These examples accompany, but are not part of, IAS 36. All the examples assume that the entities concerned have no transactions other than those described. In the examples monetary amounts are denominated in ‘currency units (CU)’.
The purpose of this example is:
to indicate how cash‑generating units are identified in various situations; and
to highlight certain factors that an entity may consider in identifying the cash‑generating unit to which an asset belongs.
Store X belongs to a retail store chain M. X makes all its retail purchases through M’s purchasing centre. Pricing, marketing, advertising and human resources policies (except for hiring X’s cashiers and sales staff) are decided by M. M also owns five other stores in the same city as X (although in different neighbourhoods) and 20 other stores in other cities. All stores are managed in the same way as X. X and four other stores were purchased five years ago and goodwill was recognised.
What is the cash‑generating unit for X (X’s cash‑generating unit)?
In identifying X’s cash‑generating unit, an entity considers whether, for example:
internal management reporting is organised to measure performance on a store‑by‑store basis; and
the business is run on a store‑by‑store profit basis or on a region/city basis.
All M’s stores are in different neighbourhoods and probably have different customer bases. So, although X is managed at a corporate level, X generates cash inflows that are largely independent of those of M’s other stores. Therefore, it is likely that X is a cash‑generating unit.
If X’s cash‑generating unit represents the lowest level within M at which the goodwill is monitored for internal management purposes, M applies to that cash‑generating unit the impairment test described in paragraph 90 of IAS 36. If information about the carrying amount of goodwill is not available and monitored for internal management purposes at the level of X’s cash‑generating unit, M applies to that cash‑generating unit the impairment test described in paragraph 88 of IAS 36.
A significant raw material used for plant Y’s final production is an intermediate product bought from plant X of the same entity. X’s products are sold to Y at a transfer price that passes all margins to X. Eighty per cent of Y’s final production is sold to customers outside of the entity. Sixty per cent of X’s final production is sold to Y and the remaining 40 per cent is sold to customers outside of the entity.
For each of the following cases, what are the cash‑generating units for X and Y?
Case 1: X could sell the products it sells to Y in an active market. Internal transfer prices are higher than market prices.
Case 2: There is no active market for the products X sells to Y.
X could sell its products in an active market and, so, generate cash inflows that would be largely independent of the cash inflows from Y. Therefore, it is likely that X is a separate cash‑generating unit, although part of its production is used by Y (see paragraph 70 of IAS 36).
It is likely that Y is also a separate cash‑generating unit. Y sells 80 per cent of its products to customers outside of the entity. Therefore, its cash inflows can be regarded as largely independent.
Internal transfer prices do not reflect market prices for X’s output. Therefore, in determining value in use of both X and Y, the entity adjusts financial budgets/forecasts to reflect management’s best estimate of future prices that could be achieved in arm’s length transactions for those of X’s products that are used internally (see paragraph 70 of IAS 36).
It is likely that the recoverable amount of each plant cannot be assessed independently of the recoverable amount of the other plant because:
the majority of X’s production is used internally and could not be sold in an active market. So, cash inflows of X depend on demand for Y’s products. Therefore, X cannot be considered to generate cash inflows that are largely independent of those of Y.
the two plants are managed together.
As a consequence, it is likely that X and Y together are the smallest group of assets that generates cash inflows that are largely independent.
Entity M produces a single product and owns plants A, B and C. Each plant is located in a different continent. A produces a component that is assembled in either B or C. The combined capacity of B and C is not fully utilised. M’s products are sold worldwide from either B or C. For example, B’s production can be sold in C’s continent if the products can be delivered faster from B than from C. Utilisation levels of B and C depend on the allocation of sales between the two sites.
For each of the following cases, what are the cash‑generating units for A, B and C?
Case 1: There is an active market for A’s products.
Case 2: There is no active market for A’s products.
It is likely that A is a separate cash‑generating unit because there is an active market for its products (see Example B - Plant for an intermediate step in a production process, Case 1).
Although there is an active market for the products assembled by B and C, cash inflows for B and C depend on the allocation of production across the two sites. It is unlikely that the future cash inflows for B and C can be determined individually. Therefore, it is likely that B and C together are the smallest identifiable group of assets that generates cash inflows that are largely independent.
In determining the value in use of A and B plus C, M adjusts financial budgets/forecasts to reflect its best estimate of future prices that could be achieved in arm’s length transactions for A’s products (see paragraph 70 of IAS 36).
It is likely that the recoverable amount of each plant cannot be assessed independently because:
there is no active market for A’s products. Therefore, A’s cash inflows depend on sales of the final product by B and C.
although there is an active market for the products assembled by B and C, cash inflows for B and C depend on the allocation of production across the two sites. It is unlikely that the future cash inflows for B and C can be determined individually.
As a consequence, it is likely that A, B and C together (ie M as a whole) are the smallest identifiable group of assets that generates cash inflows that are largely independent.
A publisher owns 150 magazine titles of which 70 were purchased and 80 were self‑created. The price paid for a purchased magazine title is recognised as an intangible asset. The costs of creating magazine titles and maintaining the existing titles are recognised as an expense when incurred. Cash inflows from direct sales and advertising are identifiable for each magazine title. Titles are managed by customer segments. The level of advertising income for a magazine title depends on the range of titles in the customer segment to which the magazine title relates. Management has a policy to abandon old titles before the end of their economic lives and replace them immediately with new titles for the same customer segment.
