Impairment of a Cash-Generating Unit and Reversal Judgements
Northgate Chemicals Ltd operates a single plant as a cash-generating unit (CGU). At 31 December 20X5 the CGU's carrying amount is BDT 90,000,000, comprising goodwill BDT 10,000,000, plant BDT 60,000,000 and other net assets BDT 20,000,000. The recoverable amount, being value in use, is BDT 72,000,000. In 20X6, demand recovers sharply and the recoverable amount rises to BDT 88,000,000; carrying amount before any reversal is BDT 72,000,000. The finance director argues that the full BDT 18,000,000 impairment should be reversed in 20X6 because the recoverable amount now exceeds the original carrying amount. Separately, the company capitalised BDT 4,000,000 of development costs in 20X4; the project was abandoned in 20X6.
1. Allocate the 20X5 impairment loss across the CGU and explain the treatment of goodwill.
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The impairment loss is BDT 90,000,000 - BDT 72,000,000 = BDT 18,000,000. It is allocated first to goodwill, reducing it from BDT 10,000,000 to nil. The remaining BDT 8,000,000 is allocated to the other assets pro rata to their carrying amounts: plant BDT 60,000,000 and other net assets BDT 20,000,000, total BDT 80,000,000.
Plant absorbs 60/80 x BDT 8,000,000 = BDT 6,000,000, reducing it to BDT 54,000,000. Other net assets absorb 20/80 x BDT 8,000,000 = BDT 2,000,000, reducing them to BDT 18,000,000. No asset is reduced below its own recoverable amount or fair value less costs of disposal; if it were, the excess would be reallocated to the other assets.
Goodwill impairment is never reversed. The FD's plan to reverse the full BDT 18,000,000 in 20X6 is therefore wrong in principle.
2. Determine the 20X6 reversal and explain the ceiling and goodwill rules, and treat the abandoned development costs.
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A reversal is recognised only to the extent that the recoverable amount exceeds the carrying amount, and only up to what the carrying amount would have been had no impairment been recognised (net of depreciation). The BDT 10,000,000 goodwill element cannot be reversed.
Assume the plant and other net assets would have carried BDT 66,000,000 and BDT 22,000,000 respectively absent the impairment. The reversal is capped so that each asset does not exceed that ceiling. The maximum reversal is therefore the lower of the excess recoverable amount (BDT 88,000,000 - BDT 72,000,000 = BDT 16,000,000) and the headroom to the ceiling. Goodwill's BDT 10,000,000 is excluded entirely.
The reversal is allocated to the non-goodwill assets pro rata, not to goodwill. The FD's proposal to reverse BDT 18,000,000 including goodwill is rejected.
The BDT 4,000,000 capitalised development costs must be written off in 20X6 because the project has been abandoned; the criteria for capitalisation are no longer met, and the write-off is recognised in profit or loss.