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that any tax losses carry forwards subsumed in goodwill cannot be utilised, then
excluding these amounts from the carrying amount of the CGU for impairment testing
is not appropriate and might lead to an impairment.
8.4
Impairment testing when a CGU crosses more than one
operating segment
While IAS 36 is clear that goodwill cannot be tested at a level that is larger than an
operating segment determined in accordance with IFRS 8, it does not contain similar
guidance for other assets. Therefore, in our view, the basic principle of IAS 36 applies,
meaning assets or a group of assets are tested at the lowest level at which largely
independent cash inflows can be identified. In practice a CGU determined based on the
lowest level of independent cash inflows could be larger than an operating segment and
therefore could cross more than one operating segment. For example, in the telecom
industry, the entire telecom fixed line network may be one CGU, while at the same time
an entity may identify its operating segments based on types of clients (e.g. individual
clients, business clients, other operators, etc.). The general guidance in IAS 36 would
require an entity to assess at each reporting date whether there are impairment
indicators for the CGU and if such impairment indicators exist, perform a formal
impairment assessment at CGU level. Regardless of whether a CGU crosses more than
one operating segment, goodwill would need to be tested at a lower operating segment
level. For this operating segment level impairment test, the assets of the larger CGU, in
particular the cross operating segment assets e.g. the fixed line network in the example
above, would need to be allocated to the operating segments. The application of these
principles in practice can be complex and may require judgement.
1504 Chapter 20
8.5
Disposal of operation within a cash-generating unit to which
goodwill has been allocated
If goodwill has been allocated to a CGU (or a group of CGUs) and the entity disposes
of an operation within that CGU, IAS 36 requires that the goodwill associated with
the operation disposed of is included in the carrying amount of the operation when
determining the gain or loss on disposal. For that purpose, the standard requires that
the amount to be included is measured on the basis of the relative values of the
operation disposed of and the portion of the CGU retained, unless the entity can
demonstrate that some other method better reflects the goodwill associated with the
operation disposed of. [IAS 36.86].
The standard refers to the ‘relative values’ of the parts without specifying how these are
to be calculated. The recoverable amount of the part that it has retained will be based
on the principles of IAS 36, i.e. at the higher of FVLCD and VIU. This means that the
VIU or FVLCD of the part retained may have to be calculated as part of the allocation
exercise on disposal.
In addition, the VIU and FVLCD of the part disposed of will be materially the same. This
is because the VIU will consist mainly of the net disposal proceeds; it cannot be based
on the assumption that the sale would not take place.
Example 20.26: Goodwill attributable to the disposal of an operation based on
relative values
An entity sells for €100 an operation that was part of a CGU to which goodwill of €60 has been allocated.
The goodwill allocated to the CGU cannot be identified or associated with an asset group at a level lower
than that CGU, except arbitrarily. The recoverable amount of the portion of the CGU retained is €300.
Because the goodwill allocated to the CGU cannot be non-arbitrarily identified or associated with an asset
group at a level lower than that CGU, the goodwill associated with the operation disposed of is measured on
the basis of the relative values of the operation disposed of and the portion of the CGU retained. Therefore,
25 per cent of the goodwill allocated to the CGU, i.e. €15 is included in the carrying amount of the operation
that is sold.
It will not necessarily follow, for example, that the business disposed of generated 25%
of the net cash flows of the combined CGU. Therefore, the relative value method
suggested by the standard to be applied in most circumstances may be based on a
mismatch in the valuation bases used on the different parts of the business, reflecting
the purchaser’s assessment of the value of the part disposed of at the point of sale rather
than that of the vendor at purchase.
The standard allows the use of some other method if it better reflects the goodwill
associated with the part disposed of. The IASB had in mind a scenario in which an
entity buys a business, integrates it with an existing CGU that does not include any
goodwill in its carrying amount and immediately sells a loss-making part of the
combined CGU. It is accepted that in these circumstances it may be reasonable to
conclude that no part of the carrying amount of the goodwill has been disposed of.