What is the cash‑generating unit for an individual magazine title?
It is likely that the recoverable amount of an individual magazine title can be assessed. Even though the level of advertising income for a title is influenced, to a certain extent, by the other titles in the customer segment, cash inflows from direct sales and advertising are identifiable for each title. In addition, although titles are managed by customer segments, decisions to abandon titles are made on an individual title basis.
Therefore, it is likely that individual magazine titles generate cash inflows that are largely independent of each other and that each magazine title is a separate cash‑generating unit.
M is a manufacturing company. It owns a headquarters building that used to be fully occupied for internal use. After down‑sizing, half of the building is now used internally and half rented to third parties. The lease agreement with the tenant is for five years.
What is the cash‑generating unit of the building?
The primary purpose of the building is to serve as a corporate asset, supporting M’s manufacturing activities. Therefore, the building as a whole cannot be considered to generate cash inflows that are largely independent of the cash inflows from the entity as a whole. So, it is likely that the cash‑generating unit for the building is M as a whole.
The building is not held as an investment. Therefore, it would not be appropriate to determine the value in use of the building based on projections of future market related rents.
In this example, tax effects are ignored.
At the end of 20X0, entity T acquires entity M for CU10,000. M has manufacturing plants in three countries.
Schedule 1. Data at the end of 20X0
Activities in each country represent the lowest level at which the goodwill is monitored for internal management purposes (determined as the difference between the purchase price of the activities in each country, as specified in the purchase agreement, and the fair value of the identifiable assets).
Because goodwill has been allocated to the activities in each country, each of those activities must be tested for impairment annually or more frequently if there is any indication that it may be impaired (see paragraph 90 of IAS 36).
The recoverable amounts (ie higher of value in use and fair value less costs of disposal) of the cash‑generating units are determined on the basis of value in use calculations. At the end of 20X0 and 20X1, the value in use of each cash‑generating unit exceeds its carrying amount. Therefore the activities in each country and the goodwill allocated to those activities are regarded as not impaired.
At the beginning of 20X2, a new government is elected in Country A. It passes legislation significantly restricting exports of T’s main product. As a result, and for the foreseeable future, T’s production in Country A will be cut by 40 per cent.
The significant export restriction and the resulting production decrease require T also to estimate the recoverable amount of the Country A operations at the beginning of 20X2.
T uses straight‑line depreciation over a 12‑year life for the Country A identifiable assets and anticipates no residual value.
To determine the value in use for the Country A cash‑generating unit (see Schedule 2), T:
prepares cash flow forecasts derived from the most recent financial budgets/forecasts for the next five years (years 20X2–20X6) approved by management.
estimates subsequent cash flows (years 20X7–20Y2) based on declining growth rates. The growth rate for 20X7 is estimated to be 3 per cent. This rate is lower than the average long‑term growth rate for the market in Country A.
selects a 15 per cent discount rate, which represents a pre‑tax rate that reflects current market assessments of the time value of money and the risks specific to the Country A cash‑generating unit.
The recoverable amount of the Country A cash‑generating unit is CU1,360.
T compares the recoverable amount of the Country A cash‑generating unit with its carrying amount (see Schedule 3).
Because the carrying amount exceeds the recoverable amount by CU1,473, T recognises an impairment loss of CU1,473 immediately in profit or loss. The carrying amount of the goodwill that relates to the Country A operations is reduced to zero before reducing the carrying amount of other identifiable assets within the Country A cash‑generating unit (see paragraph 104 of IAS 36).
Tax effects are accounted for separately in accordance with IAS 12 Income Taxes (see Illustrative Example 3A).
Schedule 2. Calculation of the value in use of the Country A cash‑generating unit at the beginning of 20X2
The present value factor is calculated as k = 1/(1+a) n , where a = discount rate and n = period of discount.
Based on management’s best estimate of net cash flow projections (after the 40% cut).
Based on an extrapolation from preceding year cash flow using declining growth rates.
Schedule 3. Calculation and allocation of the impairment loss for the Country A cash-generating unit at the beginning of 20X2
| Beginning of 20X2 | Goodwill | Identifiable assets | Total | ||
|---|---|---|---|---|---|
| CU | CU | CU | |||
| Historical cost | 1,000 | 2,000 | 3,000 | ||
| Accumulated depreciation (20X1) | – | (167) | (167) | ||
| Carrying amount | 1,000 | 1,833 | 2,833 | ||
| Impairment loss | (1,000) | (473) | (1,473) | ||
| Carrying amount after impairment loss | – | 1,360 | 1,360 | ||
Use the data for entity T as presented in Example 2, with supplementary information as provided in this example.
At the beginning of 20X2, the tax base of the identifiable assets of the Country A cash‑generating unit is CU900. Impairment losses are not deductible for tax purposes. The tax rate is 40 per cent.
The recognition of an impairment loss on the assets of the Country A cash‑generating unit reduces the taxable temporary difference related to those assets. The deferred tax liability is reduced accordingly.
| Beginning of 20X2 | Identifiable assets before impairment loss | Impairment loss | Identifiable assets after impairment loss | ||
|---|---|---|---|---|---|
| CU | CU | CU | |||
| Carrying amount (Example 2) | 1,833 | (473) | 1,360 | ||
| Tax base | 900 | – | 900 | ||
| Taxable temporary difference | 933 | (473) | 460 | ||
| Deferred tax liability at 40% | 373 | (189) | 184 | ||
In accordance with IAS 12 Income Taxes , no deferred tax relating to the goodwill was recognised initially. [ Refer: IAS 12 paragraph 15(a)] Therefore, the impairment loss relating to the goodwill does not give rise to a deferred tax adjustment.
