Testing cash-generating units with goodwill for impairment (2024)

FAQs

Testing cash-generating units with goodwill for impairment? ›

When testing for impairment, the carrying amount of the cash-generating unit, including the goodwill, should be compared with the recoverable amount of the cash-generating unit. If the recoverable amount exceeds the carrying amount, the cash-generating unit and the goodwill allocated to it are not impaired (IAS 36:90).

To recognize a goodwill impairment, the company will need to test each reporting unit to determine the amount of a goodwill impairment loss. If the fair value of a reporting unit is greater than its carrying amount in the quantitative goodwill impairment test, a company cannot record a goodwill impairment.

Goodwill and impairment

The cash-generating unit will normally be assumed to be the subsidiary. In this way, when conducting the impairment review, the carrying amount will be that of the net assets and the goodwill of the subsidiary compared with the recoverable amount of the subsidiary.

An impairment loss of a cash-generating asset is the amount by which the carrying amount of an asset exceeds its recoverable amount. Non-cash-generating assets are assets other than cash-generating assets.

The impairment loss of the CGU will be allocated to goodwill until goodwill reaches zero (because goodwill does not have fair value less cost of disposal and value in use). The impairment loss calculated in this example is 19,000,000, goodwill is given 10,000,000.

To calculate the impairment of an asset, take the carrying value of the asset (its historical cost minus accumulated depreciation) and subtract its fair market value. If its fair market value is less than the carrying value, you will need to record an impairment loss for the difference.

Example of a Goodwill Impairment

Company BB acquires the assets of company CC for $15M, valuing its assets at $10M and recognizing goodwill of $5M on its balance sheet. After a year, company BB tests its assets for impairment and finds out that company CC's revenue has been declining significantly.

To identify a CGU, an entity asks two questions: 1 Does a group of assets generate largely independent cash inflows? 2 Is there an active market for the output? Does a group of assets generate largely independent cash inflows?

In the test of goodwill impairment, we should always be alert to the signs or indications of the impairment that could occur on goodwill. These may include: Significant declines of market value. Negative impact due to the changes in the law, business environment, or technology.

A goodwill impairment is an indication that the company purchased an asset in the past, and that asset is now worth less than its value on the company's balance sheet. Goodwill impairments generally are not a good thing and often indicate a series of events that did not go as originally planned.

What is the correct order to allocate an impairment loss in a cash-generating unit? ›

first, reduce the carrying amount of any goodwill allocated to the cash-generating unit (group of units); and. then, reduce the carrying amounts of the other assets of the unit (group of units) pro rata on the basis.

To calculate the VIU, we estimate the present amount of the future cash flows that we expect to derive from the asset or CGU. Value in use represents the future expected cash flows from the continuing use of an asset and its disposal, discounted to reflect the underlying risk and the time value of money concept.

When the recoverable amount of an asset is less than its carrying amount, the carrying amount of the asset needs to be reduced to its recoverable amount and that reduction is recognised as an impairment loss.

The annual impairment test for CGUs containing goodwill and other indefinite-life intangibles can be carried out at any time in the financial year, but it should be done at the same time each year.

The impairment test compares the asset's or (CGU's) carrying amount with its recoverable amount. The recoverable amount is the higher of the amounts calculated under the fair value less cost of disposal and value in use approaches.

Goodwill. Goodwill, for the purposes of impairment testing, must be allocated to the CGU that derives benefits from the synergies of the corresponding business combination. In cases where it's impractical to assign goodwill to individual CGUs in a non-arbitrary manner, it should then be allocated to groups of CGUs.

The impairment expense is calculated as the difference between the current market value and the purchase price of the intangible asset. The impairment results in a decrease in the goodwill account on the balance sheet. The expense is also recognized as a loss on the income statement.

Goodwill impairment arises when there is a deterioration in the capabilities of acquired assets to generate cash flows, and the fair value of the goodwill dips below its book value.

Impairment of goodwill

If the carrying amount of the unit exceeds the recoverable amount of the unit, the entity must recognise an impairment loss.

According to the revised IAS 36 firms must carry out impairment test of goodwill on at least a yearly basis. If the recoverable amount of goodwill is less than its carrying amount, the carrying amount shall be reduced to its recoverable amount (e.g., an impairment loss is recognised).