Peak Retail: Goodwill, Allocable and Unallocable Corporate Assets
Peak Retail Group Ltd (PRG) prepares consolidated financial statements to 31 December. It has two cash-generating units (CGUs): Hong Kong retail and Mainland wholesale. Goodwill of HK$80 million arose when PRG acquired the Hong Kong retail business and has been allocated to that CGU. PRG also has a head office building with a carrying amount of HK$60 million, which can be allocated to the two CGUs on a reasonable and consistent basis in the ratio 60:40, and a central IT system with a carrying amount of HK$20 million that cannot be allocated on a reasonable and consistent basis. At 31 December 20X5, the carrying amount of the Hong Kong retail CGU's assets, excluding goodwill and corporate assets, is HK$420 million; the Mainland wholesale CGU is HK$300 million. The value in use of the Hong Kong retail CGU (including its share of the building but excluding the IT system) is HK$460 million and its fair value less costs of disposal is HK$445 million. The recoverable amount of the smallest group of CGUs that includes the IT system is HK$780 million. No impairment had been recognised previously.
1. Explain how goodwill and corporate assets should be allocated for impairment testing, including why the IT system is treated differently from the head office building.
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Goodwill is tested at CGU level. Goodwill acquired in a business combination does not generate cash flows independently of other assets, so under HKAS 36.80–87 it must be allocated to each of the acquirer's CGUs, or groups of CGUs, that are expected to benefit from the synergies of the combination. The allocation must be reasonable and consistent and must be completed before the impairment test. Here the HK$80 million is allocated entirely to the Hong Kong retail CGU because that is the business expected to benefit.
Corporate assets. HKAS 36.100–103 distinguishes two types:
- The head office building can be allocated to the CGUs on a reasonable and consistent basis, so it is included in the carrying amount of each CGU before comparing with recoverable amount. The Hong Kong retail CGU receives 60% × HK$60 million = HK$36 million; Mainland receives HK$24 million.
- The IT system cannot be allocated on a reasonable and consistent basis. It is therefore excluded from the individual CGU test. Instead, PRG identifies the smallest group of CGUs that includes the IT system (here, both CGUs together) and tests that group as a whole. This avoids both ignoring the asset and arbitrarily allocating it.
The distinction turns on whether a reasonable and consistent allocation basis exists, not on the nature of the asset.
2. Calculate the impairment loss for the Hong Kong retail CGU at 31 December 20X5 and show how it is allocated.
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Carrying amount of the CGU:
| Item | HK$ million |
|---|---|
| CGU assets (excl. goodwill and corporate assets) | 420 |
| Goodwill | 80 |
| Allocated head office building (60% × 60) | 36 |
| Total carrying amount | 536 |
Recoverable amount = higher of value in use (HK$460 million) and fair value less costs of disposal (HK$445 million) = HK$460 million.
Impairment loss = 536 − 460 = HK$76 million.
Allocation (HKAS 36.104). The loss is allocated first to reduce the carrying amount of goodwill allocated to the CGU, then to the other assets pro rata. Because HK$76 million is less than the goodwill of HK$80 million, the whole loss is charged against goodwill:
- Goodwill: HK$80 million → HK$4 million
- Other CGU assets and the allocated building: unchanged
The remaining HK$4 million of goodwill stays allocated to the CGU and will be tested again at the next reporting date. The impairment loss is recognised in profit or loss. The judgement point is that the building is included in the CGU before the comparison; excluding it would understate the loss.
3. Explain the second-stage test involving the IT system, compute the additional impairment, and discuss whether any of the loss can be reversed in future.
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Second-stage test. Because the IT system cannot be allocated, HKAS 36.102 requires PRG to test the smallest group of CGUs that includes it. After the first-stage loss, the group's carrying amount is:
| Item | HK$ million |
|---|---|
| Hong Kong retail CGU (460, comprising 420 assets + 36 building + 4 goodwill) | 460 |
| Mainland wholesale CGU (300 + 24 building) | 324 |
| IT system | 20 |
| Total | 804 |
Recoverable amount of the group is HK$780 million, so the additional impairment is HK$24 million.
Allocation. The loss is allocated to the assets of the group, with goodwill reduced first. The remaining HK$4 million of goodwill is written off, leaving HK$20 million to be allocated pro rata across the other assets of the group (total carrying amount HK$800 million):
- Hong Kong retail assets and building: 456/800 × 20 = HK$11.4 million
- Mainland assets and building: 324/800 × 20 = HK$8.1 million
- IT system: 20/800 × 20 = HK$0.5 million
Reversal. An impairment loss recognised for goodwill cannot be reversed (HKAS 36.124). Impairment losses on the other assets may be reversed if there has been a change in the estimates used to determine recoverable amount, but only up to the carrying amount that would have been determined (net of depreciation) had no impairment been recognised. The reversal is recognised in profit or loss. The key judgement is that the group-level test can impair a CGU that is performing adequately on its own, because the unallocated corporate asset is tested at the group level.