An entity has an identifiable asset with a carrying amount of CU1,000. Its recoverable amount is CU650. The tax rate is 30 per cent and the tax base of the asset is CU800. Impairment losses are not deductible for tax purposes. The effect of the impairment loss is as follows:
| Before impairment | Effect of impairment | After impairment | ||
|---|---|---|---|---|
| CU | CU | CU | ||
| Carrying amount | 1,000 | (350) | 650 | |
| Tax base | 800 | – | 800 | |
| Taxable (deductible) temporary difference | 200 | (350) | (150) | |
| Deferred tax liability (asset) at 30% | 60 | (105) | (45) | |
In accordance with IAS 12, the entity recognises the deferred tax asset to the extent that it is probable that taxable profit will be available against which the deductible temporary difference can be utilised.
Use the data for entity T as presented in Example 2, with supplementary information as provided in this example. In this example, tax effects are ignored.
In 20X3, the government is still in office in Country A, but the business situation is improving. The effects of the export laws on T’s production are proving to be less drastic than initially expected by management. As a result, management estimates that production will increase by 30 per cent. This favourable change requires T to re‑estimate the recoverable amount of the net assets of the Country A operations (see paragraphs 110 and 111 of IAS 36). The cash‑generating unit for the net assets of the Country A operations is still the Country A operations.
Calculations similar to those in Example 2 show that the recoverable amount of the Country A cash‑generating unit is now CU1,910.
T compares the recoverable amount and the net carrying amount of the Country A cash‑generating unit.
Schedule 1. Calculation of the carrying amount of the Country A cash‑generating unit at the end of 20X3
After recognition of the impairment loss at the beginning of 20X2, T revised the depreciation charge for the Country A identifiable assets (from CU166.7 per year to CU123.6 per year), based on the revised carrying amount and remaining useful life (11 years).
There has been a favourable change in the estimates used to determine the recoverable amount of the Country A net assets since the last impairment loss was recognised. Therefore, in accordance with paragraph 114 of IAS 36, T recognises a reversal of the impairment loss recognised in 20X2.
In accordance with paragraphs 122 and 123 of IAS 36, T increases the carrying amount of the Country A identifiable assets by CU387 (see Schedule 3), ie up to the lower of recoverable amount (CU1,910) and the identifiable assets’ depreciated historical cost (CU1,500) (see Schedule 2). This increase is recognised immediately in profit or loss.
In accordance with paragraph 124 of IAS 36, the impairment loss on goodwill is not reversed.
Schedule 2. Determination of the depreciated historical cost of the Country A identifiable assets at the end of 20X3
| End of 20X3 | Identifiable assets |
|---|---|
| CU | |
| Historical cost | 2,000 |
| Accumulated depreciation (166.7 × 3 years) | (500) |
| Depreciated historical cost | 1,500 |
| Carrying amount (Schedule 1) | 1,113 |
| Difference | 387 |
Schedule 3. Carrying amount of the Country A assets at the end of 20X3
| End of 20X3 | Goodwill | Identifiable assets | Total | ||
|---|---|---|---|---|---|
| CU | CU | CU | |||
| Gross carrying amount | 1,000 | 2,000 | 3,000 | ||
| Accumulated amortisation | – | (414) | (414) | ||
| Accumulated impairment loss | (1,000) | (473) | (1,473) | ||
| Carrying amount | – | 1,113 | 1,113 | ||
| Reversal of impairment loss | 0 | 387 | 387 | ||
| Carrying amount after reversal of impairment loss | – | 1,500 | 1,500 | ||
In this example, tax effects are ignored.
At the end of 20X0, entity K tests a plant for impairment. The plant is a cash‑generating unit. The plant’s assets are carried at depreciated historical cost. The plant has a carrying amount of CU3,000 and a remaining useful life of 10 years.
The plant’s recoverable amount (ie higher of value in use and fair value less costs of disposal) is determined on the basis of a value in use calculation. Value in use is calculated using a pre‑tax discount rate of 14 per cent.
Management approved budgets reflect that:
at the end of 20X3, the plant will be restructured at an estimated cost of CU100. Since K is not yet committed to the restructuring, a provision has not been recognised for the future restructuring costs.
there will be future benefits from this restructuring in the form of reduced future cash outflows.
At the end of 20X2, K becomes committed to the restructuring. The costs are still estimated to be CU100 and a provision is recognised accordingly. The plant’s estimated future cash flows reflected in the most recent management approved budgets are given in paragraph IE51 and a current discount rate is the same as at the end of 20X0.
At the end of 20X3, actual restructuring costs of CU100 are incurred and paid. Again, the plant’s estimated future cash flows reflected in the most recent management approved budgets and a current discount rate are the same as those estimated at the end of 20X2.
Schedule 1. Calculation of the plant’s value in use at the end of 20X0
Excludes estimated restructuring costs reflected in management budgets.
Excludes estimated benefits expected from the restructuring reflected in management budgets.
The plant’s recoverable amount (ie value in use) is less than its carrying amount. Therefore, K recognises an impairment loss for the plant.
