Carrying amount
450
1,350 1,800
Recoverable amount
1,650
Impairment loss
150
Impairment of fixed assets and goodwill 1513
Of the goodwill impairment loss of €150, €30 (20%) will be allocated to the non-controlling interest
because the goodwill is allocated to the controlling interest and non-controlling interest on the same
basis as profit or loss.
(b)
The acquired subsidiary is part of a larger CGU
Entity Y becomes part of a larger CGU, Z. As before, €500 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 Z.
Z’s goodwill related to previous business combinations is €800.
At the end of 20X0, Parent determines that the recoverable amount of the Z CGU is €3,300. The carrying
amount of its net assets excluding goodwill is €2,250.
Identifiable
Goodwill
net assets
Total
€
€
€
Carrying amount
1,250
2,250 3,500
Recoverable amount
3,300
Impairment loss
200
All of the impairment loss of €200 is allocated to the goodwill. As the partially-owned subsidiary forms part
of a larger CGU, the goodwill impairment loss must be allocated first to the parts of the cash-generating unit
Z, and then to the controlling and non-controlling interests of Entity Y.
The impairment loss is allocated on the basis of the relative carrying values of the goodwill of the parts before
the impairment. Entity Y is allocated 36% of the impairment (450 ÷ 1,250), in this case €72, of which €14.40
(20%) will be allocated to the non-controlling interest.
9.3
Testing for impairment in entities with non-controlling
interests: alternative allocation methodologies
At 9 above we noted that 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.
There are therefore two broad methods of grossing up goodwill for impairment testing
purposes when non-controlling interest is measured at its proportionate interest in the
net identifiable assets of the subsidiary at the acquisition date:
(a) a ‘mechanical’ gross up of the controlling interest’s goodwill on the basis of
ownership interests; and
(b) a ‘rational’ gross up of the controlling interest’s goodwill that takes into account the
acquirer’s control premium, if any.
Similarly, there are two broad methods of allocating goodwill impairment:
(a) a ‘mechanical’ allocation in which the impairment loss is allocated on the basis of
ownership interests; and
(b) a ‘rational’ allocation, in which the entity applies an allocation methodology that
recognises the disproportionate sharing of the controlling and non-controlling
interests in the goodwill book value. The rational allocation takes into account the
acquirer’s control premium, if any.
1514 Chapter 20
When non-controlling interest is measured at its proportionate interest in the net
identifiable assets of the subsidiary, there are alternatives for both the gross up and
allocation methods. The following are all acceptable:
• rational gross up and rational allocation;
• rational gross up and mechanical allocation; and
• mechanical gross up and mechanical allocation.
A mechanical gross up and a rational allocation is not appropriate because a mechanical
gross up results in the controlling and non-controlling interests having goodwill carrying
values which are proportionate to their ownership interests.
Although the above methods of allocating goodwill and grossing up the NCI are
acceptable, entities would be expected to be consistent year on year in the
approach that they apply in testing any particular CGU or CGU group. This does
not prevent an entity from applying different approaches to different CGUs or
CGU groups, should that be appropriate in the circumstances. Both
Examples 20.29 and 20.30 in 9.1 and 9.2 above are examples of mechanical
allocation of impairment losses. In Example 20.30 the NCI is recorded initially at
fair value, so there is no gross up methodology for goodwill but in Example 20.29,
goodwill is grossed up mechanically.
The examples below illustrate the various methods. Depending on the
circumstances, the gross up and allocation process could be much more complex
than in the examples below. For example, where goodwill is being tested for
impairment for a group of CGUs with multiple non-controlling interests measured
at both fair value and proportionate interest in net identifiable assets, other
(practical) approaches, not illustrated below may result in a reasonable measurement
and allocation of goodwill impairment. Also, detailed records may need to be
maintained to facilitate the gross up and allocation process.
Example 20.31: Measurement and allocation of goodwill impairment losses when
there are non-controlling interests
An entity purchases 80% of a business for €160. The controlling and non-controlling interests share in profits
on the basis of their ownership interests. The fair value of the net identifiable assets is €140 and the fair value
of the non-controlling interest is €36. Goodwill is allocated to the business acquired.
Subsequent to the acquisition, the entity performs an impairment test and determines that the recoverable
amount of the CGU is €160.
Scenario 1 – Non-controlling interest recorded at fair value
The entity elects to record the non-controlling interest at fair value, rather than the non-controlling interest’s
proportionate share of the recognised amounts of the acquiree’s identifiable net assets. Accordingly, goodwill
of €56 is recorded (= €160 + €36 – €140).
