Goodwill That Refused to Behave
In January 20X5, Marden Group acquired 80% of Sable Ltd for £180m cash. At acquisition, Sable's identifiable net assets had a fair value of £150m; the group measures non-controlling interests at the proportionate share of net assets. Sable is a single cash-generating unit. At 31 December 20X5, Sable's recoverable amount is £155m and the carrying amount of its net assets (including goodwill) is £190m. Separately, Marden holds a 30% associate, Torrin Ltd, carried at £40m under the equity method. Torrin has suffered trading losses and its recoverable amount is now £28m; Marden has no legal or constructive obligation to fund Torrin's losses. The finance director proposes to impair only the group's share of Sable's goodwill and to write Torrin down to £28m through goodwill.
1. Compute the goodwill arising on Sable and the impairment required at 31 December 20X5, and evaluate the FD's proposal.
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Goodwill at acquisition.
- Consideration: £180m
- NCI at proportionate share: 20% × £150m = £30m
- Less fair value of identifiable net assets: (£150m)
- Goodwill = £180m + £30m − £150m = £60m
Impairment testing of the Sable CGU.
Under IAS 36, the carrying amount of the CGU (including goodwill) is compared with its recoverable amount. The CGU carrying amount is £190m; recoverable amount is £155m, so the impairment loss is £35m.
Allocation of the impairment. The loss is allocated first to goodwill, then to other assets pro rata. Goodwill is £60m, so the full £35m is absorbed by goodwill:
- Goodwill written down from £60m to £25m.
Allocation between group and NCI. Because NCI is measured at the proportionate share of net assets, goodwill is recognised only for the parent's 80% share. The impairment of goodwill is therefore allocated 80% to the group (£28m) and 20% to NCI (£7m) - but since NCI was measured proportionately, no goodwill was attributed to NCI, so the entire £35m impairment of goodwill is borne by the group's share of goodwill. (If NCI had been measured at fair value, goodwill would include a notional NCI share and the impairment would be split 80:20.)
The FD's proposal is wrong. Impairing 'only the group's share' would recognise £28m and leave £7m of goodwill unimpaired, overstating net assets by £7m. The CGU test is performed on the whole CGU; the impairment is £35m and, under the proportionate method, the whole £35m reduces the group's goodwill.
Torrin (associate). An investment in an associate is tested for impairment under IAS 36 as a single asset (or as part of a larger CGU if it does not generate independent cash flows). The recoverable amount is £28m and the carrying amount is £40m, so an impairment of £12m is required. It is recognised in profit or loss and cannot be charged against goodwill - goodwill is not recognised separately for an equity-accounted associate, and the write-down reduces the carrying amount of the investment itself. The FD's proposal to write it down 'through goodwill' is not permitted.
2. Discuss the judgements and disclosure implications arising from the impairment, including the treatment of the unrecognised NCI goodwill.
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Key judgements.
- CGU identification. Sable is treated as a single CGU. If Sable had multiple cash-generating units, the impairment would be allocated differently and the outcome could change materially. The auditor would challenge whether Sable's operations are genuinely a single CGU or whether they generate independent cash inflows.
- Recoverable amount. Recoverable amount is the higher of fair value less costs of disposal and value in use. The £155m figure must be supported by a value-in-use calculation whose cash-flow projections, growth rates and discount rate are all judgements. A small change in the discount rate could eliminate the impairment entirely or increase it substantially.
- NCI measurement. The proportionate method means no goodwill is attributed to NCI. This creates an inconsistency with the fair-value method and affects the allocation of impairment. The group should disclose which method was used.
- Associate impairment. The £12m write-down is a judgement about whether Torrin's losses are 'other than temporary'. IAS 28 requires the investor to consider whether there is objective evidence of impairment; the absence of an obligation to fund losses does not prevent the write-down, but it does mean the investment cannot be carried below zero without recognising a liability.
Disclosure implications (IAS 36.126-137).
- The impairment loss of £35m (Sable) and £12m (Torrin) must be disclosed by class of asset and in the segment note.
- For the Sable CGU, disclose the recoverable amount, whether it is fair value less costs of disposal or value in use, the discount rate used, the growth rate and the period of cash-flow projections.
- Disclose the carrying amount of goodwill allocated to the CGU (£25m after impairment) and the events that led to the impairment.
- For Torrin, disclose the nature of the investment, the impairment and the reasons.
Unrecognised NCI goodwill. Because NCI is measured proportionately, the goodwill recognised (£60m) excludes the NCI's share of the acquiree's goodwill. The impairment of £35m therefore falls entirely on the group. This is a known consequence of the proportionate method and should be explained so users can compare groups using different NCI policies. The statement of changes in equity and the goodwill note should reconcile opening and closing goodwill, showing the impairment separately.