Allocating goodwill to cash-generating units

Learning objectives

• Identify the units expected to benefit from the synergies to which goodwill is allocated, at the lowest level of internal monitoring and not larger than an operating segment.L2, L3
• Justify the level at which goodwill is allocated and how it relates to internal monitoring and to IAS 21.L3, L4

Normative references

• IAS 36 §80For impairment testing, goodwill acquired in a business combination is allocated, from the acquisition date, to each of the acquirer's CGUs, or groups of CGUs, expected to benefit from the synergies of the combination, whether or not other assets or liabilities of the acquiree are assigned to those units or groups; each unit or group represents the lowest level at which goodwill is monitored for internal management purposes and is not larger than an operating segment (IFRS 8, para. 5) before aggregation.
• IAS 36 §81Goodwill represents future economic benefits that are not individually identified; it does not generate cash flows independently and often contributes to the cash flows of several CGUs. When it can be allocated on a non-arbitrary basis only to groups of CGUs, the lowest level of monitoring may comprise several CGUs, and references to CGUs to which goodwill is allocated (paragraphs 83 to 99 and Appendix C) also apply to those groups.
• IAS 36 §82Testing goodwill at the level at which it is monitored internally does not require new reporting systems to be developed.
• IAS 36 §83The level of allocation for the test may differ from the level at which goodwill is allocated for measuring foreign currency gains and losses under IAS 21; monitoring at a lower level for IAS 21 purposes does not require testing at that level.

Original summaries of the paragraphs (reference register), never a quotation of the standard.

12 questions

• For the purpose of impairment testing, to which units is goodwill acquired in a business combination allocated?L2
• What upper limit does IAS 36 set for the unit or group of units to which goodwill is allocated?L2
• Which statements about goodwill are correct under IAS 36? (several answers)L2
• The Velonor group has acquired a chain of bicycle shops. Each shop is a CGU. Management monitors the goodwill from this acquisition at the level of the Urban Bikes group, which comprises five shops, within the Mobility operating segment. It has no monitoring of goodwill shop by shop. At which level is goodwill allocated?L3
• Optimedia monitors goodwill at the level of its three divisions, each within a separate operating segment. Its internal auditor argues that IAS 36 requires it to design goodwill reporting CGU by CGU. What should be concluded?L3
• For the purposes of IAS 21, the Hexaport group tracks the goodwill of each of its foreign subsidiaries, whereas it monitors goodwill for internal management at the level of its two regional divisions. What consequence does this finer tracking have for the level of the impairment test?L3
• Brivane's audit committee is reviewing the goodwill allocation policy. Which statements comply with IAS 36? (several answers)L3
• The Calderis group has three operating segments: Heating, Air Conditioning and Services. It has just acquired Thermalys, whose activities all fall within the Heating segment, where the synergies are expected, and the goodwill is monitored there by that segment's management. The finance director proposes to test this goodwill at the level of the whole group, where the headroom of the other segments would comfortably cover any loss. Which analysis is correct?L3
• The retailer Primavente acquires the logistics company Flexroute. The business plan shows that most of the synergies will come from lower delivery costs in two existing Primavente CGUs, North Stores and South Stores, monitored separately by management within the same operating segment. Flexroute forms a third CGU, which will also benefit from the synergies to a lesser extent. The accountant proposes to allocate all the goodwill to the Flexroute CGU, on the grounds that the acquired assets are there. Which analysis is correct?L3
• Lumivia, which has two operating segments (Public Lighting and Residential Lighting), has only ever monitored goodwill at the level of the entity as a whole. It acquires a manufacturer whose synergies will benefit both segments. The groups of CGUs in each segment allow a non-arbitrary allocation. How should Lumivia allocate this goodwill?L4
• The Oceanis group acquires Medilab, a network of laboratories located in three countries. Oceanis has two operating segments; the expected synergies concern only the Health segment, where management monitors performance, goodwill included, at the level of two regional hubs, each grouping several CGUs. The controller proposes either to test the goodwill at the level of the whole group, or to create CGU-by-CGU reporting, aligned with the country-level tracking performed for IAS 21. Write a memo justifying the level at which goodwill is allocated.L4
• The Ardentis group has acquired Nordhaven, which holds operating subsidiaries in Norway, Sweden and Denmark. For IAS 21, goodwill is assigned to each of these three foreign operations. Management monitors goodwill at the level of the Nordic hub, a group of CGUs that remains within the Northern Europe operating segment, where all the synergies are expected. The auditors question the level of the impairment test. Which analysis is correct?L4