The initial carrying amount of the CGU is €196 (= €140 + €56). Assuming for simplicity that at the
time of the impairment test the carrying amounts are unchanged, there is impairment of €36 (= €196 –
€160). The entire impairment loss is applied against the goodwill balance of €56, reducing recorded
goodwill to €20. The entity is required to allocate the impairment loss between the controlling and
non-controlling interests.
Impairment of fixed assets and goodwill 1515
Rational allocation: the goodwill impairment loss is allocated on a rational basis using a methodology that
recognises the disproportionate sharing of the controlling and non-controlling interests in the goodwill
book value. The rational allocation takes into account the acquirer’s control premium, if any. Goodwill of
€48 (= €160 – (€140 × 80%)) relates to the controlling interest and goodwill of €8 (= €36 – (€140 × 20%))
relates to the non-controlling interest. Therefore, a rational allocation method would result in impairment
of €48 / €56 × �
�36 = €31 being allocated to the controlling interest and impairment of €8 / €56 × €36 = €5
being allocated to the non-controlling interest.
Mechanical allocation: the goodwill impairment loss is allocated on the basis of ownership interests.
Therefore, impairment of €29 (= €36 × 80%) is allocated to the controlling interest while impairment of €7
(= €36 × 20%) is allocated to the non-controlling interest [Note 1].
Scenario 2 – Non-controlling interest recorded at fair value of identifiable assets
The entity elects to record non-controlling interest at its proportionate share of the fair value of the acquiree’s
identifiable net assets, i.e. €28 (= €140 × 20%). Therefore, goodwill of €48 is recorded (= €160 + €28 – €140).
In this case, the carrying amount of the CGU is €188 (= €140 + €48). The entity is required to gross up the
carrying amount of the CGU for the purposes of determining whether the CGU is impaired.
Rational gross up and rational allocation: goodwill attributable to the non-controlling interest is calculated by
grossing up the recognised goodwill using a factor which takes into account the premium, if any, relating to
the fact that the entity has a controlling 80% interest. Assume the relevant gross up factor results in goodwill
attributable to the non-controlling interest of €8 [Note 2]. Therefore, the adjusted carrying value of the
reporting unit is €196 (= €188 + €8). There is impairment of €36 (= €196 – €160). The total impairment of
€36 is then allocated between the controlling and non-controlling interest on a rational basis. Using the same
rational allocation methodology as in Scenario 1 results in impairment of €31 being allocated to the
controlling interest and impairment of €5 being allocated to the non-controlling interest. The impairment of
€5 associated with the non-controlling interest is not recognised because no goodwill is recorded in the
financial statements relating to the non-controlling interest.
Rational gross up and mechanical allocation: as above, assume the relevant gross up factor results in
goodwill attributable to the non-controlling interest of €8 and the adjusted carrying value of the
reporting unit is €196 (= €188 + €8). The total impairment of €36 is then allocated between the
controlling and non-controlling interest based on their ownership interests, resulting in impairment of
€29 (= €36 × 80%) being allocated to the controlling interest and impairment of €7 (= €36 × 20%) being
allocated to the non-controlling interest. The impairment of €7 associated with the non-controlling
interest is not recognised because no goodwill is recorded in the financial statements relating to the non-
controlling interest.
Mechanical gross up and mechanical allocation: goodwill attributable to the non-controlling interest is
€12 (= €48 ÷ (80/20)). Therefore, the adjusted carrying value of the reporting unit is €200 (= €188 +
€12). There is impairment of €40 (= €200 (adjusted carrying value) less €160 (= recoverable amount).
Impairment of €32 (= 80% × €40) is allocated to the controlling interest and impairment of €8 (= 20%
× €40) is allocated to the non-controlling interest. The impairment of €8 associated with the non-
controlling interest is not recognised because no goodwill is recorded in the financial statements relating
to the non-controlling interest.
Note [1]: As a further illustration of the difference between the two methods, suppose that the entity
determined that the recoverable amount was nil. In this case, under the rational allocation in Scenario 1,
the non-controlling interest of €36 would be reduced to zero, as an impairment of €8 to goodwill and
an impairment of €28 (= 20% of €140) to other identifiable assets would be each allocated to non-
controlling interest. However, under mechanical allocation in Scenario 1, the non-controlling interest
would be reduced by €39 (= 20% of the carrying value of €196) with the result being a non-controlling
interest debit balance of €3.
Note [2]: Note that this results in total adjusted goodwill of €56, which is the same goodwill figure that is
recorded in Scenario 1 when non-controlling interest is recorded at fair value.