Schedule 2. Calculation of the impairment loss at the end of 20X0
| Plant | |
|---|---|
| CU | |
| Carrying amount before impairment loss | 3,000 |
| Recoverable amount (Schedule 1) | 2,051 |
| Impairment loss | (949) |
| Carrying amount after impairment loss | 2,051 |
No event occurs that requires the plant’s recoverable amount to be re‑estimated. Therefore, no calculation of the recoverable amount is required to be performed.
The entity is now committed to the restructuring. Therefore, in determining the plant’s value in use, the benefits expected from the restructuring are considered in forecasting cash flows. This results in an increase in the estimated future cash flows used to determine value in use at the end of 20X0. In accordance with paragraphs 110 and 111 of IAS 36, the recoverable amount of the plant is re‑determined at the end of 20X2.
Schedule 3. Calculation of the plant’s value in use at the end of 20X2
Excludes estimated restructuring costs because a liability has already been recognised.
Includes estimated benefits expected from the restructuring reflected in management budgets.
The plant’s recoverable amount (value in use) is higher than its carrying amount (see Schedule 4). Therefore, K reverses the impairment loss recognised for the plant at the end of 20X0.
Schedule 4. Calculation of the reversal of the impairment loss at the end of 20X2
The reversal does not result in the carrying amount of the plant exceeding what its carrying amount would have been at depreciated historical cost. Therefore, the full reversal of the impairment loss is recognised.
There is a cash outflow of CU100 when the restructuring costs are paid. Even though a cash outflow has taken place, there is no change in the estimated future cash flows used to determine value in use at the end of 20X2. Therefore, the plant’s recoverable amount is not calculated at the end of 20X3.
Schedule 5. Summary of the carrying amount of the plant
| End of year | Depreciated historical cost | Recoverable amount | Adjusted depreciation charge | Impairment loss | Carrying amount after impairment | ||||
|---|---|---|---|---|---|---|---|---|---|
| CU | CU | CU | CU | CU | |||||
| 20X0 | 3,000 | 2,051 | 0 | (949) | 2,051 | ||||
| 20X1 | 2,700 | nc | (205) | 0 | 1,846 | ||||
| 20X2 | 2,400 | 2,162 | (205) | 521 | 2,162 | ||||
| 20X3 | 2,100 | nc | (270) | 0 | 1,892 | ||||
| nc = not calculated as there is no indication that the impairment loss may have increased/decreased. | |||||||||
In this example, tax effects are ignored.
At the end of 20X0, entity F tests a machine for impairment. The machine is a cash‑generating unit. It is carried at depreciated historical cost and its carrying amount is CU150,000. It has an estimated remaining useful life of 10 years.
The machine’s recoverable amount (ie higher of value in use and fair value less costs of disposal) is determined on the basis of a value in use calculation. Value in use is calculated using a pre‑tax discount rate of 14 per cent.
Management approved budgets reflect:
estimated costs necessary to maintain the level of economic benefit expected to arise from the machine in its current condition; and
that in 20X4, costs of CU25,000 will be incurred to enhance the machine’s performance by increasing its productive capacity.
At the end of 20X4, costs to enhance the machine’s performance are incurred. The machine’s estimated future cash flows reflected in the most recent management approved budgets are given in paragraph IE60 and a current discount rate is the same as at the end of 20X0.
Schedule 1. Calculation of the machine’s value in use at the end of 20X0
Includes estimated costs necessary to maintain the level of economic benefit expected to arise from the machine in its current condition.
Excludes estimated costs to enhance the machine’s performance reflected in management budgets.
Excludes estimated benefits expected from enhancing the machine’s performance reflected in management budgets.
The machine’s recoverable amount (value in use) is less than its carrying amount. Therefore, F recognises an impairment loss for the machine.
Schedule 2. Calculation of the impairment loss at the end of 20X0
| Machine | |
|---|---|
| CU | |
| Carrying amount before impairment loss | 150,000 |
| Recoverable amount (Schedule 1) | 121,128 |
| Impairment loss | (28,872) |
| Carrying amount after impairment loss | 121,128 |
No event occurs that requires the machine’s recoverable amount to be re‑estimated. Therefore, no calculation of recoverable amount is required to be performed.
The costs to enhance the machine’s performance are incurred. Therefore, in determining the machine’s value in use, the future benefits expected from enhancing the machine’s performance are considered in forecasting cash flows. This results in an increase in the estimated future cash flows used to determine value in use at the end of 20X0. As a consequence, in accordance with paragraphs 110 and 111 of IAS 36, the recoverable amount of the machine is recalculated at the end of 20X4.
Schedule 3. Calculation of the machine’s value in use at the end of 20X4
Includes estimated benefits expected from enhancing the machine’s performance reflected in management budgets.
The machine’s recoverable amount (ie value in use) is higher than the machine’s carrying amount and depreciated historical cost (see Schedule 4). Therefore, K reverses the impairment loss recognised for the machine at the end of 20X0 so that the machine is carried at depreciated historical cost.
Schedule 4. Calculation of the reversal of the impairment loss at the end of 20X4
The value in use of the machine exceeds what its carrying amount would have been at depreciated historical cost. Therefore, the reversal is limited to an amount that does not result in the carrying amount of the machine exceeding depreciated historical cost.
