it may be that the synergies that gave rise to the goodwill are in another part of the larger
group because the subgroup is part of a CGU containing other subsidiary companies. It
may not be possible to translate some synergies such as economies of scale into cash flows
to the entity or subgroup in question. Although there is no impairment at the level of the
CGU in the group consolidated financial statements, the entity may not be able to avoid
writing down the goodwill in the individual or subgroup statements at the time the first
impairment test is performed in the year of the acquisition. In our view, it would not be
appropriate to consider synergies arising outside the individual or subgroup financial
statements when testing impairment in the individual or subgroup financial statements
unless these synergies would be available to market participants and therefore could be
built into the FVLCD. Whether this write down needs to be recorded in the statement of
profit or loss or whether it is appropriate to treat it as an equity transaction in the form of
a distribution to the parent is a matter of judgement.
12.2.2
The effect of IFRS 8 – Operating segments – when allocating
goodwill to CGU’s in individual (or subgroup) financial statements
As discussed at 8.1 above, goodwill is not necessarily tested at the lowest level of CGUs
(however defined in the context of these group entities or subgroups), but at the level
of a CGU group at which goodwill is monitored. However, that CGU group cannot be
larger than an operating segment before aggregation (see 8.1.4 above). [IAS 36.80].
We believe that for the purposes of testing goodwill in the individual or subgroup’s financial
statements, companies must apply the guidance in IFRS 8 to determine its operating
segments even if IFRS 8 is not applicable because the subsidiary (subgroup) is not public.
Therefore, if the application of IFRS 8 would result in the identification of separate
operating segments in the individual or subgroup’s financial statements, goodwill cannot be
tested for impairment at a level above the operating segments in those financial statements
(i.e. the operating segments would serve as a ceiling). It would not be appropriate to apply
paragraph 80 of IAS 36 in these circumstances based on the operating segments as
determined by the ultimate parent entity for its consolidated financial statements.
However, the CGU/CGU group for the purposes of goodwill impairment testing could
be at a level lower than the subgroup’s operating segments.
1528 Chapter 20
Example 20.37: A subgroup with goodwill that is not an operating segment for the
group
A mining entity (group) extracts a metal ore that does not have an active market until it has been through a
smelting and refining process. Each mine is held in a separate subsidiary, as is the refinery, and in two joint
ventures. The refinery, subsidiaries and joint ventures are located in several different countries. The entity
considers the CGU to comprise the subsidiary that holds the smelter together with the subsidiaries that hold
the individual mines and the interests in the joint ventures.
The entity acquires a group of mine-holding subsidiaries in a country where there is a requirement to prepare
consolidated financial statements at the highest level within that country. These consolidated financial statements,
which are prepared using the acquisition method by the relevant intermediate parent, include goodwill. The entity
does not consider the subgroup to be an operating segment. However, in the subgroup’s financial statements, first
of all the relevant operating segments would need to be determined from the subgroup’s perspective. If it was
concluded that from the subgroup’s perspective there was only one operating segment, this would be the maximum
level at which goodwill is tested for impairment in the subgroup’s consolidated financial statements.
12.2.3
Acquisitions by subsidiaries and determining the level at which the
group tests goodwill for impairment
IAS 36 requires goodwill to be allocated to the lowest level within the entity at which
the goodwill is monitored for internal management purposes. If a subsidiary undertakes
acquisitions and recognises goodwill in its own financial statements, the level at which
the subsidiary’s management monitors the goodwill may differ from the level at which
the parent’s or group’s management monitors goodwill from the group’s perspective.
If a subsidiary’s management monitors its goodwill at a lower level than the level at
which the parent’s or group’s management monitors its goodwill, a key issue is whether
that lower level should, from the group’s perspective, be regarded as the ‘lowest level
within the entity at which the goodwill is monitored for internal management purposes’?
The answer is not necessarily, as is demonstrated in the following example.
Example 20.38: Monitoring goodwill arising from acquisitions by subsidiaries
A parent acquired 100% of the issued shares of a company that operates autonomously and is required to prepare
IFRS-compliant financial statements. The subsidiary has acquired various businesses both before and after
becoming part of the group. Those business combinations have included significant amounts of goodwill.
The subsidiary’s management monitors its acquired goodwill at the level of the subsidiary’s operating
segments identified in accordance with IFRS 8. However, management of the parent/group monitors its
acquired goodwill at the level of the group’s operating segments, which is a higher level than the subsidiary’s
operating segments. The subsidiary’s operations form part of two of the group’s six operating segments.
