IFRS 3 (Revised)- Groups of Entities (D-2.2)

Goodwill and impairment

Nature of Goodwill:

• Goodwill arises in group financial statements as it is tied to the net assets of an acquired subsidiary and is not separable from them.

Impairment Review Process:

• Conducted at the cash-generating unit (CGU) level, typically assumed to be the subsidiary.
• The carrying amount (net assets + goodwill) of the CGU is compared to its recoverable amount.

Allocation of Impairment Losses:

• If impairment occurs, goodwill is written off first.
• Remaining losses are allocated pro rata to other assets unless a specific asset is impaired.

Annual Review Requirement:

• Goodwill is subject to an annual impairment review to prevent overstatement in financial statements.

Accounting Characteristics of Goodwill:

• Goodwill cannot be revalued; impairment losses are directly charged to income.
• Goodwill is not amortized since it is not systematically consumed or worn out.

Scenario:

• A parent company acquires a subsidiary for $800, which includes goodwill of $200.

• The subsidiary's carrying amount (net assets + goodwill) is $1,000.

• After a year, the recoverable amount of the subsidiary is determined to be $900.

Steps for the Impairment Review:
Compare Carrying Amount and Recoverable Amount:

• Carrying amount = $1,000

• Recoverable amount = $900

• Impairment loss = $1,000 - $900 = $100

Allocate Impairment Loss:

• Goodwill is written off first.

• Goodwill = $200, so $100 of impairment is charged against goodwill.

• Remaining goodwill after impairment = $200 - $100 = $100.

Accounting Impact:

• The impaired goodwill of $100 is charged directly to the income statement.

• No impairment is allocated to other assets since the goodwill absorbs the full loss.

Revised Values in Financial Statements:

• Goodwill: $100 (after impairment).

• Net assets: Unchanged at $800 (no further loss to allocate).

• Total carrying amount of the subsidiary: $900 (matches recoverable amount).

This example demonstrates how goodwill is evaluated, impaired, and accounted for in line with impairment review principles.