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A Students Guide to

Group Accounts
Sample chapter
A Students guide to group accounts second edition by Tom Clendon
A free sample chapter

About the book

The book starts out assuming no knowledge of group accounts and takes you through
all the various consolidation problems, starting with a 100% directly owned subsidiary
and building all the way to complex group structures and the translation of foreign
subsidiaries.

With plenty of exercises to practice, the use of relevant diagrams, colour, examples
and humour bring this potentially dry subject to life. And it is written in plain English!

Each chapter sets out what is new, explains the issue in both words and numbers
through worked examples, contains practice questions, a mind map, a further expla-
nation in double entry (if you like that sort of thing) and also a technical corner where
further tricky little sub plots are explored!

This student focused book is essential for students studying for their degrees, MBA
programs and professional examinations including ACCA, CIMA and ICAEW.

The book can be purchased direct from www.kaplanpublishing.co.uk, or from your


local stockist. You can find your nearest stockist on the Kaplan Publishing website.

About the author

Tom Clendon trained with KPMG and qualified as a certified accountant in 1989. He has
many years experience in preparing students for their professional examinations.

In 2009 he received Tutor of the Year award from PQ magazine. He runs a very popular
face book page tom clendon lecturer.
chapter 7
Impairment review
of goodwill

It
Aislittle
always a silly thing
sincerity is to
give advice, but to give
a dangerous thing,
good advice is fatal.
and a great deal of it
absolutely fatal
chapter 7 Impairment review of goodwill

What's new?
Goodwill is subject to an annual impairment review, and where it has been
impaired must be written down. In the examples that we have looked at to date
the goodwill that has arisen at acquisition has either not been impaired and
so remained intact at the reporting date or the question has clearly stated the
amount of the impairment loss. We have also seen that where NCI at acquisition
is measured at fair value then goodwill is in full and so the impairment loss is then
split between the parent's profits (w5) and the NCI (w4). Further we have also
seen that where the NCI at acquisition is measured on a proportionate basis then
goodwill is attributable to the parent only and so the impairment loss is wholly
charged against the parent's profits (w5).

Well now is the time to understand how to measure the impairment loss! First
we shall explore the general principles of impairment, before considering the
impairment of full goodwill and then the impairment of goodwill when it is only
attributable to the parent.

Impairment of an asset
An asset is impaired when its carrying value exceeds its recoverable amount. The
impairment loss is therefore calculated using the following proforma:

This is the net book value i. e. the figure the asset is


currently recorded at in the accounts.
Impairment review This is the estimate of how
Carrying value X much cash the company
less Recoverable amount (X) thinks it will get from the
Impairment loss X asset.

This loss must be recognised, and


the asset written down to the
recoverable a mount. Prudent!
For example if the carrying amount of an asset was $100, but only $80 could be
recovered from the asset then the impairment loss is $20.

Impairment review $
Carrying value 100
less Recoverable amount (80)
Impairment loss 20

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chapter 7 Impairment review of goodwill
Please bear in mind that if the recoverable amount exceeds the carrying value
then the impairment review results in no impairment loss. We do not record
impairment gains!

There are no accounting choices or accounting policy decisions to be made in


respect of impairment. The impairment loss must be recorded and the asset
written down to its recoverable amount.

Impairment of goodwill
When goodwill is subject to an impairment review it is necessary to do this at the
level of a cash-generating unit. A cash-generating unit is a collection of assets
and liabilities that generate an independent stream of cash. This is because
goodwill is inseparable from the net assets of the subsidiary. That it is to say the
subsidiary is the cash-generating unit so the net assets and the goodwill together
are considered as the carrying value to be compared to the recoverable amount.

In all our examples the impairment loss arising from the impairment review will
be used to write down the goodwill. Strictly though, if the cash-generating unit
has another asset that is specifically damaged or otherwise impaired then the
impairment loss would first be allocated to that asset. If the impairment loss
exceeded the goodwill then the remaining balance of the loss will be allocated
against the other assets on a pro-rata basis.

Impairment of goodwill when calculated in full


Where the NCI has been calculated at fair value i.e. there is goodwill in full, the
impairment loss will be split between the parent and the NCI in the proportion
that they normally share profits and losses. In the context of a group statement
of financial position this will mean the parents share of the impairment loss will
reduce the group retained earnings in w5 and the impairment loss attributable to
the NCI will reduce the NCI in w4.

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chapter 7 Impairment review of goodwill

Example
Four years ago Oman made an acquisition of 80% of the shares in
Muscat when its retained earnings were $50m. Below are the summarised
statements of financial position of the two companies.

Oman Muscat
$m $m
Non-current assets
Tangible 100 100
Investment in Muscat 175

Current assets
Inventory 140 200
Receivables 160 100
Cash at bank 125 200
700 600

Ordinary shares ($1) 160 050


Retained earnings 240 100
Equity 400 150

Non-current liabilities 100 250


Current liabilities 200 200
700 600

Additional information
1 At the date of acquisition the fair values of Muscat's assets were equal to
their carrying amounts.
2 Oman has a policy of accounting for any NCI at acquisition at fair value.
The fair value of the NCI at the acquisition date was $25m. No goodwill had
previously been impaired. Muscat is regarded as a cash-generating unit
with a $230m recoverable amount at the year-end.