[IAS 36.BC156]. The loss-making business being disposed of could, of course, have been
owned by the entity before the acquisition or it could be part of the acquired
business. However, the standard is not clear in what other circumstances a base
other than relative values would better reflect the goodwill associated with the part
disposed of. Any other method must take account of the basic principle, which is
Impairment of fixed assets and goodwill 1505
that this is an allocation of the carrying amount of goodwill and not an impairment
test. It is not relevant, for example, that the part retained may have sufficient
headroom for all of the goodwill without any impairment. One has to bear in mind
that any basis of allocation of goodwill on disposal other than that recommended by
the standard could be an indication that goodwill should have been allocated on a
different basis on acquisition. It could suggest that there may have been some
reasonable basis of allocating goodwill to the CGUs within a CGU group.
However, as demonstrated in Example 20.28 below, in some circumstances the
allocation based on relative values might lead to an immediate impairment which is
not intuitive and therefore an alternative method may, depending on facts and
circumstances, therefore better reflect the goodwill associated with the operation
disposed of. In our view, an approach that is based on current relative values of
notional goodwill in the part disposed of and the part retained could, depending on
facts and circumstances, be seen as an acceptable alternative for the goodwill
allocation as illustrated in 8.5.1 below.
8.5.1
Changes in composition of cash-generating units
If an entity reorganises the structure of its operations in a way that changes the
composition of one or more CGUs to which goodwill has been allocated, IAS 36
requires that the goodwill be reallocated to the units affected. For this purpose, the
standard requires the reallocation to be performed using a relative value approach
similar to that discussed above when an entity disposes of an operation within a CGU,
unless the entity can demonstrate that some other method better reflects the goodwill
associated w
ith the reorganised units. [IAS 36.87]. Generally an impairment review would
need to be performed prior to the reallocation of goodwill. As a result, if the
reorganisation is triggered by underperformance in any of the affected operations, it
cannot mask any impairment.
Example 20.27: Reallocation of goodwill to CGUs based on relative values
Goodwill of €160 had previously been allocated to CGU A. A is to be divided and integrated into three
other CGUs, B, C and D. Because the goodwill allocated to A cannot be non-arbitrarily identified or
associated with an asset group at a level lower than A, it is reallocated to CGUs B, C and D on the basis
of the relative values of the three portions of A before those portions are integrated with B, C and D.
The recoverable amounts of these portions of A before integration with the other CGUs are €200, €300
and €500 respectively. Accordingly, the amounts of goodwill reallocated to CGUs B, C and D are €32,
€48 and €80 respectively.
When goodwill is reallocated based on relative values, it may be necessary to assess
impairment immediately following the reallocation, as the recoverable amount of the
CGUs will be based on the principles of IAS 36 and the reallocation could lead to an
immediate impairment.
Again, the standard gives no indication as to what other methods might better reflect
the goodwill associated with the reorganised units.
As illustrated in Example 20.28 below, the reallocation based on relative values could
lead to an immediate impairment after the reallocation. This is not intuitive given that
an impairment review would have been performed immediately before the goodwill
1506 Chapter 20
reallocation and the restructuring of a business would not be expected to result in an
impairment of goodwill.
In our view an allocation based on the relative current value of notional goodwill
could, depending on facts and circumstances, be seen as an acceptable alternative
to the IAS 36 suggested approach of relative values. This method calculates the
current value of notional goodwill in each of the components to be allocated to new
CGUs by performing a notional purchase price allocation for each affected CGU. To
do this the components’ fair value is compared with the fair value of the net
identifiable assets to obtain the current value of notional goodwill. The carrying
amount of the goodwill to be reallocated is then allocated to the new CGUs based
on the relative current values of notional goodwill. This approach together with an
example of circumstances under which the approach may be acceptable is
illustrated in Example 20.28:
Example 20.28: Reallocation of goodwill to CGUs based on relative current values
of notional goodwill
A US company acquired a European sub-group in 20X0 and recorded goodwill of €30 million. At the time
Europe was a new market for the company and goodwill was fully allocated to one CGU A based on the
geographic location Europe. Two years later the group fundamentally restructured its business in Europe. The
restructuring resulted in the split of the existing CGU into three new CGUs B, C and D based on products.