Schedule 5. Summary of the carrying amount of the machine
| Year | Depreciated historical cost | Recoverable amount | Adjusted depreciated charge | Impairment loss | Carrying amount after impairment | ||||
|---|---|---|---|---|---|---|---|---|---|
| CU | CU | CU | CU | CU | |||||
| 20X0 | 150,000 | 121,128 | 0 | (28,872) | 121,128 | ||||
| 20X1 | 135,000 | nc | (12,113) | 0 | 109,015 | ||||
| 20X2 | 120,000 | nc | (12,113) | 0 | 96,902 | ||||
| 20X3 | 105,000 | nc | (12,113) | 0 | 84,789 | ||||
| 20X4 | 90,000 | (12,113) | |||||||
| enhancement | 25,000 | – | |||||||
| 115,000 | 122,072 | (12,113) | 17,324 | 115,000 | |||||
| 20X5 | 95,833 | nc | (19,167) | 0 | 95,833 | ||||
| nc = not calculated as there is no indication that the impairment loss may have increased/decreased. | |||||||||
In this example, tax effects are ignored.
Parent acquires an 80 per cent ownership interest in Subsidiary for CU2,100 on 1 January 20X3. At that date, Subsidiary’s net identifiable assets have a fair value of CU1,500. Parent chooses to measure the non‑controlling interests as the proportionate interest of Subsidiary’s net identifiable assets of CU300 (20% of CU1,500). Goodwill of CU900 is the difference between the aggregate of the consideration transferred and the amount of the non‑controlling interests (CU2,100 + CU300) and the net identifiable assets (CU1,500).
The assets of Subsidiary together are the smallest group of assets that generate cash inflows that are largely independent of the cash inflows from other assets or groups of assets. Therefore Subsidiary is a cash‑generating unit. Because other cash‑generating units of Parent are expected to benefit from the synergies of the combination, the goodwill of CU500 related to those synergies has been allocated to other cash‑generating units within Parent. Because the cash‑generating unit comprising Subsidiary includes goodwill within its carrying amount, it must be tested for impairment annually, or more frequently if there is an indication that it may be impaired (see paragraph 90 of IAS 36).
At the end of 20X3, Parent determines that the recoverable amount of cash‑generating unit Subsidiary is CU1,000. The carrying amount of the net assets of Subsidiary, excluding goodwill, is CU1,350.
Goodwill attributable to non‑controlling interests is included in Subsidiary’s recoverable amount of CU1,000 but has not been recognised in Parent’s consolidated financial statements. Therefore, in accordance with paragraph C4 of Appendix C of IAS 36, the carrying amount of Subsidiary is grossed up to include goodwill attributable to the non‑controlling interests, before being compared with the recoverable amount of CU1,000. Goodwill attributable to Parent’s 80 per cent interest in Subsidiary at the acquisition date is CU400 after allocating CU500 to other cash‑generating units within Parent. Therefore, goodwill attributable to the 20 per cent non‑controlling interests in Subsidiary at the acquisition date is CU100.
Schedule 1. Testing Subsidiary for impairment at the end of 20X3
| End of 20X3 | Goodwill of Subsidiary | Net identifiable assets | Total | ||
|---|---|---|---|---|---|
| CU | CU | CU | |||
| Carrying amount | 400 | 1,350 | 1,750 | ||
| Unrecognised non-controlling interests | 100 | – | 100 | ||
| Adjusted carrying amount | 500 | 1,350 | 1,850 | ||
| Recoverable amount | 1,000 | ||||
| Impairment loss | 850 | ||||
In accordance with paragraph 104 of IAS 36, the impairment loss of CU850 is allocated to the assets in the unit by first reducing the carrying amount of goodwill.
Therefore, CU500 of the CU850 impairment loss for the unit is allocated to the goodwill. In accordance with paragraph C6 of Appendix C of IAS 36, if the partially‑owned subsidiary is itself a cash‑generating unit, the goodwill impairment loss is allocated to the controlling and non‑controlling interests on the same basis as that on which profit or loss is allocated. In this example, profit or loss is allocated on the basis of relative ownership interests. Because the goodwill is recognised only to the extent of Parent’s 80 per cent ownership interest in Subsidiary, Parent recognises only 80 per cent of that goodwill impairment loss (ie CU400).
The remaining impairment loss of CU350 is recognised by reducing the carrying amounts of Subsidiary’s identifiable assets (see Schedule 2).
Schedule 2. Allocation of the impairment loss for Subsidiary at the end of 20X3
| End of 20X3 | Goodwill | Net identifiable assets | Total | ||
|---|---|---|---|---|---|
| CU | CU | CU | |||
| Carrying amount | 400 | 1,350 | 1,750 | ||
| Impairment loss | (400) | (350) | (750) | ||
| Carrying amount after impairment loss | – | 1,000 | 1,000 | ||
In this example, tax effects are ignored.
Parent acquires an 80 per cent ownership interest in Subsidiary for CU2,100 on 1 January 20X3. At that date, Subsidiary’s net identifiable assets have a fair value of CU1,500. Parent chooses to measure the non‑controlling interests at fair value, which is CU350. Goodwill of CU950 is the difference between the aggregate of the consideration transferred and the amount of the non‑controlling interests (CU2,100 + CU350) and the net identifiable assets (CU1,500).
