurement of non-controlling interest.

The requirement to gross-up goodwill for impairment testing applies when an entity has used the proportionate share method. This creates an ongoing requirement to track goodwill by transaction to determine whether the goodwill was recognized under the proportionate share or fair value method. The gross-up requirement is driven by the origin of the goodwill, not by whether there is a non-controlling interest in the CGU or groups of CGUs to which the goodwill has been allocated.  What about impairment of goodwill

Goodwill that is recorded under the fair value method is subject to the ordinary impairment testing requirements of IAS 36. Any impairment loss is allocated to the controlling and non-controlling interests as described in Allocating goodwill impairment losses to controlling and non-controlling interests below. The allocation method will be impacted by the grouping of CGUs.

Goodwill that is recorded under the proportionate share method must be grossed up for impairment testing in accordance with IAS 36 C4. The recorded goodwill and the notional amount of goodwill allocable to the non-controlling interest (equaling the grossed-up goodwill) are included in the carrying amount of the CGU or group of CGUs being tested and compared to the recoverable amount. Any impairment loss calculated on the gross-up method is then segregated into the amount relating to recorded goodwill and notional goodwill.

The amount that relates to the notional goodwill is not recognized as a loss as the related “asset” has never been recognized. The amount that relates to recorded goodwill is recognized as an impairment loss in the income statement and subject to the allocation method described in Allocating goodwill impairment losses to controlling and non-controlling interests below. The allocation method may be impacted by the grouping of CGUs. Partially owned CGUs may be grouped with wholly owned CGUs for impairment testing purposes.

Allocating goodwill impairment losses to controlling and non-controlling interests

The allocation of impairment losses can be complex under both the proportionate share method and the fair value method. Some potentially significant complications to the allocation of impairment losses are created by the fair value method for measuring the non-controlling interest, combined with the guidance in IAS 36. IAS 36 allows the grouping of CGUs for purposes of impairment testing. What about impairment of goodwill

The choice of measuring the non-controlling interest using the proportionate share method or the fair value method will need to be tracked to determine whether the gross-up method is required. Goodwill must continue to be specifically identified and tracked where CGUs are grouped for the purpose of goodwill impairment testing. What about impairment of goodwill

The goodwill allocated to such a grouping of CGUs may combine goodwill from 100% business combinations and goodwill from business combinations where only the controlling shareholder’s proportion of goodwill was recognized. It may be necessary to allocate impairment losses between the controlling and non-controlling interests. What about impairment of goodwill

The decision tree below illustrates the process for determining whether goodwill needs to be grossed up for impairment testing, the calculation of impairment losses for goodwill, and the allocation of losses between the controlling and non-controlling interests if the proportionate share method is chosen. What about impairment of goodwill

Impairment testing and allocation of impairment losses using the proportionate share method

Impairment testing and allocation of impairment losses using the proportionate share method
Note: Figure 10-2 is illustrated below

The following example provides an example that illustrates the impact of grouping wholly owned CGUs with CGUs containing a non-controlling interest when testing goodwill for impairment if the proportionate share method is chosen. What about impairment of goodwill

EXAMPLE – Allocation of an impairment loss to controlling and non-controlling interests if the proportionate share method is chosen

An entity has recorded goodwill of CU400 in an 80% acquisition and applied the proportionate share method to the valuation of the non-controlling interest. The goodwill is allocated to a group of CGUs for impairment testing, including some wholly owned CGUs of the entity. There is no other goodwill. The group of CGUs is tested for impairment annually. The carrying amount of the CGUs and recorded goodwill is CU1,400. The recoverable amount of the CGUs is CU1,100. What about impairment of goodwill

Using the proportionate share method, what amount of goodwill should be allocated to the recorded and the unrecorded (notional) goodwill?

Analysis What about impairment of goodwill

The goodwill gross-up, or notional goodwill, is CU100 (CU400 / 80% – CU400). This amount would be added to the carrying value of the group of CGUs. The carrying value for the purposes of testing goodwill is CU1,500 (CU1,400 + CU100). The recoverable amount is less than the adjusted carrying value, so there is an impairment loss of CU400 (CU1,100 – CU1,500).

The impairment loss is less than the total of recorded goodwill plus notional goodwill of CU500. As a result it must be allocated between the recorded and the unrecorded (notional) elements.