1516 Chapter 20
10
IMPAIRMENT OF INTANGIBLE ASSETS WITH AN
INDEFINITE USEFUL LIFE
IAS 38 makes the point that ‘indefinite’ does not mean ‘infinite’, and unforeseeable
factors may affect the entity’s ability and intention to maintain the asset at its standard
of performance assessed at the time of estimating the asset’s useful life. [IAS 38.91]. The
requirements of IAS 36 for this type of asset can be summarised as follows:
1.
all intangible assets with indefinite useful lives must be tested for impairment at
least once per year and at the same time each year; [IAS 36.10]
2. any intangible asset with an indefinite useful life recognised during the reporting
period must be tested for impairment before the end of the period; [IAS 36.10]
3. any intangible asset (regardless of whether it has an indefinite useful life or not)
that is not yet available for use recognised during the reporting period must be
tested for impairment before the end of the period; [IAS 36.10-11]
4.
if an intangible asset that has an indefinite useful life or is not yet available for use
can only be tested for impairment as part of a CGU, then that CGU must be tested
for impairment at least annually; [IAS 36.89]
5. if there are indicators of impairment a period end test must also be performed;
[IAS 36.9] and
6.
for an intangible asset that has an indefinite useful life that is part of a CGU, there
are specific concessions, discussed below, allowing an impairment test in a
previous period to be used if that test showed sufficient headroom. [IAS 36.24].
Any intangible asset not yet ready for use must be tested annually because its ability to
generate sufficient future economic benefits to recover its carrying amount is usually
subject to greater uncertainty before the asset is available for use than after it is available
for use. [IAS 36.11].
This will obviously affect any entity that capitalises development expenditure in
accordance with IAS 38 where the period of development may straddle more than one
accounting period. The requirement will also apply to in-process research and
development costs recognised in a business combination (see Chapter 9 at 5.5.2.D).
An intangible asset with an indefinite useful life may generate independent cash inflows
as an individual asset, in which case the impairment testing procedure for a single asset
as set out at 7 above applies. Most intangible assets form part of the assets within a CGU,
in which case the procedures relevant to testing a CGU as set out above apply. In
particular IAS 36 makes it clear that if an intangible asset with an indefinite useful life,
or any intangible asset not yet ready for use, is included in the assets of a CGU, then that
CGU has to be tested for impairment annually. [IAS 36.89]. As with other assets, it may be
that the FVLCD of the intangible asset with an indefinite useful life can be ascertained
but the asset itself does not generate largely independent cash flows. If its individual
FVLCD is lower than the carrying amount, th
is does not necessarily mean that the asset
is impaired. The impairment test is still based on the CGU of which the asset is a part,
and if the recoverable amount of the CGU is higher than the carrying amount of the
CGU, there is no impairment loss.
Impairment of fixed assets and goodwill 1517
IAS 36 allows a concession that applies to those intangible assets with an indefinite
useful life that form part of a CGU, which is similar to the concession for goodwill. It
allows the most recent detailed calculation of such an asset’s recoverable amount made
in a preceding period to be used in the impairment test in the current period if all of the
following criteria are met:
(a) if the intangible asset is part of a CGU, the assets and liabilities making up that unit
have not changed significantly since the most recent recoverable amount calculation;
(b) that calculation of the asset’s recoverable amount exceeded its carrying amount by
a substantial margin; and
(c) the likelihood that an updated calculation of the recoverable amount would be less
than the asset’s carrying amount is remote, based on an analysis of events and
circumstances since the most recent calculation of the recoverable amount.
[IAS 36.24].
Thus if there was sufficient headroom on the last calculation and little has changed in
the CGU to which the asset belongs, it can be revisited and re-used rather than having
to be entirely started from scratch, which considerably reduces the work involved in
the annual test. The impairment test cannot be rolled forward forever, of course, and an
entity will have to take a cautious approach to estimating when circumstances have
changed sufficiently to require a new test.
Impairment losses experienced on intangible assets with an indefinite useful life are
recognised exactly as set out at 11 below, either as an individual asset or as part of a
CGU, depending upon whether the intangible concerned is part of a CGU or not.
Note that there is an important distinction concerning the allocation of losses in a
CGU between the treatment of goodwill and that of intangible assets with an
indefinite useful life. If goodwill forms part of the assets of a CGU, any impairment
loss first reduces the goodwill and thereafter the remaining assets are reduced pro-
International GAAP® 2019: Generally Accepted Accounting Practice under International Financial Reporting Standards Page 299
