The two-step impairment test involves the following:
Step 1: Compare the carrying amount of the cash generating unit, including the
goodwill, with its recoverable amount. The recoverable amount of such a unit should be
measured, consistent with the requirements in IAS 36, as the higher of value in use and
net selling price. If the recoverable amount of the unit exceeds its carrying amount, the
goodwill allocated to that unit is not impaired. If not, then follow Step 2.
Step 2: Compare the implied value of goodwill with its carrying amount.
Implied goodwill is the excess of the recoverable amount of the unit to which the
goodwill has been allocated over the fair value of the net identifiable assets that the
entity would recognize if it acquired that unit in a business combination on the date of
the impairment test. Any excess of the carrying amount of goodwill over its implied
value is recognized immediately, in profit or loss, as an impairment loss. If the cash
generated unit is impaired, any impairment loss is allocated first to reduce the carrying
amount of goodwill, and subsequently to the other assets of the cash generating unit on
a pro-rata basis, based on the carrying amount of each asset in the unit.
IFRS 3 requires that goodwill related to a minority interest should not be
recognized in the consolidated financial statements of the parent company. When a
parent purchases a controlling, but not 100%, interest in a subsidiary, the goodwill
recognized relates only to the parent's ownership interests and does not include amounts
attributable to the minority.
Minority interest is defined in IAS 27 “Consolidated and Separate Financial
Statements” as that portion of the profit or loss and net assets of a subsidiary attributable
to equity interests that are not owned, directly or indirectly through subsidiaries, by the
parent.
When there is a minority interest in a cash-generating unit to which goodwill
was allocated, the carrying amount of that unit comprises:
■ interest of the parent company and minority interest in net identifiable assets
of the unit;
■ parent company interest in goodwill.
Some of the recoverable amount of the cash generating unit is attributable to
minority interest in goodwill and, therefore, is not recognized in the consolidated
financial statement. As a result, to test for impairment, the carrying amount must be
adjusted before being compared with its recoverable amount.
Adjustment = Goodwill allocated to cash-generating unit + Unrecognized
minority interest
New value is compared with the adjusted recoverable amount of the unit in order
to establish whether the cash-generating unit is impaired.
Example 3: Goodwill impairment based on IFRS 3 (2004)
Following on example 1, XYZ Company acquired 80% of ABC Company, cost
of combination $200,000 mil. Goodwill has been initially assessed at $48,000 mil.
ABC’s assets meet the cash-generating unit definition. Assume that, at year-end, XYZ
determines that the recoverable amount of cash-generating unit ABC is $160,000 mil.
XYZ use linear amortization for a period of 10 years to identifiable assets and
anticipates no residual value. At the acquisition date, goodwill has been recognized, so
it must be tested annually for impairment.
Testing for impairment at year-end
A part of $160,000 mil recoverable amount is attributed to unrecognized
minority interest in goodwill. Based on IAS 36, the carrying amount of ABC should be
adjusted in order to include goodwill attributable to minority interest, and then
compared to the recoverable amount. Therefore, it is necessary to assess the goodwill
attributable to minority interest.