Impairment of Assets

Case Study 2

Determination of Cash-

Generating Units

Main Issues Related to Determination of CGUs

►Determination is not conditioned upon existence of indicators of impairment

►Judgement and very good knowledge of the industry and of the organisation of the company are required

►Varying approaches in practice in various entities may be applied

►Determination should be done at the lowest level possible

►Independent cash inflows does not necessarily mean external cash inflows

Allocation of goodwill to CGUs

►Goodwill cannot generate independent cash inflows

►It shall be allocated to level of each of the CGUs, if non-arbitrary allocation is possible.

►If not possible to allocate to CGUs, goodwill may be tested on the level of a group of CGUs. There are two conditions that should be met for such a group of CGUs:

►It should represent the lowest level within the entity at which the goodwill is monitored for internal management purposes, and

►It should not be larger than an operating segment (as defined in IFRS 8)

Allocation of Goodwill and Corporate Assets to the CGUs

Scenario 1 – acquisition of a market share in China

►A group that manufactures and distributes cosmetics has acquired an entity in China.

►The objective of this business combination was purely to acquire the market share and distribution network of the Chinese entity .

►The group intends to keep using the local brand for another 18 months during which period this will be replaced by the brand of the group.

►Simultaneously the group will impose its own products to replace the local ones.

►The goodwill generated from this acquisition amounted to 90 million currency units.

Question

►Should this goodwill be allocated to the CGUs of the acquiree or of the acquirer?

Allocation of Goodwill and Corporate Assets to the CGUs

Solution

►The goodwill should not be allocated to the CGUs of the acquiree, but to the CGUs of the acquirer, because the synergies resulting from the business combination will benefit only the CGUs of the acquirer (it will allow the group to penetrate the market with its own products, obtain economies of scale and increase sales volume)

Allocation of Goodwill and Corporate Assets to the CGUs

Scenario 2 – allocation of a patented technology

►A telecommunication group has two business segments: fixed phone and mobile phones.

►Each of these segments has several divisions.

►One of the divisions, part of the mobile phones segment, has acquired in 2011 Entity B and has identified as a separate intangible asset a specific patented technology.

►This patented technology, which is the main asset of Entity B, is used not only within the acquiring division, but also by three other divisions, part of both business segments.

►Entity B is invoicing all the divisions royalties for the use of the technology. This represents 100% of the revenues earned by Entity B

►The royalties are calculated as a percentage of the turnover generated through the use of the respective technology

►The group considered that entity B is a CGU and the patented technology was included as an asset in this CGU

Allocation of Goodwill and Corporate Assets to the CGUs

Question

►Was the group right in considering the patented technology as part of the Entity B’s cash generating unit?

Solution

►No, the decision was wrong

►Although the revenues of entity B are 100% internally generated, as there is no active market for the services rendered by B through the use of the technology entity, B is not a CGU

►The patented technology rather meets the definition of a corporate asset

►The carrying amount of the asset should be allocated to each division on the basis of the relative amount of royalties invoiced to each division

Impairment loss for a cash-generating unit

►The impairment loss shall be allocated to reduce the carrying amount of the assets of the unit (group of units) in the following order:

►first, to reduce the carrying amount of any goodwill allocated to the cashgenerating unit (group of units); and

►then, to the other assets of the unit (group of units) pro rata on the basis of the carrying amount of each asset in the unit (group of units).

Impairment loss for a cash-generating unit

►In allocating an impairment loss, an entity shall not reduce the carrying amount of an asset below the highest of:

►its fair value less costs to sell (if determinable);

►its value in use (if determinable); and

►zero.

►The amount of the impairment loss that would otherwise have been allocated to the asset shall be allocated pro rata to the other assets of the unit (group of units).

Reversing an impairment loss

►An entity shall assess at each reporting date whether there is any indication that an impairment loss recognised in prior periods for an asset other than goodwill may no longer exist or may have decreased. If any such indication exists, the entity shall estimate the recoverable amount of that asset.

►The increased carrying amount of an asset other than goodwill attributable to a reversal of an impairment loss shall not exceed the carrying amount that would have been determined (net of amortisation or depreciation) had no impairment loss been recognised for the asset in prior years.

►An impairment loss recognised for goodwill shall not be reversed in a subsequent period.