The impairment loss of CU400 would be allocated CU320 (CU400 x CU400 / CU500) to the recorded portion of goodwill and recorded as an expense and a reduction of recorded goodwill. It would be allocated in total to the controlling interest. The remaining CU80 of the impairment loss relates to the non-controlling interest, but is effectively ignored because it relates to unrecorded notional goodwill. What about impairment of goodwill

The decision tree below illustrates the process for the calculation of impairment losses for goodwill and the allocation of losses between the controlling and non-controlling interests if the fair value method is chosen. What about impairment of goodwill

Impairment testing and allocation of impairment losses using the fair value method What about impairment of goodwill

What about impairment of goodwill
Note: Figure 10-1 is illustrated above

A group of CGUs that goodwill has been allocated to may include wholly owned CGUs and CGUs with a non-controlling interest. An entity that has acquired goodwill from a less than 100% acquisition using the proportionate share method first calculates the gross-up of goodwill. Any impairment loss is then calculated. The impairment loss is applied first to the goodwill in accordance with the hierarchy for allocating impairment losses. What about impairment of goodwill

An entity that has applied only the fair value method of measuring non-controlling interests does not need to calculate the goodwill gross-up. Some of the goodwill may be allocated to a group of CGUs that include both wholly owned CGUs and CGUs that have non-controlling interests. What about impairment of goodwill

This goodwill is tested for impairment as part of the carrying value of the group of CGUs. Any impairment loss is allocated between the wholly owned and partially owned CGUs based on the relative carrying amounts of goodwill. Any impairment loss on the portion allocated to the wholly owned CGUs is allocated to the controlling interest. Any impairment loss on the portion allocated to the CGUs with a non-controlling interest is allocated between the controlling and non-controlling interests in the same way that profit and loss is allocated as specified in IAS 36 C6.

An entity that has applied both the proportionate share method and the fair value method to measure non-controlling interest will face challenges in calculating and recording any goodwill impairment when it incorporates a newly acquired business into a group of existing CGUs with goodwill. What about impairment of goodwill

The below example provides an example that illustrates the allocation of an impairment loss for testing goodwill when there are wholly owned CGUs grouped with CGUs with a non-controlling interest. What about impairment of goodwill

EXAMPLE – Allocation of an impairment loss to controlling and non-controlling interests with pre-existing goodwill

An entity has previously recorded goodwill of CU800, all arising from 100% acquisitions that occurred under IFRS 3 (2004). It subsequently records goodwill of CU500 in an 80% acquisition and applies the fair value method to the valuation of the non-controlling interest. The acquired business is a single CGU, but is grouped with a number of wholly owned CGUs for impairment testing. The CU800 of previously recorded goodwill is also allocated to that group of CGUs. There is no other non-controlling interest. Profit or loss of the acquired business is allocated on the basis of the common shareholding.

The group of CGUs is tested for impairment annually. The annual testing indicated that the carrying value of the CGUs and the goodwill that is tested with them is less than the recoverable amount by CU500, resulting in an impairment loss.

How should the impairment loss be allocated?PPE Components and parts XX

Analysis

Goodwill gross-up is not required. All existing goodwill arose in 100% acquisitions and a partial acquisition using the fair value method to value the non-controlling interest. The impairment loss would first be allocated between the wholly-owned portion of the group of CGUs and the portion with controlling and non-controlling interests based on the relative carrying amounts of goodwill. A goodwill impairment loss of CU307 (CU500 x CU800/CU1,300) would be allocated to the wholly-owned portion of the group of CGUs. All of this loss would be allocated to the controlling interest.

A goodwill impairment of CU193 (CU500 x CU500/ CU1,300) would be allocated to the CGU that includes the controlling and non-controlling interests. This would be further allocated between the controlling and non-controlling interests on the same basis as profit and loss. Therefore, the amount of impairment loss attributed to the controlling interest is CU154 (CU193 x 80%), and the amount allocated to the non-controlling interest is CU39 (CU193 x 20%). The total impairment loss allocated to the controlling interest is CU461 (CU307 + CU154).

Disposals and group reorganizations with goodwill

Goodwill that has been allocated to a CGU or group of CGUs is included in the carrying amount of the operation when calculating the profit or loss on disposal.

The goodwill attributable to the disposed operation and the part of the CGU that is retained is based on relative fair values. This method is applied unless the entity can demonstrate that some other method better reflects the goodwill attributable to the operation being disposed of. The relative fair value method is the method commonly used in practice. It is very difficult to demonstrate that another method better represents how goodwill might be attributed.

An entity might reorganize its business and change the composition of one or more CGUs to which goodwill has been allocated. The goodwill attributable to operations that are moved between CGUs is calculated using the relative fair values of the CGUs transferred and remaining in the CGU. In accordance with IAS 36 87, this method is applied unless the entity can demonstrate that another allocation method better reflects the goodwill attributable to the transferred operations.

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Something else -   Lessee accounting under IFRS 16

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