The assets of Subsidiary together are the smallest group of assets that generate cash inflows that are largely independent of the cash inflows from other assets or groups of assets. Therefore, Subsidiary is a cash‑generating unit. Because other cash‑generating units of Parent are expected to benefit from the synergies of the combination, the goodwill of CU500 related to those synergies has been allocated to other cash‑generating units within Parent. Because Subsidiary includes goodwill within its carrying amount, it must be tested for impairment annually, or more frequently if there is an indication that it might be impaired (see paragraph 90 of IAS 36).
At the end of 20X3, Parent determines that the recoverable amount of cash‑generating unit Subsidiary is CU1,650. The carrying amount of the net assets of Subsidiary, excluding goodwill, is CU1,350.
Schedule 1. Testing Subsidiary for impairment at the end of 20X3
| End of 20X3 | Goodwill | Net identifiable assets | Total | ||
|---|---|---|---|---|---|
| CU | CU | CU | |||
| Carrying amount | 450 | 1,350 | 1,800 | ||
| Recoverable amount | 1,650 | ||||
| Impairment loss | 150 | ||||
In accordance with paragraph 104 of IAS 36, the impairment loss of CU150 is allocated to the assets in the unit by first reducing the carrying amount of goodwill.
Therefore, the full amount of impairment loss of CU150 for the unit is allocated to the goodwill. In accordance with paragraph C6 of Appendix C of IAS 36, if the partially‑owned subsidiary is itself a cash‑generating unit, the goodwill impairment loss is allocated to the controlling and non‑controlling interests on the same basis as that on which profit or loss is allocated.
In this example, tax effects are ignored.
Suppose that, for the business combination described in paragraph IE68A of Example 7B, the assets of Subsidiary will generate cash inflows together with other assets or groups of assets of Parent. Therefore, rather than Subsidiary being the cash‑generating unit for the purposes of impairment testing, Subsidiary becomes part of a larger cash‑generating unit, Z. Other cash‑generating units of Parent are also expected to benefit from the synergies of the combination. Therefore, goodwill related to those synergies, in the amount of CU500, has been allocated to those other cash‑generating units. Z’s goodwill related to previous business combinations is CU800.
Because Z includes goodwill within its carrying amount, both from Subsidiary and from previous business combinations, it must be tested for impairment annually, or more frequently if there is an indication that it might be impaired (see paragraph 90 of IAS 36).
At the end of 20X3, Parent determines that the recoverable amount of cash‑generating unit Z is CU3,300. The carrying amount of the net assets of Z, excluding goodwill, is CU2,250.
Schedule 3. Testing Z for impairment at the end of 20X3
| End of 20X3 | Goodwill | Net identifiable assets | Total | ||
|---|---|---|---|---|---|
| CU | CU | CU | |||
| Carrying amount | 1,250 | 2,250 | 3,500 | ||
| Recoverable amount | 3,300 | ||||
| Impairment loss | 200 | ||||
In accordance with paragraph 104 of IAS 36, the impairment loss of CU200 is allocated to the assets in the unit by first reducing the carrying amount of goodwill. Therefore, the full amount of impairment loss of CU200 for cash‑generating unit Z is allocated to the goodwill. In accordance with paragraph C7 of Appendix C of IAS 36, if the partially‑owned Subsidiary forms part of a larger cash‑generating unit, the goodwill impairment loss would be allocated first to the parts of the cash‑generating unit, Z, and then to the controlling and non‑controlling interests of the partially‑owned Subsidiary.
Parent allocates the impairment loss to the parts of the cash‑generating unit on the basis of the relative carrying values of the goodwill of the parts before the impairment. In this example Subsidiary is allocated 36 per cent of the impairment (450/1,250). The impairment loss is then allocated to the controlling and non‑controlling interests on the same basis as that on which profit or loss is allocated.
In this example, tax effects are ignored.
Entity M has three cash‑generating units: A, B and C. The carrying amounts of those units do not include goodwill. There are adverse changes in the technological environment in which M operates. Therefore, M conducts impairment tests of each of its cash‑generating units. At the end of 20X0, the carrying amounts of A, B and C are CU100, CU150 and CU200 respectively.
The operations are conducted from a headquarters. The carrying amount of the headquarters is CU200: a headquarters building of CU150 and a research centre of CU50. The relative carrying amounts of the cash‑generating units are a reasonable indication of the proportion of the headquarters building devoted to each cash‑generating unit. The carrying amount of the research centre cannot be allocated on a reasonable basis to the individual cash‑generating units.
The remaining estimated useful life of cash‑generating unit A is 10 years. The remaining useful lives of B, C and the headquarters are 20 years. The headquarters is depreciated on a straight‑line basis.
The recoverable amount (ie higher of value in use and fair value less costs of disposal) of each cash‑generating unit is based on its value in use. Value in use is calculated using a pre‑tax discount rate of 15 per cent.
In accordance with paragraph 102 of IAS 36, M first identifies all the corporate assets that relate to the individual cash‑generating units under review. The corporate assets are the headquarters building and the research centre.
M then decides how to deal with each of the corporate assets:
the carrying amount of the headquarters building can be allocated on a reasonable and consistent basis to the cash‑generating units under review; and
the carrying amount of the research centre cannot be allocated on a reasonable and consistent basis to the individual cash‑generating units under review.
The carrying amount of the headquarters building is allocated to the carrying amount of each individual cash‑generating unit. A weighted allocation basis is used because the estimated remaining useful life of A’s cash‑generating unit is 10 years, whereas the estimated remaining useful lives of B and C’s cash‑generating units are 20 years.
