Impairment Testing of a Cash-Generating Unit with Goodwill
Coastal Manufacturing Ltd operates three divisions treated as separate cash-generating units (CGUs): North, South and West. Coastal acquired South two years ago, recognising goodwill of $150,000 allocated to the South CGU. At 31 December 20X5, South shows indicators of impairment following the loss of a major customer. The carrying amounts of South's net assets are: goodwill $150,000; plant $600,000; intangibles (patent) $100,000; inventory $80,000; receivables $70,000. The recoverable amount of the South CGU is estimated at $750,000. Coastal's CFO argues that because the CGU's fair value less costs of disposal is $780,000, no impairment is needed and the value-in-use calculation can be ignored.
1. Determine the recoverable amount of the South CGU and calculate the impairment loss.
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Recoverable amount is the higher of fair value less costs of disposal and value in use. The CFO's argument is wrong: Coastal cannot simply elect the higher of the two measures - it must use the higher of the two, but it must still determine value in use unless the asset's fair value less costs of disposal already exceeds carrying amount (which it does not here, since $780,000 < $1,000,000).
- Fair value less costs of disposal: $780,000
- Value in use: not given, but the recoverable amount cannot be less than $780,000. Assume value in use is lower and recoverable amount = $780,000.
Carrying amount of CGU = $150,000 + $600,000 + $100,000 + $80,000 + $70,000 = $1,000,000.
Impairment loss = $1,000,000 − $780,000 = $220,000.
2. Allocate the impairment loss across the CGU's assets and explain the treatment of inventory and receivables.
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The loss is allocated in the following order:
- First, to goodwill allocated to the CGU, up to its carrying amount: $150,000.
- Then, to the other assets pro rata to their carrying amounts, but only to the extent that no asset is written below its own recoverable amount.
Remaining loss: $220,000 − $150,000 = $70,000 allocated pro rata across plant ($600,000), patent ($100,000), inventory ($80,000) and receivables ($70,000) - total $850,000.
| Asset | Carrying | Share | Allocation |
|---|---|---|---|
| Plant | $600,000 | 600/850 | $49,412 |
| Patent | $100,000 | 100/850 | $8,235 |
| Inventory | $80,000 | 80/850 | $6,588 |
| Receivables | $70,000 | 70/850 | $5,765 |
However, inventory and receivables are measured under their own standards (lower of cost and net realisable value; amortised cost less impairment). They should not absorb CGU impairment under the PP&E/intangibles standard. In practice the $70,000 is allocated only across plant and patent (total $700,000): plant $60,000, patent $10,000. Coastal should verify each asset's own recoverable amount before finalising the allocation.
3. Explain the disclosure and subsequent accounting implications of the goodwill impairment.
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Subsequent accounting: Once goodwill is impaired, the write-down is not reversed in future periods, even if conditions improve - this applies to all goodwill impairment. The reduced carrying amounts of plant and patent are depreciated/amortised over their remaining useful lives, so future depreciation charges fall.
Disclosures required:
- The amount of the impairment loss recognised and the line item in the statement of profit or loss.
- The events and circumstances leading to the impairment (loss of a major customer).
- The recoverable amount and whether it is fair value less costs of disposal or value in use.
- The discount rate used in the value-in-use calculation.
- For goodwill, the carrying amount allocated to the CGU and the basis of the recoverable amount determination.
Coastal must also reassess whether the allocation of goodwill to South remains consistent with how the entity monitors goodwill internally.