Goodwill Impairment and Cash-Generating Unit Allocation
Harbour Group acquired a subsidiary two years ago, recognising goodwill of BDT 900m. The subsidiary is not a separate cash-generating unit (CGU); it is part of a larger CGU, the 'Coastal Division', with carrying amount BDT 3,400m including allocated goodwill of BDT 600m. Head office assets of BDT 500m support all divisions and cannot be allocated on a reasonable and consistent basis. At year-end, the recoverable amount of the Coastal Division is BDT 2,700m. The group also holds a separate CGU, 'Inland', with carrying amount BDT 1,200m and recoverable amount BDT 1,350m. Management argues no impairment is needed because the group as a whole has positive net assets and the Inland surplus 'offsets' Coastal.
1. Calculate the impairment for the Coastal Division, showing how unallocated head office assets are treated, and rebut management's offsetting argument.
Read the worked answer
Step 1 – Test CGUs individually. Impairment is tested at the lowest level that generates largely independent cash inflows. Coastal and Inland are separate CGUs; a surplus in Inland cannot offset a deficit in Coastal. Management's net-asset argument is wrong.
Step 2 – Corporate assets. Head office assets of BDT 500m cannot be allocated on a reasonable and consistent basis. The standard approach is a two-step bottom-up/top-down test:
- Test the CGU without the corporate assets: Coastal carrying BDT 3,400m vs recoverable BDT 2,700m → indicative impairment BDT 700m.
- Test the CGU including a reasonable share of corporate assets. If a notional allocation is made (say proportionally), the carrying amount rises, increasing the impairment, but the impairment attributable to corporate assets is recognised separately.
Step 3 – Allocate the loss. The BDT 700m loss is allocated first to goodwill allocated to Coastal (BDT 600m), then pro rata to other assets of the CGU. Goodwill is written down to BDT 600m – BDT 600m = nil within Coastal. The remaining BDT 100m reduces other assets pro rata, but no asset below its own recoverable amount.
Step 4 – Inland. Carrying BDT 1,200m < recoverable BDT 1,350m, so no impairment; the BDT 150m headroom is not recognised as a gain and cannot be transferred.
Conclusion: recognise BDT 700m impairment in Coastal, eliminating allocated goodwill first. The unallocated goodwill of BDT 300m (900 – 600) is tested at the group level of CGUs to which it relates.
2. Explain the disclosure and reversal rules that apply after the impairment is recognised.
Read the worked answer
Reversal. An impairment loss recognised for goodwill is never reversed. For other assets in the CGU, reversal is permitted if there has been a change in the estimates used to determine recoverable amount since the last impairment, but only up to what the carrying amount would have been (net of depreciation) had no impairment been recognised. The reversal is recognised in profit or loss unless the asset was previously revalued, in which case it goes to OCI under the revaluation route.
Disclosure. For each material impairment: the events and circumstances leading to it, the amount, the recoverable amount and whether it is fair value less costs of disposal or value in use, the discount rate used for value in use, and the segment reporting. For goodwill, disclose the allocation to CGUs, the basis of recoverable amount, key assumptions, and sensitivity. The exam expects you to note that goodwill reversals are prohibited and that the Inland headroom is not a reversal candidate.