Schedule 1. Calculation of a weighted allocation of the carrying amount of the headquarters building
| End of 20X0 | A | B | C | Total | ||
|---|---|---|---|---|---|---|
| CU | CU | CU | CU | |||
| Carrying amount | 100 | 150 | 200 | 450 | ||
| Useful life | 10 years | 20 years | 20 years | |||
| Weighting based on useful life | 1 | 2 | 2 | |||
| Carrying amount after weighting | 100 | 300 | 400 | 800 | ||
| Pro-rata allocation of the building | 12% | 38% | 50% | 100% | ||
| (100/800) | (300/800) | (400/800) | ||||
| Allocation of the carrying amount of the building (based on pro-rata above) | 19 | 56 | 75 | 150 | ||
| Carrying amount (after allocation of the building) | 119 | 206 | 275 | 600 | ||
Paragraph 102 of IAS 36 requires first that the recoverable amount of each individual cash‑generating unit be compared with its carrying amount, including the portion of the carrying amount of the headquarters building allocated to the unit, and any resulting impairment loss recognised. Paragraph 102 of IAS 36 then requires the recoverable amount of M as a whole (ie the smallest group of cash‑generating units that includes the research centre) to be compared with its carrying amount, including both the headquarters building and the research centre.
Schedule 2. Calculation of A, B, C and M’s value in use at the end of 20X0
It is assumed that the research centre generates additional future cash flows for the entity as a whole. Therefore, the sum of the value in use of each individual cash-generating unit is less than the value in use of the business as a whole. The additional cash flows are not attributable to the headquarters building.
Schedule 3. Impairment testing A, B and C
| End of 20X0 | A | B | C |
|---|---|---|---|
| CU | CU | CU | |
| Carrying amount (after allocation of the building) (Schedule 1) | 119 | 206 | 275 |
| Recoverable amount (Schedule 2) | 199 | 164 | 271 |
| Impairment loss | 0 | (42) | (4) |
The next step is to allocate the impairment losses between the assets of the cash‑generating units and the headquarters building.
Schedule 4. Allocation of the impairment losses for cash‑generating units B and C
| Cash-generating unit | B | C | ||
|---|---|---|---|---|
| CU | CU | |||
| To headquarters building | (12) | (42 × 56 /206) | (1) | (4 × 75 /275) |
| To assets in cash-generating unit | (30) | (42 × 150 /206) | (3) | (4 × 200 /275) |
| (42) | (4) |
Because the research centre could not be allocated on a reasonable and consistent basis to A, B and C’s cash‑generating units, M compares the carrying amount of the smallest group of cash‑generating units to which the carrying amount of the research centre can be allocated (ie M as a whole) to its recoverable amount.
Schedule 5. Impairment testing the smallest group of cash‑generating units to which the carrying amount of the research centre can be allocated (ie M as a whole)
| End of 20X0 | A | B | C | Building | Research centre | M | |||
|---|---|---|---|---|---|---|---|---|---|
| CU | CU | CU | CU | CU | CU | ||||
| Carrying amount | 100 | 150 | 200 | 150 | 50 | 650 | |||
| Impairment loss arising from the first step of the test | – | (30) | (3) | (13) | – | (46) | |||
| Carrying amount after the first step of the test | 100 | 120 | 197 | 137 | 50 | 604 | |||
| Recoverable amount (Schedule 2) | 720 | ||||||||
| Impairment loss for the ‘larger’ cash-generating unit | 0 | ||||||||
Therefore, no additional impairment loss results from the application of the impairment test to M as a whole. Only an impairment loss of CU46 is recognised as a result of the application of the first step of the test to A, B and C.
The purpose of this example is to illustrate the disclosures required by paragraphs 134 and 135 of IAS 36.
Entity M is a multinational manufacturing firm that uses geographical segments for reporting segment information. M’s three reportable segments are Europe, North America and Asia. Goodwill has been allocated for impairment testing purposes to three individual cash‑generating units—two in Europe (units A and B) and one in North America (unit C)—and to one group of cash‑generating units (comprising operation XYZ) in Asia. Units A, B and C and operation XYZ each represent the lowest level within M at which the goodwill is monitored for internal management purposes.
M acquired unit C, a manufacturing operation in North America, in December 20X2. Unlike M’s other North American operations, C operates in an industry with high margins and high growth rates, and with the benefit of a 10‑year patent on its primary product. The patent was granted to C just before M’s acquisition of C. As part of accounting for the acquisition of C, M recognised, in addition to the patent, goodwill of CU3,000 and a brand name of CU1,000. M’s management has determined that the brand name has an indefinite useful life [ Refer: IAS 38 paragraph 88] . M has no other intangible assets with indefinite useful lives.
