An impairment loss on the goodwill generated in a business combination occurs when a cash-generating unit carrying amount exceeds its recoverable amount.
In this sense, said impairment generated must first be attributed to the goodwill.
If remaining impairment exists, this must be attributed to the assets to make up the cash-generating unit under paragraph 104 of IAS 36.
For an entity to recognize a goodwill, a business combination is necessary.
A business combination results from the union of two or more entities in a single entity that reports.
For example, company A acquires a line of business from a hospital.
This entity must recognize the assets and liabilities of the acquired entity (hospital) at fair value.
If, as a result of this acquisition, the consideration given to the hospital is greater than the fair value of its assets and liabilities, the acquired company must recognize goodwill.
This goodwill is an asset that shows the result of having paid a higher value to purchase a certain business from another entity.
This asset should not be amortized; however, it will be necessary to check if, it shows impairment at the end of the period reported.
Let’s look at the following example:
A pharmaceutical company acquires the business line of a hospital related to cardiac surgery for 450,000.
The business combination was effected through the transfer of assets and liabilities to the acquiring entity.
The information on the assets and liabilities of the acquired business on the acquisition date is shown below:
The accounting recognition of the pharmaceutical company is as follows:
As you can see, the acquiring entity recognizes the assets and liabilities of the acquiree at fair value, including the assets generated internally by the hospital, such as the list of clients.
In this way, goodwill of 30,000 is generated.
The next step to understanding the concept of goodwill impairment is to know the cash-generating unit definition.
For this, we will continue to use the example of the pharmaceutical company and the hospital.
As we saw in the business combination, the pharmaceutical company recognized the hospital’s property, plant, and equipment.
This property, plant, and equipment consists of a large number of equipments.
If there is evidence that part of these assets has decreased it’s value at the end of the reporting period, the entity must perform an impairment test and recognize this loss.
However, according to management’s judgment, if it is not possible to analyze the impairment of property, plant, and equipment asset-by-asset, then, the entity must perform the impairment test in the entire cash-generating unit, that is, at the line of business as such.
In this case, the cash-generating unit is made up of the asset group of the hospital’s cardiac surgery business line.
This unit can generate cash inflows that are independent of the cash flows derived from other assets or groups of assets of the company.
Remember that the recoverable amount of an asset or a cash-generating unit is the higher value between its fair value less costs to sell, and its value in use.
Now, since they are such specialized equipment, the entity comes to the conclusion that there is no active market for this type of equipment, and therefore, the fair value cannot be reliably determined; for this reason, the company uses the value in use to determine the recoverable amount.
Value in use is the present value of future cash flows that a cash-generating unit can generate over time.
Then, if at the end of the reporting period, the value in use of the cash-generating unit is 400,000 and, as we saw previously, the carrying amount of property, plant and equipment is 410,000; exist an impairment loss of the 10,000 cash-generating unit
However, according to paragraph 104 of IAS 36, the loss will be distributed first to the total goodwill, which is 30,000; thus, the new carrying amount of goodwill is 20,000
But how would the accounting recognition be if the impairment loss increases to 50,000?
In this case, the carrying amount of goodwill would be zero, and the carrying amount of the unit’s assets would be 390,000 (410,000 – 20,000).
If you want more information about the accounting recognition of a cash-generating unit, I recommend you read the following post:
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