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- July 2009
- Impairment of Goodwill
Impairment of Goodwill
- By Rob Mackay
- Published 15/07/2009
- July 2009
- Unrated
ASIC’s reviews of financial reports identified an average write down in goodwill and indefinite life intangibles of 5.8% for the six months to 31 December 2008.
With goodwill generally being the first asset to take an impairment hit when the outlook for business units deteriorates, further goodwill write downs can be expected for the full year to 30 June 2009.
Impairment issues should therefore be at the forefront of management’s minds this reporting season, and for those entities without in-house expertise, external consultants should be considered sooner rather than later.
Testing goodwill at the appropriate CGU level
Since goodwill does not generate cash flows independently from other assets, its value must be allocated to cash generating units (CGU’s) for the purpose of impairment testing.
AASB 136 requires that goodwill be either allocated to (i) a single CGU where it is possible to attribute the goodwill acquired to a specific CGU; or (ii) a group of CGU’s where multiple CGU’s are expected to benefit from the synergies arising from goodwill acquired and where the goodwill cannot be allocated to individual CGU’s on a non-arbitrary basis.
(i) Single CGU allocation
The recoverable value of the CGU incorporating the goodwill must be compared with its carrying amount. Any impairment identified at the CGU level will first reduce the carrying value of goodwill and then be used to reduce the carrying value of other assets.
(ii) Multiple CGU allocation
Often, the benefits of goodwill span across a group of CGU’s. Goodwill that has been attributed to a group of CGU’s may be assessed at either this group level, or at a higher level no larger than the operating segment to which the CGU’s belong. This level shall reflect the way that the entity manages its operations and monitors the associated goodwill.
Individual CGU’s benefiting from the goodwill (but to which the goodwill has not been allocated) will first be assessed for impairment if there is an impairment indicator by comparing its carrying value (excluding goodwill) with recoverable value. The CGU’s across which goodwill has been allocated will then be assessed for impairment at the group level at which management has chosen to monitor it, by comparing the aggregate carrying values, including the goodwill allocated, with recoverable value of that group. Again, any impairment identified will first reduce the carrying value of goodwill and then be used to reduce the carrying value of other assets.
Timing
A CGU, or group of CGU’s, to which goodwill has been allocated, will need to be tested each year for impairment regardless of the existence of any impairment indicators since AASB 136 requires that goodwill be tested for impairment annually.
Management can select at what point in the year that the goodwill impairment test relating to a particular CGU (or group of CGU’s where applicable) will be conducted, however it must then be conducted at the same time every year (unless there is an earlier indication of impairment). For goodwill acquired during the year, the related CGU must be tested again before the end of the year.
With goodwill generally being the first asset to take an impairment hit when the outlook for business units deteriorates, further goodwill write downs can be expected for the full year to 30 June 2009.
Impairment issues should therefore be at the forefront of management’s minds this reporting season, and for those entities without in-house expertise, external consultants should be considered sooner rather than later.
Testing goodwill at the appropriate CGU level
Since goodwill does not generate cash flows independently from other assets, its value must be allocated to cash generating units (CGU’s) for the purpose of impairment testing.
AASB 136 requires that goodwill be either allocated to (i) a single CGU where it is possible to attribute the goodwill acquired to a specific CGU; or (ii) a group of CGU’s where multiple CGU’s are expected to benefit from the synergies arising from goodwill acquired and where the goodwill cannot be allocated to individual CGU’s on a non-arbitrary basis.
(i) Single CGU allocation
The recoverable value of the CGU incorporating the goodwill must be compared with its carrying amount. Any impairment identified at the CGU level will first reduce the carrying value of goodwill and then be used to reduce the carrying value of other assets.
(ii) Multiple CGU allocation
Often, the benefits of goodwill span across a group of CGU’s. Goodwill that has been attributed to a group of CGU’s may be assessed at either this group level, or at a higher level no larger than the operating segment to which the CGU’s belong. This level shall reflect the way that the entity manages its operations and monitors the associated goodwill.
Individual CGU’s benefiting from the goodwill (but to which the goodwill has not been allocated) will first be assessed for impairment if there is an impairment indicator by comparing its carrying value (excluding goodwill) with recoverable value. The CGU’s across which goodwill has been allocated will then be assessed for impairment at the group level at which management has chosen to monitor it, by comparing the aggregate carrying values, including the goodwill allocated, with recoverable value of that group. Again, any impairment identified will first reduce the carrying value of goodwill and then be used to reduce the carrying value of other assets.
Timing
A CGU, or group of CGU’s, to which goodwill has been allocated, will need to be tested each year for impairment regardless of the existence of any impairment indicators since AASB 136 requires that goodwill be tested for impairment annually.
Management can select at what point in the year that the goodwill impairment test relating to a particular CGU (or group of CGU’s where applicable) will be conducted, however it must then be conducted at the same time every year (unless there is an earlier indication of impairment). For goodwill acquired during the year, the related CGU must be tested again before the end of the year.
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Article Series
This article is part 3 of a 5 part series. Other articles in this series are shown below:
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Impairment of Goodwill