The carrying amounts of goodwill and intangible assets with indefinite useful lives [ Refer: IAS 38 paragraph 88] allocated to units A, B and C and to operation XYZ are as follows:
| Goodwill | Intangible assets with indefinite useful lives | |
|---|---|---|
| CU | CU | |
| A | 350 | |
| B | 450 | |
| C | 3,000 | 1,000 |
| XYZ | 1,200 | |
| Total | 5,000 | 1,000 |
During the year ending 31 December 20X3, M determines that there is no impairment of any of its cash‑generating units or group of cash‑generating units containing goodwill or intangible assets with indefinite useful lives [ Refer: IAS 38 paragraph 88] . The recoverable amounts (ie higher of value in use and fair value less costs of disposal) of those units and group of units are determined on the basis of value in use calculations. M has determined that the recoverable amount calculations are most sensitive to changes in the following assumptions:
| Units A and B | Unit C | Operation XYZ |
|---|---|---|
| Gross margin during the budget period (budget period is 4 years) | 5-year US government bond rate during the budget period (budget period is 5 years) | Gross margin during the budget period (budget period is 5 years) |
| Raw materials price inflation during the budget period | Raw materials price inflation during the budget period | Japanese yen/US dollar exchange rate during the budget period |
| Market share during the budget period | Market share during the budget period | Market share during the budget period |
| Growth rate used to extrapolate cash flows beyond the budget period | Growth rate used to extrapolate cash flows beyond the budget period | Growth rate used to extrapolate cash flows beyond the budget period |
Gross margins during the budget period for A, B and XYZ are estimated by M based on average gross margins achieved in the period immediately before the start of the budget period, increased by 5 per cent per year for anticipated efficiency improvements. A and B produce complementary products and are operated by M to achieve the same gross margins.
Market shares during the budget period are estimated by M based on average market shares achieved in the period immediately before the start of the budget period, adjusted each year for any anticipated growth or decline in market shares. M anticipates that:
market shares for A and B will differ, but will each grow during the budget period by 3 per cent per year as a result of ongoing improvements in product quality.
C’s market share will grow during the budget period by 6 per cent per year as a result of increased advertising expenditure and the benefits from the protection of the 10‑year patent on its primary product.
XYZ’s market share will remain unchanged during the budget period as a result of the combination of ongoing improvements in product quality and an anticipated increase in competition.
A and B purchase raw materials from the same European suppliers, whereas C’s raw materials are purchased from various North American suppliers. Raw materials price inflation during the budget period is estimated by M to be consistent with forecast consumer price indices published by government agencies in the relevant European and North American countries.
The 5‑year US government bond rate during the budget period is estimated by M to be consistent with the yield on such bonds at the beginning of the budget period. The Japanese yen/US dollar exchange rate is estimated by M to be consistent with the average market forward exchange rate over the budget period.
M uses steady growth rates to extrapolate beyond the budget period cash flows for A, B, C and XYX. The growth rates for A, B and XYZ are estimated by M to be consistent with publicly available information about the long‑term average growth rates for the markets in which A, B and XYZ operate. However, the growth rate for C exceeds the long‑term average growth rate for the market in which C operates. M’s management is of the opinion that this is reasonable in the light of the protection of the 10‑year patent on C’s primary product.
M includes the following disclosure in the notes to its financial statements for the year ending 31 December 20X3.
Impairment Tests for Goodwill and Intangible Assets with Indefinite Lives
Goodwill has been allocated for impairment testing purposes to three individual cash‑generating units—two in Europe (units A and B) and one in North America (unit C)—and to one group of cash‑generating units (comprising operation XYZ) in Asia. The carrying amount of goodwill allocated to unit C and operation XYZ is significant in comparison with the total carrying amount of goodwill, but the carrying amount of goodwill allocated to each of units A and B is not. Nevertheless, the recoverable amounts of units A and B are based on some of the same key assumptions, and the aggregate carrying amount of goodwill allocated to those units is significant.
The recoverable amount of operation XYZ has been determined based on a value in use calculation. That calculation uses cash flow projections based on financial budgets approved by management covering a five‑year period, and a discount rate of 8.4 per cent. Cash flows beyond that five‑year period have been extrapolated using a steady 6.3 per cent growth rate. This growth rate does not exceed the long‑term average growth rate for the market in which XYZ operates. Management believes that any reasonably possible change in the key assumptions on which XYZ’s recoverable amount is based would not cause XYZ’s carrying amount to exceed its recoverable amount.
The recoverable amount of unit C has also been determined based on a value in use calculation. That calculation uses cash flow projections based on financial budgets approved by management covering a five‑year period, and a discount rate of 9.2 per cent. C’s cash flows beyond the five‑year period are extrapolated using a steady 12 per cent growth rate. This growth rate exceeds by 4 percentage points the long‑term average growth rate for the market in which C operates. However, C benefits from the protection of a 10‑year patent on its primary product, granted in December 20X2. Management believes that a 12 per cent growth rate is reasonable in the light of that patent. Management also believes that any reasonably possible change in the key assumptions on which C’s recoverable amount is based would not cause C’s carrying amount to exceed its recoverable amount.
The recoverable amounts of units A and B have been determined on the basis of value in use calculations. Those units produce complementary products, and their recoverable amounts are based on some of the same key assumptions. Both value in use calculations use cash flow projections based on financial budgets approved by management covering a four‑year period, and a discount rate of 7.9 per cent. Both sets of cash flows beyond the four‑year period are extrapolated using a steady 5 per cent growth rate. This growth rate does not exceed the long‑term average growth rate for the market in which A and B operate. Cash flow projections during the budget period for both A and B are also based on the same expected gross margins during the budget period and the same raw materials price inflation during the budget period. Management believes that any reasonably possible change in any of these key assumptions would not cause the aggregate carrying amount of A and B to exceed the aggregate recoverable amount of those units.
The key assumptions shown in this table for units A and B are only those that are used in the recoverable amount calculations for both units.