CGU Impairment and Store-Closure Provision
Bluewater Foods Ltd is a private Canadian food processor reporting under IFRS. Its retail division is a cash-generating unit (CGU) with a carrying amount of $5,200,000 at December 31, 20X5, comprising goodwill of $1,000,000, property, plant and equipment of $3,200,000, a finite-life intangible of $400,000, and a right-of-use asset of $600,000. Due to a new competitor and rising costs, management estimates the CGU's recoverable amount at $4,000,000. Management also plans to close 10 of its 40 stores in 20X6. Estimated closure costs are lease termination penalties of $300,000, employee severance of $250,000, retraining of remaining staff of $80,000, and marketing to retain customers of $50,000. A supply contract for the stores being closed has future minimum payments of $800,000; Bluewater expects to receive $300,000 of benefits from the contract before closure, and the supplier has offered to cancel the contract for a $200,000 penalty. The plan has been approved by the board, and affected employees have been informed. Management has not yet recorded any impairment or provision.
1. Calculate and allocate the impairment loss for the retail CGU.
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Impairment calculation
Carrying amount = $5,200,000. Recoverable amount = $4,000,000. Impairment loss = $1,200,000.
Allocation under IAS 36
First reduce goodwill: goodwill of $1,000,000 is written off. Remaining loss = $200,000. Allocate the remaining $200,000 pro rata to the other CGU assets: PPE $3,200,000, intangible $400,000, right-of-use asset $600,000. Total = $4,200,000.
- PPE: $200,000 x 3,200/4,200 = $152,381
- Intangible: $200,000 x 400/4,200 = $19,048
- Right-of-use asset: $200,000 x 600/4,200 = $28,571 Total remaining allocation = $200,000.
Carrying amounts after impairment
- Goodwill: $0
- PPE: $3,047,619
- Intangible: $380,952
- Right-of-use asset: $571,429 Total = $4,000,000.
Judgements
The recoverable amount is the higher of fair value less costs of disposal and value in use. Management should document the cash-flow projections, discount rate, and market evidence. Inventory and receivables are not included in this CGU impairment allocation because they are measured under IAS 2 and IFRS 9. Goodwill impairment cannot be reversed. The loss is recognized in profit or loss.
2. Determine the restructuring provision under IAS 37, including the onerous supply contract.
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Restructuring provision under IAS 37
A provision is recognized when there is a present obligation from a past event, probable outflow, and reliable estimate. For restructuring, there must also be a detailed formal plan and a valid expectation in those affected that the plan will be carried out. The board has approved the plan and employees have been informed, so the restructuring obligation exists.
Recognize:
- Lease termination penalties: $300,000. These are directly caused by the closure and unavoidable.
- Employee severance: $250,000. A valid expectation has been created.
- Onerous supply contract: compare the unavoidable cost of fulfilling the contract with the penalty. Fulfilling costs $800,000 - $300,000 benefits = $500,000. The cancellation penalty is $200,000. The unavoidable cost is the lower of $500,000 and $200,000, so recognize $200,000. Total provision = $300,000 + $250,000 + $200,000 = $750,000.
Do not recognize:
- Retraining of $80,000 and marketing of $50,000. These are future operating costs, not incremental costs of the restructuring, and no obligation exists at year-end.
Judgement
If the lease penalty is not yet legally unavoidable or the employees have not been informed, the timing changes. The provision should be measured at the best estimate and discounted if the effect is material.
3. Explain the presentation and disclosure requirements for the impairment and restructuring, and identify the main judgement areas.
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Presentation and disclosure
- Impairment loss of $1,200,000 is recognized in profit or loss. It should not be offset against restructuring costs. Present it in a line that reflects its nature, such as impairment of non-current assets, or disclose it separately if material.
- Disclose the CGU, the impairment amount by asset class, the recoverable amount of $4,000,000, whether it is fair value less costs of disposal or value in use, the discount rate, and the key assumptions. If fair value less costs of disposal is used, disclose the valuation technique.
- Disclose the restructuring provision of $750,000, including the nature of the obligation, expected timing, uncertainties, and movements during the year. IAS 37 requires a reconciliation of opening and closing provisions.
- Disclose the onerous contract separately if material, including the $200,000 provision and the basis for the unavoidable cost.
- Consider segment disclosure if the retail division is a reportable segment and the closure is material.
Judgement areas
Management must support the recoverable amount, the store closure plan, the employee communication date, and the lease penalty. Small changes in the discount rate or cash flows can change the impairment. The auditor should challenge the assumptions, especially because the impairment and provision are both material and involve significant estimation.