The subsidiary’s goodwill comprises goodwill arising on its acquisitions, some of which took place before,
and some after, the subsidiary became part of the group.
In contrast, the goodwill recognised by the group comprises:
• Goodwill acquired by the parent in the acquisition of the subsidiary;
• Goodwill acquired by the subsidiary since becoming part of the group;
• Goodwill acquired by the parent in other operating combinations (i.e. goodwill that relates to other
subsidiaries and businesses that make up the group).
The goodwill acquired in the acquisition of the subsidiary that is recognised by the parent in its consolidated
financial statements is therefore different from the goodwill recognised by the subsidiary (which relates only
to the acquisitions made by the subsidiary itself and was measured at the date of the acquisition concerned,
as any other goodwill would be internally generated goodwill from the subsidiary’s perspective and therefore
not recognised by the subsidiary).
Impairment of fixed assets and goodwill 1529
In such circumstances the actions of the subsidiary’s management in deciding the level at which it tests its
goodwill for impairment will not cause the group to be ‘locked in’ to testing goodwill at the same level in the
consolidated financial statements.
Rather, the group should test its goodwill for impairment at the level at which management of the group (i.e.
of the parent) monitors its various investments in goodwill, namely, in this example, at the group’s operating
segment level.
12.3 Group reorganisations
and the carrying value of investments in
subsidiaries
A common form of group reorganisation involves the transfer of the entire business of
a subsidiary to another subsidiary of the same parent. These transactions often take
place at the book value of the transferor’s assets rather than at fair value. If the original
carrying value was a purchase price that included an element of goodwill, the remaining
‘shell’, i.e. an entity that no longer has any trade or activities, may have a carrying value
in the parent company’s statement of financial position in excess of its net
worth/recoverable amount. It could be argued that as the subsidiary is now a shell with
no possibility in its current state of generating sufficient profits to support its value, a
loss should be recognised by the parent in its separate financial statements to reduce its
investment in the shell company to its net worth/recoverable amount. However, the
transfer of part of the group’s business from one controlled entity to another has no
substance from the perspective of the group and will have no effect in the consolidated
accounts. There has also been no loss overall to the parent as a result of this
reorganisation as the loss in net worth/recoverable amount in one subsidiary results in
an increase in the net worth/recoverable amount in the other subsidiary.
This is, of course, a transaction between companies under common control as all of the
combining entities or businesses are ultimately controlled by the same party or parties
both before and after the business combination, and that control is not transitory.
[IFRS 3.B1]. This means that the treatment by the acquirer is out of the scope of IFRS 3.
From the transferor entity’s perspective, the transaction combines a sale of its assets at
an undervalue to the acquirer, by reference to the fair value of the transferred assets,
and a distribution of the shortfall in value to its parent. The fair value of those assets to
the parent may well not be reflected in the transferor’s own statement of financial
position because there is no push-down accounting under IFRS. The transferor is not
obliged to record the ‘distribution’ to its parent at fair value. IFRIC 17 – Distributions of
Non-cash Assets to Owners – issued in November 2008, requires gains or losses
measured by reference to fair value of the assets distributed to be taken to profit or loss
but, amongst other restrictions, excludes from its scope non-cash distributions made by
wholly-owned group companies (see Chapter 8 at 2.4.2).
This interpretation of the transferor’s transaction (as a sale at an undervalue and a
deemed distribution to the parent) is wholly consistent with a legal analysis in some
jurisdictions, for example the United Kingdom, where a company that does not have
zero or positive distributable reserves is unable to sell its assets at an undervalue because
it cannot make any sort of distribution.
The parent, in turn, could be seen as having made a capital contribution of the shortfall
in value to the acquirer. The parent may choose to record the distribution from the
1530 Chapter 20
transferor (and consequent impairment in its carrying value) and the contribution to the
acquirer (and consequent increase in its carrying value). This is consistent with our
analysis in Chapter 8 at 4.2 regarding intra-group transactions.
The acquirer will not necessarily record the capital contribution even if this is an option
available to it.
However, the underlying principles are not affected by whether or not the acquirer
makes this choice – there has been a transfer of value from one subsidiary to another.
This demonstrates why the business transfer alone does not necessarily result in an
impairment charge in the parent entity.
If the above analysis is not supportable in a particular jurisdiction then an impairment
write down may have to be taken.