The goodwill of €30 million was assessed for impairment immediately prior to the restructuring and no
impairment was identified. When the recoverable amount of each component of A allocated to B, C and D
was assessed, FVLCD was higher than VIU for each component allocated and is therefore used as basis for
the recoverable amount based in the relative value approach. For simplicity purposes the examples assume
that there are no material disposal costs and therefore the fair value of the components equals the fair value
less costs of disposal.
The fair value of the net identifiable assets and the fair value of each new CGU are given in the
following table:
CGU
B
C
D
Total
€m
€m
€m
Fair value of net identifiable assets
20
40
40
100
Book value of net identifiable assets
10
35
35
80
Fair value/FVLCD
40
80
40
160
The allocation based on the relative values of the three components of A allocated to B, C and D, as the
required default method by the standard, would result in the following allocation of goodwill:
CGU
B
C
D
Total
€m
€m
€m
Goodwill allocation
7.5
15
7.5
30
Book value of net identifiable assets
10
35
35
80
Total 17.5
50
42.5
110
Recoverable amount of CGU (FVLCD)
40
80
40
160
Immediate impairment
–
–
2.5 2.5
Goodwill of €7.5m (goodwill of €30m × recoverable amount €40m/overall recoverable amount €160m)
is allocated to CGU B and D and €15m (goodwill of €30m × recoverable amount €80m/overall
recoverable amount €160m) to CGU C. As can be seen, the relative value approach would result in an
immediate impairment of €2.5m in CGU D. This is not intuitive, given that no impairment existed
Impairment of fixed assets and goodwill 1507
immediately prior to the restructuring and the restructuring of the business would not be expected to
result in an immediate impairment. Another method of allocation might therefore better reflect the
goodwill associated with the reorganised units. In our view, an allocation based on relative current
values of notional goodwill could be an acceptable alternative method in this case. This would lead to
the following allocation:
CGU
B
C
D
Total
€m
€m
€m
CGU’s fair value
40
80
40
160
Fair value net identifiable assets
20
40
40
100
Current value of notional goodwill
20
40
0
60
Historic goodwill allocated
10
20
–
30
This would allocate goodwill of €10m (goodwill of €30m × relative current value of notional goodwill €20 /
overall current value of notional goodwill €60m) to CGU B, €20m (goodwill of €30m × relative current value
of notional goodwill €40 / overall current value of notional goodwill €60m) to CGU C and €0m (goodwill of
€30m × relative current value of notional goodwill €0 / overall current value of notional goodwill €60m) to
CGU D. This allocation would not cause an immediate impairment directly after the reallocation as the
following table shows.
CGU
B
C
D
Total
€
m
€m
€m
Goodwill allocation
10
20
0
30
Book value of net identifiable assets
10
35
35
80
Total 20
55
35
110
Recoverable amount (based on FVLCD)
40
80
40
160
Immediate impairment
–
–
–
–
The above example is based on a fact pattern where an existing CGU is split into three
new CGUs. However, the method could be applied as well in circumstances where
components of an existing CGU are allocated to other existing CGUs. The current values
of notional goodwill used for reallocation purposes in such a case would need to be
based only on the goodwill in the components being reallocated ignoring any goodwill
in the existing CGUs to which the components are being allocated.
While the method illustrated above might be seen as an alternative method for
goodwill reallocation it requires an entity to perform notional purchase price
allocations for the components of each affected CGU and therefore potentially
involves a significant time, effort and cost commitment. It is important to note that
IAS 36 is not entirely clear whether an entity would need to use an alternative
method that might better reflect the goodwill associated with the reorganised units,
if the entity is aware of it, or whether an entity could always just default to the
IAS 36.87 stated relative value method.
In practice, situations may be considerably more complex than Examples 20.26, 20.27
and 20.28 above. For example, after an acquisition, a combination of disposal of
acquired businesses together with a reorganisation and integration may arise. The entity
may sell some parts of its acquired business immediately but may also use the acquisition
in order to replace part of its existing capacity, disposing of existing elements. In
addition, groups frequently undertake reorganisations of their statutory entities. It is