often the case that CGUs do not correspond to these individual entities and the
1508 Chapter 20
reorganisations may be undertaken for taxation reasons so the ownership structure
within a group may not correspond to its CGUs. This makes it clear how important it is
that entities identify their CGUs and the allocation of goodwill to them, so that they
already have a basis for making any necessary allocations when an impairment issue
arises or there is a disposal.
9
NON-CONTROLLING INTERESTS – THE IMPACT ON
GOODWILL IMPAIRMENT TESTING
The amount of goodwill recorded by an entity when it acquires a controlling stake in a
subsidiary that is less than 100% of its equity depends on which of the two following
methods have been used to calculate it. Under IFRS 3 an entity has a choice between
two methods:
(i) Goodwill
attributable
to
the non-controlling interests is not recognised in the
parent’s consolidated financial statements as the non-controlling interest is stated
at its proportion of the net fair value of the net identifiable assets of the acquiree.
(ii) The non-controlling interest is measured at its acquisition-date fair value, which
means that its share of goodwill will also be recognised.
Under method (i) above the carrying amount of that CGU comprises:
(a) both the parent’s interest and the non-controlling interest in the identifiable
net assets of the CGU; and
(b) the parent’s interest in goodwill.
But part of the recoverable amount of the CGU determined in accordance with
IAS 36 is attributable to the non-controlling interest in goodwill.
IFRS 3 allows both measurement methods. The choice of method is to be made for each
business combination, rather than being a policy choice, and could have a significant
effect on the amount recognised for goodwill. [IFRS 3.19, IAS 36.C1].
Previous acquisitions under IFRS 3 (2007) were required to be accounted for using
method (i) and were not restated on transition to the revised standard. [IFRS 3.64].
These methods are described in more detail in Chapter 9 at 8.
The IASB itself has noted that there are likely to be differences arising from measuring
the non-controlling interest at its proportionate share of the acquiree’s net identifiable
assets, rather than at fair value. First, the amounts recognised in a business combination
for the non-controlling interest and goodwill are likely to be lower (as illustrated in the
example given in Chapter 9 at 8.3). Second, if a CGU to which the goodwill has been
allocated is subsequently impaired, any impairment of goodwill recognised through
income is likely to be lower than it would have been if the non-controlling interest had
been measured at fair value.
The Standard is clear that not all of the goodwill arising will necessarily be allocated to
a CGU or group of CGUs which includes the subsidiary with the non-controlling
interest. [IAS 36.C2].
Guidance is given on the allocation of impairment losses:
Impairment of fixed assets and goodwill 1509
(a) If a subsidiary, or part of a subsidiary, with a non-controlling interest is itself a
CGU, the impairment loss is allocated between the parent and the non-controlling
interest on the same basis as that on which profit or loss is allocated. [IAS 36.C6].
(b) If it is part of a larger CGU, goodwill impairment losses are allocated to the parts
of the CGU that have a non-controlling interest and the parts that do not on the
following basis: [IAS 36.C7]
(i) to the extent that the impairment relates to goodwill in the CGU, the relative
carrying values of the goodwill of the parts before the impairment; and
(ii) to the extent that the impairment relates to identifiable assets in the CGU, the
relative carrying values of these assets before the impairment. Any such
impairment is allocated to the assets of the parts of each unit pro-rata on the
basis of the carrying amount of each asset in the part.
In those parts that have a non-controlling interest the impairment loss is allocated
between the parent and the non-controlling interest on the same basis as that on
which profit or loss is allocated.
However, it is not always clear how an entity should test for impairment when there is
NCI. The issues include:
• calculating the ‘gross up’ of the carrying amount of goodwill because NCI is
measured at its proportionate share of net identifiable assets and hence its share of
goodwill is not recognised (see 9.1 below);
• allocation of impairment losses between the parent and NCI; and
• reallocation of goodwill between NCI and controlling interests after a change in a
parent’s ownership interest in a subsidiary that does not result in a loss of control.
Each of these issues arises in one or more of the following situations:
(a) NCI is measured on a proportionate share, rather than fair value;
(b) because of the existence of a control premium there are indications that it would
be appropriate to allocate goodwill between the parent and NCI on a basis that is
disproportionate to the percentage of equity owned by the parent and the NCI
shareholders; and
(c) there are subsequent changes in ownership between the parent and NCI
shareholders, but the parent maintains control.
Increases in the parent’s share are discussed at 9.1.1 below and disposals at 8.5 above.
