ACCA P2考試：Impairment of goodwill

1. Following the revisions to IFRS 3, Business Combinations and IAS 27, Consolidated and Separate Financial Statements in January 2008, there are now two ways of measuring the goodwill that arises on the acquisition of a subsidiary and each has a slightly different impairment process. This article discusses and shows both ways of measuring goodwill following the acquisition of a subsidiary, and how each measurement of goodwill is subject to an impairment review.

2. How to calculate goodwill

The traditional measurement of goodwill on the acquisition of a subsidiary is the excess of the fair value of the consideration given by the parent over the parent’s share of the fair value of the net assets acquired. This method can be referred to as the proportionate method. It determines only the goodwill that is attributable to the parent company.

The new method of measuring goodwill on the acquisition of the subsidiary is to compare the fair value of the whole of the subsidiary (as represented by the fair value of the consideration given by the parent and the fair value of the non controlling interest) with all of the fair value of the net assets of the subsidiary acquired. This method can be referred to as the gross or full goodwill method. It determines the goodwill that relates to the whole of the subsidiary, ie goodwill that is both attributable to the parent’s interest and the non-controlling interest (NCI).

3. Basic principles of impairment

An asset is impaired when its carrying value exceeds the recoverable amount. The recoverable amount is, in turn, defined as the higher of the fair value less cost to sell and the value in use; where the value in use is the present value of the future cash flows. As the asset has never been revalued, the loss has to be charged to income. Impairment losses are non-cash expenses, like depreciation, so in the cash flow statement they will be added back when reconciling operating profit to cash generated from operating activities, just like depreciation again.

Assets are generally subject to an impairment review only if there are indicators of impairment. IAS 36, Impairment of Assets lists examples of circumstances that would trigger an impairment review.

External sources

¤ market value declines

¤ negative changes in technology, markets, economy, or laws

¤ increases in market interest rates

¤ company share price is below book value

Internal sources

¤ obsolescence or physical damage

¤ asset is part of a restructuring or held for disposal

¤ worse economic performance than expected