Actual circumstances may be less straightforward. In particular, the transferor and the
acquirer may not be held directly by the same parent. This may make it necessary to
record an impairment against the carrying value of the transferor (‘shell’) company in its
intermediate parent to reflect its loss in value, which will be treated as an expense or as
a distribution, depending on the policy adopted by the entity and the relevant facts and
circumstances. See Chapter 8 at 4.4.1 for a discussion of the policy choices available to
the entity. There may be another, higher level within the group at which the above
arguments against impairment will apply.
Example 20.39: Group reorganisations and impairment
Topco has two directly held subsidiaries, Tradeco and Shellco. It acquired Shellco for £30 million and
immediately thereafter transferred all of its trade and assets to its fellow subsidiary Tradeco for book value
of £10 million with the proceeds being left outstanding on intercompany account. Shellco now has net assets
of £10 million (its intercompany receivable) but a carrying value in Topco of £30 million. On the other hand,
the value of Tradeco has been enhanced by its purchase of the business at an undervalue.
In our view, there are two acceptable ways in which Tradeco may account for this. The cost of the investment
in Tradeco’s individual financial statements may be the fair value of the cash given as consideration, i.e.
£10 million. Alternatively, it is the fair value of the cash given as consideration (£10 million), together with
a deemed capital contribution received from Topco for the difference up to the fair value of the business of
Shellco of £20 million, which will be recognised in equity, giving a total consideration of £30 million.
The capital contribution measured under the second method represents the value distributed by Shellco to its
parent Topco and thence to Tradeco. Meanwhile Topco could record a transfer of £20 million from the
carrying value of Shellco to the carrying value of Topco.
If there is an intermediate holding company between Topco and Shellco but all other facts remain the same, then
it would appear that an impairment ought to be made against the carrying value of Shellco in its immediate
parent, which will be treated as an expense or as a distribution, depending on the policy adopted by the entity
and the relevant facts and circumstances. The argument against impairment would still apply in Topco.
12.4 Investments in subsidiaries, associates and joint ventures
Investment in subsidiaries, associates and joint ventures carried at cost in separate
financial statements of the parent and equity accounted investments are within the
scope of IAS 36.
While a parent entity could elect to account for investments in subsidiaries, associates
and joint ventures under IFRS 9, most parent entities choose to carry these investments
at cost as permitted by IAS 27. [IAS 36.4, IAS 27.10]. IAS 27 was amended in 2014 to give
Impairment of fixed assets and goodwill 1531
parent entities the option to use the equity method to account for these investments in
an entity’s separate financial statements.
The recoverable amount for investments carried at cost or under the use of the equity
method is the higher of FVLCD and VIU. Specific questions around FVLCD are dealt
with at 12.4.1 below. Challenges in respect of VIU for invest
ments carried at cost or
under the equity method are dealt with at 12.4.2 below.
It is important to note that testing an investment in an associate or joint venture carried
under the equity method using IAS 28 in group financial statements cannot always
provide assurance about the recoverability of the cost of shares in the investor’s
separate financial statements, if they are carried at cost. [IAS 27.10(a)]. Accounting for the
group’s share of losses may take the equity interest below cost and an impairment test
could reveal no need for an impairment loss in the consolidated financial statements.
This might not necessarily provide any assurance about the (higher) carrying value of
shares in the separate financial statements.
12.4.1
Fair value less costs of disposal (FVLCD) for investments in
subsidiaries, associates and joint ventures
In order to establish FVLCD an entity must apply IFRS 13’s requirements as outlined
at 6 above and described in detail in Chapter 14.
If an entity holds a position in a single asset or liability that is traded in an active
market, IFRS 13 requires an entity to measure fair value using that price, without
adjustment. This requirement is accepted when the asset or liability being
measured is a financial instrument in the scope of IFRS 9. However, when an entity
holds an investment in a subsidiary, joint venture or associate the question is what
the unit of account is, the individual shares or the investment as a whole, and
whether it would be appropriate to include a control premium when determining
fair value provided that market participants take this into consideration when
pricing the asset. See 6.1.1 above and Chapter 14 at 5.1.1 for consideration and
recent developments in respect of this.
Unlike investments with quoted prices, discussed above, there are less issues if FVLCD
is used to determine the recoverable amount of an asset that does not have a quoted
price in an active market and is either:
• an investment in a subsidiary, joint venture or associate; or
• a CGU comprising the investment’s underlying assets.
Using FVLCD may avoid some of the complexities of determining appropriate cash
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