Testing goodwill for impairment

Question

Our company acquired a subsidiary and goodwill on acquisition arose.

According to IFRS, we have to test the goodwill for any impairment at least annually.

How can we do it? The goodwill does not have any fair value and it’s not possible to determine neither its value in use nor its recoverable amount.
 

Answer

It is NOT possible to test goodwill for impairment as an individual asset, standing on its own, because it’s not possible to calculate its recoverable amount.

Instead, you need to test the impairment of goodwill at a higher level, when testing relevant cash-generating unit (CGU).

In the impairment test, you need to compare:

• The carrying amount of the CGU including goodwill, and
• The recoverable amount of the CGU

In most cases, CGU will be either a company (subsidiary) as a whole entity, but it could be also a separate division if some goodwill is allocated to that division.

Each CGU to which goodwill is allocated should represent the lowest level at which the goodwill is monitored and it cannot be larger than an operating segment as defined by IFRS 8.

If the carrying amount of CGU with goodwill is greater than the recoverable amount of CGU, then there is an impairment loss.

The impairment loss is recognized in the following order:

1. Any goodwill is reduced to zero. Once the impairment loss reduces the goodwill to zero, you cannot reverse it.
2. Remaining impairment loss is allocated to the individual assets within CGU on pro-rata basis, but not below the recoverable amount of that asset or below zero.

You can read more about it in this article with example of goodwill testing when there are more than one divisions in the company.

The following example illustrates the situation as asked in this question:
 

Example

ABC acquired a subsidiary DEF for CU 100 000 when the fair value of DEF’s net assets was CU 95 000.

At the end of 20X1, the fair value of DEF’s assets was CU 80 000 and the value in use was CU 85 000. The carrying amount of DEF’s assets at the end of 20X1 was as follows:

• Buildings: CU 50 000
• Machines and other equipment: CU 30 000
• Other assets: CU 15 000

When testing goodwill for impairment, ABC needs to compare:

• The carrying amount of DEF with goodwill: CU 50 000+CU 30 000+CU 15 000+CU 5 000 (goodwill of CU 100 000-CU 95 000) = CU 100 000, with
• The recoverable amount of DEF, which is higher of value in use of CU 85 000 and fair value less cost of disposal of CU 80 000

There is an impairment loss of CU 100 000 – CU 85 000 = CU 15 000.

The impairment loss is allocated first to goodwill which is reduced from CU 5 000 to zero.

The remaining CU 10 000 is allocated to the individual assets in CGU on pro-rata basis:

The journal entry is:

• Debit Profit or loss – Impairment of assets: CU 15 000

• Credit Goodwill: CU 5 000

• Credit Buildings: CU 5 263

• Credit Equipment: CU 3 158

• Credit Other assets: CU 1 579

ABC needs to allocate the impairment loss specifically to each individual asset, not to the group of assets.