Ravenswood Ltd: impairment of a CGU containing goodwill and a revalued asset
Ravenswood Ltd tests its bottling plant for impairment each year. The plant is the smallest group of assets that generates independent cash inflows and is also an operating segment. At 31 December 20X6, before any impairment, the plant's assets are: plant and machinery with a carrying amount of $400,000 (stated under the revaluation model, including a $60,000 revaluation surplus held in OCI), capitalised development costs of $100,000 (cost model, remaining life five years), and goodwill of $100,000 from the 20X4 acquisition of a bottling business, which was allocated to the plant. Demand has fallen sharply and the plant runs at 60% capacity. Management estimates fair value less costs of disposal at $430,000 and value in use at $460,000. No individual asset's own recoverable amount is below the carrying amount that would result from the allocation below.
1. Determine the recoverable amount of the plant and the amount of the impairment loss. Explain the level at which the test is performed.
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Level of testing. The plant is the smallest identifiable group of assets generating largely independent cash inflows, so it is the CGU. Because goodwill is allocated to it, the CGU must be tested annually whether or not there are indicators, and the level must not be larger than an operating segment before aggregation – the plant qualifies.
Recoverable amount. The higher of:
- fair value less costs of disposal: 430,000
- value in use: 460,000 = $460,000.
Impairment loss. Carrying amount of the CGU = 400,000 + 100,000 + 100,000 = $600,000 Loss = 600,000 - 460,000 = $140,000.
Note that the loss is not measured asset by asset: the bottling plant's assets do not generate independent cash flows, so the cash-flow forecasts and the impairment test are performed at the CGU level. The recoverable amount of $460,000 includes the cash flows from all three asset groups together.
2. Allocate the $140,000 impairment loss and state, for each component, where it is recognised.
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Step 1 – Goodwill first. The loss is allocated to goodwill before any other asset: goodwill of $100,000 is written off in full. Charged to profit or loss.
Step 2 – Remaining $40,000 pro rata over the other assets of the CGU.
| Asset | Carrying amount | Share | Loss allocated |
|---|---|---|---|
| Plant and machinery | 400,000 | 80% | 32,000 |
| Development costs | 100,000 | 20% | 8,000 |
| Total | 500,000 | 100% | 40,000 |
No asset is reduced below the highest of its own fair value less costs of disposal, value in use or zero – the question states this constraint is not breached.
Where recognised:
- Goodwill $100,000 and development costs $8,000 → profit or loss.
- Plant and machinery $32,000 → other comprehensive income. The asset is carried under the revaluation model, so an impairment loss on it is treated as a revaluation decrease under IAS 16: it is debited against the revaluation surplus in respect of that class (the surplus is $60,000, so the whole $32,000 is absorbed) rather than being taken to profit or loss. Any excess over the surplus would be taken to profit or loss.
Total charge to profit or loss = $108,000; total charge to OCI = $32,000.
3. In 20X7 demand recovers and the plant's recoverable amount rises sharply. Explain which, if any, of the 20X6 impairment losses can be reversed and how the reversal would be measured and presented.
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Goodwill – never reversed. IAS 36 prohibits reversal of an impairment loss recognised for goodwill in any subsequent period, because any later recovery is by definition an internally generated item.
Development costs – reversible. A reversal is recognised in profit or loss if, and only if, there has been a change in the estimates used to determine the recoverable amount since the last impairment test, and the indicators that caused the original loss have reversed. The reversal is capped at the carrying amount that would have been determined (net of amortisation) had no impairment been recognised – here, the original $100,000 less two further years of amortisation.
Plant and machinery – reversible, through OCI. The reversal is treated as a revaluation increase under IAS 16. Because the original $32,000 was charged to OCI, the reversal is credited to OCI and restores the revaluation surplus; it is capped at the carrying amount that would have been determined had no impairment been recognised (i.e. the revalued amount less depreciation since). Any amount above that cap is not recognised.
The overall point: the symmetry between where the loss went and where the reversal goes is the key judgement, and the cap prevents an entity from writing an asset back above its undisturbed carrying amount.