The Interpretations Committee considered these issues in 2010 but declined to propose
an amendment to IAS 36 as part of the Annual Improvements. They were concerned
that there could be possible unintended consequences of making any changes, and
recommended that the Board should consider the implication of these issues as part of
the IFRS 3 post-implementation review.1 While these issues were not specifically
addressed in the IFRS 3 post-implementation review, participants informed the Board
that in their view the required impairment test is complex, time-consuming and
expensive and involves significant judgements. The Board therefore decided to
undertake research to consider improvements, in particular on whether there is scope
1510 Chapter 20
for simplification when it comes to impairment testing. At the time of writing this
research is still ongoing.
In the absence of any guidance, we consider that an entity is not precluded from grossing
up goodwill on a basis other than ownership percentages if to do so is reasonable. A
rational gross up will result in a goodwill balance that most closely resembles the balance
that would have been recorded had non-controlling interest been recorded at fair value.
This is explored further at 9.3 below.
9.1
Testing for impairment in entities with non-controlling interests
measured at the proportionate share of net identifiable assets
If an entity measures NCI at its proportionate interest in the net identifiable assets
of a subsidiary at the acquisition date, rather than at the fair value, goodwill
attributable to the NCI is included in the recoverable amount of the CGU but is
not recognised in the consolidated financial statements. To enable a like-for-like
comparison,
IAS 36 requires the carrying amount of a non-wholly-owned CGU to
be notionally adjusted by grossing up the carrying amount of goodwill allocated to
the CGU to include the amount attributable to the non-controlling interest. This
notionally adjusted carrying amount is then compared with the recoverable
amount. [IAS 36.C3, C4]. If there is an impairment, the entity allocates the impairment
loss as usual, first reducing the carrying amount of goodwill allocated to the CGU
(see 11.2 below). However, because only the parent’s goodwill is recognised, the
impairment loss is apportioned between that attributable to the parent and that
attributable to the non-controlling interest, with only the former being recognised.
[IAS 36.C8].
If any impairment loss remains, it is allocated in the usual way to the other assets of the
CGU pro rata on the basis of the carrying amount of each asset in the CGU (the
allocation of impairment losses to CGUs is discussed at 11.2 below). [IAS 36.104].
These requirements are illustrated in the following example. [IAS 36.IE62-68]. Note that
in these examples goodwill allocation and impairment is based on the ownership
interests. At 9.3 below we discuss alternative allocation methodologies when there
is a control premium.
Example 20.29: A CGU with goodwill and non-controlling interest
Entity X acquires an 80 per cent ownership interest in Entity Y for €1,600 on 1 January 20X0. At that
date, Entity Y’s identifiable net assets have a fair value of €1,500. Entity X recognises in its
consolidated financial statements:
(a) goodwill of €400, being the difference between the cost of the business combination of €1,600 and the
non-controlling interest of €300 (20% of €1,500) and the identifiable net assets of Entity Y of €1,500;
(b) Entity Y’s identifiable net assets at their fair value of €1,500; and
(c) a non-controlling interest of €300.
At the end of 20X0 the carrying amount of Entity Y’s identifiable assets has reduced to €1,350 (excluding
goodwill) and Entity X determines that the recoverable amount of CGU Y is €1,000.
The carrying amount of CGU Y must be notionally adjusted to include goodwill attributable to the non-
controlling interest, before being compared with the recoverable amount of €1,000. Goodwill attributable to
Entity X’s 80% interest in Entity Y at the acquisition date is €400. Therefore, goodwill notionally attributable
to the 20% non-controlling interest in Entity Y at the acquisition date is €100, being (€400 ÷ 80% × 20%).
Impairment of fixed assets and goodwill 1511
Testing CGU Y for impairment at the end of 20X0 gives rise to an impairment loss of €850 calculated as follows:
Identifiable
Goodwill
net assets
Total
€
€
€
Carrying amount
400
1,350 1,750
Unrecognised non-controlling interest
100
–
100
Notionally adjusted carrying amount
500
1,350
1,850
Recoverable amount 1,000
Impairment loss
850
The impairment loss of €850 is allocated to the assets in the CGU by first reducing the carrying amount of
goodwill to zero. Therefore, €500 of the €850 impairment loss for the CGU is allocated to the goodwill.
However, because Entity X only holds a 80% ownership interest in Entity Y, it recognises only 80 per cent
of that goodwill impairment loss (i.e. €400). The remaining impairment loss of €350 is recognised by reducing
the carrying amounts of Entity Y’s identifiable assets, as follows:
Identifiable
Goodwill
net assets
Total
€
€
€
Carrying amount
400
1,350 1,750
Impairment loss
(400)
(350)
(750)
Carrying amount after impairment loss
–
1,000
1,000
Of the impairment loss of €350 relating to Entity Y’s identifiable assets, €70 (i.e. 20% thereof) would be
attributed to the non-controlling interest.