Required
Prepare the consolidated statement of financial position of Oman.

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chapter 7 Impairment review of goodwill
The first two workings are routine.

W1 Group structure

Oman
Parent's interest 80%
The subsidiary was acquired
four years ago
NCI 20%
Muscat

W2 Net assets of the subsidiary

At acquisition At year-end
$m $m
Share capital 50 50
Retained earnings 50 100
100 150

$50m
The post-acquisition profits of the subsidiary are $50m ($150m - $100m) and
these will be shared as normal between the parent and the NCI.

W3 Goodwill

$m
FV of the parent's investment 175
FV of the NCI at acquisition 25
Less the FV of the subsidiary's net assets at acquisition (100)
Goodwill at acquisition 100
Less impairment loss (20)
Goodwill at reporting date 80

The impairment loss of


$20m has come from
the next working - the
impairment review
of Muscat the cash-
generating unit.

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chapter 7 Impairment review of goodwill

The impairment review of goodwill is conducted by aggregating the net assets at


the year-end with the goodwill arising to form the cash generating unit that we can
then compare with the recoverable amount.

Impairment review of Muscat

$m $m
Carrying value
Net assets of the subsidiary at year-end 150
Goodwill 100
250
Recoverable amount (230)
Impairment loss 20

This impairment loss is used to reduce the asset of


goodwill. As NCI at acquisition is at fair value so goodwill
is in full and the impairment loss is split between the
parent and the NCI in the normal proportions.
To the extent that the carrying value of $250m exceeds the
recoverable amount of $230m this reveals an impairment loss
of $20m.

W4 NCI

$m
Fair value of the NCI at acquisition 25
Plus the NCI% of the post-acquisition profits w2 (20% x 50) 10
Less the NCI% of the impairment loss w3 (20% x 20) (4)
31

W5 Group retained earnings

$m
Parent's profits 240
Plus the parents % of the post-acquisition profits w2 (80% x 50) 40
Less the parents % of the goodwill impairment
(80% x 20) (16)
loss w3

264

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chapter 7 Impairment review of goodwill
Oman group statement of financial position

$m
Non-current assets
Goodwill w3 post impairment 80
Tangible assets (100 + 100) 200

Current assets
Inventory (140 + 200) 340
Receivables (160 + 100) 260
Cash at bank (125 + 200) 325
1,205

Ordinary shares ($1) parent only 160


Retained earnings w5 264
NCI w4 31
Equity 455

Non-current liabilities (100 + 250) 350


Current liabilities (200 + 200) 400
1,205

Impairment of goodwill when calculated on a proportionate basis


When goodwill has been calculated on a proportionate basis, for the purposes
of conducting the impairment review it is necessary to crudely gross up
goodwill proportionally so that in the impairment review goodwill will include an
unrecognised notional goodwill attributable to the NCI.

This is because the recoverable amount will relate to the whole cash-generating
unit, so it is argued some of this must relate to the unrecognised notional goodwill
attributable to the NCI.

Any impairment loss that arises is first allocated against the total of recognised
and unrecognised goodwill in the normal proportions that the parent and NCI
share profits and losses.

Any amounts written off against the notional goodwill will not affect the
consolidated financial statements. Any amounts written off against the recognised
goodwill will be attributable to the parent only, without affecting the NCI.

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chapter 7 Impairment review of goodwill

If the total amount of impairment loss exceeds the amount allocated against
recognised and notional goodwill, the excess will be allocated against the other
assets on a pro-rata basis. This further loss will be shared between the parent and
the NCI in the normal proportion that they share profits and losses.

Example
At the year-end an impairment review is being conducted on the 80%
owned subsidiary David Leigh. At the date of the impairment review the
carrying value of the subsidiarys net assets were $600m and the goodwill
$80m (based on NCI at acquisition being a proportion of net assets) and the
recoverable amount of the subsidiary $640m.

Required
Determine the outcome of the impairment review.

In conducting the impairment review of proportionate goodwill it is first necessary


to gross it up.

Proportionate goodwill Grossed up Goodwill including the notional


unrecognised NCI of $20m
$80m x 100/80 = $100m

Now for the purposes of the impairment review, the goodwill will be $100m and
together with the net assets of $600m forms the carrying value of the cash-
generating unit - the subsidiary.

Impairment review

Carrying value $m $m
Net assets of subsidiary at year-end 600
Goodwill-recognised and notional 100
700
Recoverable amount (640)
Impairment loss on the gross goodwill 60

Impairment loss on the goodwill attributable to the


(80% x 60) 48
parent

This is the impairment loss that is actually recorded

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chapter 7 Impairment review of goodwill
The impairment loss of $60m is less than the recognised and notional goodwill of
$100m, so only goodwill has been impaired. The parent's share of the impairment
loss (80% x $60m) $48m is recognised in group retained earnings (w5) thus
reducing the proportionate goodwill that has been recognised from $80m by $48m
to $32m. The NCI (w4) is not charged with any of this impairment loss, after all
the goodwill that is being impaired is wholly attributable to the parent. There is no
actual recording of either the notional unrecognised goodwill of $20m nor of its
impairment.