In this example the same result would have been achieved by just comparing the recoverable amount of
€1,000 with the carrying amount of €1,750. However, what if the recoverable amount of the CGU had been
greater than the carrying amount of the identifiable net assets prior to recognising the impairment loss?
Assume the same facts as above, except that at the end of 20X0, Entity X determines that the recoverable
amount of CGU Y is €1,400. In this case, testing CGU Y for impairment at the end of 20X0 gives rise to an
impairment loss of €450 calculated as follows:
Identifiable
Goodwill
net assets
Total
€
€
€
Carrying amount
400
1,350 1,750
Unrecognised non-controlling interest
100
–
100
Notionally adjusted carrying amount
500
1,350
1,850
Recoverable amount
1,400
Impairment loss
450
All of the impairment loss of €450 is allocated to the goodwill. However, Entity X recognises only 80 per cent of that
goodwill impairment loss, i.e. €360. This allocation of the impairment loss results in the following carrying amounts
for CGU Y in the financial statements of Entity X at the end of 20X0:
Identifiable
Goodwill
net assets
Total
€
€
€
Carrying amount
400
1,350 1,750
Impairment loss
(360)
–
(360)
Carrying amount after impairment loss
40
1,350
1,390
Of the impairment loss of €360, none of it is attributable to the non-controlling interest since it all relates to
the majority shareholder’s goodwill.
1512 Chapter 20
In this case the total carrying amount of the identifiable net assets and the goodwill has not been reduced to
the recoverable amount of €1,400, but is actually less than the recoverable amount. This is because the
recoverable amount of goodwill relating to the non-controlling interest (20% of [€500 – €450]) is not
recognised in the consolidated financial statements.
9.1.1
Acquisitions of non-controlling interests measured at the
proportionate share of net identifiable assets
As described above, in order to enable a like-for-like comparison, IAS 36 requires the
carrying amount of a non-wholly-owned CGU to be notionally adjusted by grossing up
the carrying amount of goodwill allocated to the CGU to include the amount attributable
to the non-controlling interest.
What happens if the non-controlling interest is acquired by the entity so that it is now wholly
owned? IFRS 10 now requires these purchases to be reflected as equity transactions, which
means that there is no change to goodwill. [IFRS 10.23]. Other methods have
been used in the
past that may still be reflected in the carrying amounts of goodwill. These could have
partially or wholly reflected the fair value of the additional interest acquired.
No notional adjustment is required when the remaining non-controlling interest is
acquired and the carrying amount of the unit, including the recognised goodwill, i.e. the
goodwill paid in the acquisition where control was obtained, should be tested against
100% of the recoverable amount of the unit.
9.2
Testing for impairment in entities with non-controlling interests
initially measured at fair value
The following examples in which the non-controlling interest is initially measured at
fair value, are based on the Examples 7B and 7C in IAS 36’s Illustrative Examples and
illustrate the requirements for testing for impairment when non-controlling interest is
initially measured at fair value. Note that in these examples goodwill impairment is
allocated on the basis of the ownership interests. At 9.3 below we discuss alternative
allocation methodologies when there is a control premium.
Example 20.30: Non-controlling interests measured initially at fair value
Entity X acquires an 80 per cent ownership interest in Entity Y for €2,100 on 1 January 20X0. At that date,
Entity Y’s identifiable net assets have a fair value of €1,500. Entity X chooses to measure the non-controlling
interests at its fair value of €350. Goodwill is €950, which is the aggregate of the consideration transferred
and the amount of the non-controlling interests (€2,100 + €350) less the net identifiable assets (€1,500).
(a)
The acquired subsidiary is a stand-alone CGU
Entity Y is a CGU but part of the goodwill is allocated to other of Entity X’s CGUs that are expected to benefit from
the synergies of the combination. Goodwill of €450 is allocated to the Entity Y CGU and €500 to the other CGUs.
At the end of 20X0, the carrying amount of Entity Y’s identifiable assets excluding goodwill has reduced to €1,350
and Entity X determines that the recoverable amount of CGU Y is €1,650.
Identifiable
Goodwill
net assets
Total
€
€
€
International GAAP® 2019: Generally Accepted Accounting Practice under International Financial Reporting Standards Page 298