$m
Goodwill attributable to the parent at acquisition 80
Less impairment loss (80% x 60) (48)
Goodwill at the reporting date 32

This impairment loss is wholly charged


against group retained earnings w5

If the impairment loss had been say $110m i.e. $10m more than recognised and
notional goodwill of $100m, then in addition to writing off all of the recognised
goodwill there would have been a further actual impairment loss of $10m to
recognise. This would relate to other assets of the subsidiary and be charged
between the parent's profits (w5) and the NCI (w4) in the ratio of 80/20 being the
proportion that profits and losses are shared.

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chapter 7 Impairment review of goodwill

Mind Map

Annual impairment
review of goodwill
is required

Goodwill together
with the net assets of
the subsidiary form a
cash-generating unit

An impairment loss
arises when the
When NCI at carrying value of When NCI at
acquisition is at fair the cash-generating acquisition is a
unit exceeds the proportion of net
value so there is full
recoverable amount assets so goodwill
goodwill
is attributable to the
parent only

In the impairment review process


goodwill attributable to the
parent is notionally grossed up
but only the parent's share of
the impairment loss on gross
goodwill is actually recorded

Impairment losses on Impairment losses on


full goodwill are charged the goodwill attributable
against retained earnings to the parent only are
w5 and NCI w4 wholly charged against
retained earnings w5

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chapter 7 Impairment review of goodwill
Double entry
The recording of impairment losses when NCI at acquisition is at fair value
so goodwill is in full can be thought of in double entry terms.

Let us consider the recording of the impairment loss of $20m on the full
goodwill of Muscat, the 80% subsidiary.

The impairment loss reduces the asset of full goodwill in the top half of the
group statement of financial position and it also reduces the equity (split
between the retained earnings and the NCI).

To record the impairment loss is to recognise an expense that will decrease


equity, i.e. the retained earnings and also the NCI. To reduce equity is a DR.
To record the impairment loss is to write down an asset. To reduce an asset
is a CR.

$m $m
DR Retained earnings (w5) 16
DR NCI (w4) 04
CR Goodwill (w3) 20

The recording of impairment losses when NCI at acquisition is measured as


a proportion of net assets so that goodwill is attributable to the parent only
can be thought of in double entry terms.
The notional grossing up of the goodwill attributable to the parent purely for
the purposes of the impairment review is not a double entry as this notional
goodwill is unrecognised and unrecorded. The actual impairment loss on
the goodwill attributable to the parent was $48m.
To record the impairment loss is to recognise an expense that will decrease
equity, in this case the whole loss is charged against the retained earnings.
To make equity go down is a DR.

To record the impairment loss is to write off the asset of goodwill. To reduce
an asset is a CR.

$m $m
DR Retained earnings (w5) 48
CR Goodwill (w3) 48

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chapter 7 Impairment review of goodwill

Technical corner
Determining the recoverable amount
There are two ways of recovering cash from an asset or collection of net
assets (cash-generating unit).

One way of recovering cash from an asset is to sell it. The measurement of
the recoverable amount can therefore be the fair value less costs to sell i.e.
sale proceeds less any costs necessary to achieve the sale.

The other way of recovering cash from an asset is to keep and use the
asset so that it generates a cash flow in the future. This second way is
termed the value in use. When measuring the future cash flows it will be
necessary to discount the figures to a present value.

The recoverable amount is the higher of the net sale proceeds and the
value in use. It is the higher because that is what the standard1 says but
actually also to reflect the common sense that losses will always try to be
minimised.

For example if an asset could be sold for $230m net of selling costs, but
has a value in use of $150m, the recoverable amount will be $230m (the
higher) as the sensible decision will be to sell the asset. But if the asset
could be sold for $125m net of selling costs and has a value in use of
$200m, then the asset will be kept, making the recoverable amount $200m.
The recoverable amount will always be the higher of the two figures on offer.

The measurement of the recoverable amount is of course subjective since


the sale proceeds are an estimate as indeed are the future cash flows in the
value in use calculation.

1 IAS36 Impairment of Assets

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chapter 7 Impairment review of goodwill
Question Singapore
The following information relates to Singapore a 60% subsidiary.

Fair value
Net Net Recoverable
of the Parent's
assets at assets at amount at
NCI at investment
acquisition year-end year-end
acquisition
$m $m $m $m $m
500 600 250 800 1,000

Required
(i) Assuming that NCI at acquisition is measured at fair value and so that
goodwill is full, determine the goodwill that will be recognised in the
group statement of financial position at the reporting date i.e. after the
impairment review.
(ii) Assuming that the NCI at acquisition is measured as a proportion of
net assets so that goodwill is attributable to the parent only, determine
the goodwill that will be recognised in the group statement of financial
position at the reporting date i.e. after the impairment review.

where the goodwill is attributable to the parent


only, when doing the impairment review the
goodwill will have to be notionally grossed up

87