Source: https://www.bdo.com.au/en-au/accounting-news/accounting-news-november-2016/blind-freddy
Timestamp: 2020-06-02 14:58:42
Document Index: 656979850

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Blind Freddy – Common errors in accounting for impairment – Part 5 – Testing goodwill for impairment - BDO Australia
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Blind Freddy – Common errors in accounting for impairment – Part 5 – Testing goodwill for impairment
The nature of goodwill leads to a number of complex rules as to how it should be treated for impairment testing. This in turn leads to a number of potential ‘Blind Freddy’ errors that could lead to a material misstatement.
The principles for allocating goodwill acquired in a business combination to CGUs or groups of CGUs for the purpose of impairment testing are described in AASB 136 Impairment of Assets, paragraph 80.
not be larger than an operating segment as defined by paragraph 5 of AASB 8 Operating Segments before aggregation.
AASB 136, paragraph 80
Not allocating goodwill acquired in a business combination to the acquirer’s CGUs or groups of CGUs that are expected to benefit from the synergies of the combination.
Allocating goodwill to CGUs at a level lower than that at which goodwill is monitored for internal management purposes.
Lastly, paragraph 80 requires that each CGU or group of CGUs to which goodwill is allocated cannot be larger than an operating segment as defined in paragraph 5 of AASB 8 Operating Segments.
AASB 8, paragraph 5
This requirement applies equally to private companies that are not required to present the segment disclosures in AASB 8. This means that you would need to first identify all your operating segments (before aggregation) prior to allocating goodwill.
Bus Company C, historically based in New South Wales, has created a national business through acquisitions and now operates in Victoria, Tasmania and Western Australia. For the purpose of reporting under AASB 8, it aggregates all of its operating segments because they share similar economic characteristics.
Bus Company C tests goodwill for impairment at the Australian level.
This is an error because each state is likely to meet the definition of an operating segment.
Bus Company D, historically based in New South Wales, has created a national business through acquisitions and now operates in Victoria, Tasmania and Western Australia. Bus Company D is not required to report under AASB 8 Segment Reporting.
Bus Company D tests goodwill for impairment at the Australian level.
Again, this is an error because each state is likely to meet the definition of an operating segment. The requirement in AASB 136 to test at a level no larger than an operating segment applies, regardless of whether the entity is required to report under AASB 8.
Allocating goodwill to CGUs at a level higher than an operating segment, before aggregation.
If goodwill has been allocated to a cash-generating unit and the entity disposes of an operation within that unit, the goodwill associated with the operation disposed of shall be:
included in the carrying amount of the operation when determining the gain or loss on disposal; and
measured on the basis of the relative values of the operation disposed of and the portion of the cash-generating unit retained, unless the entity can demonstrate that some other method better reflects the goodwill associated with the operation disposed of.
AASB 136, paragraph 86
This is a ‘Blind Freddy’ error, resulting in an overstatement of the gain on disposal.
This is also a ‘Blind Freddy’ error, resulting in an overstatement of the gain on disposal.
Not allocating goodwill to an operation that has been disposed of.
Not calculating the amount of goodwill to be allocated to an operation disposed of in a reasonable manner, e.g. using relative fair values of the operation disposed and the portion of the CGU retained.
AASB 136, paragraph 87 also includes requirements for reallocation of goodwill when an entity reorganises its reporting structure so that there is a change in the composition of CGUs to which goodwill has been allocated.
AASB 136, paragraph 87
Historically, Bus Company E operates 20 bus routes across various cities in Australia. The operation comprises 20 CGUs and has been monitored on a city basis.
Bus Company E does not allocate goodwill to these three new units. This is a ‘Blind Freddy’ error as the three new units have no goodwill allocated.
Not reallocating goodwill to the CGUs affected by a group reorganisation.
Not reallocating goodwill based on the relative value approach to the units affected by a group reorganisation.
As described in last month’s accounting news article, a common cause of errors is preparers not distinguishing between the special rules that apply to testing goodwill in respect of allocating to a CGU or a group of CGUs, and the basic requirement to test assets, other than goodwill, for impairment.
When, as described in paragraph 81, goodwill relates to a cash-generating unit but has not been allocated to that unit, the unit shall be tested for impairment, whenever there is an indication that the unit may be impaired, by comparing the unit’s carrying amount, excluding any goodwill, with its recoverable amount. Any impairment loss shall be recognised in accordance with paragraph 104.
AASB 136, paragraph 88
Big Co continues to test impairment only at the level of the A-B-C group. This is a ‘Blind Freddy’ error because Big Co has failed to comply with the requirement in paragraph 88 to perform ‘bottom up’ impairment testing.
Failing to perform ‘bottom up’ impairment testing when there are impairment indicators for an individual CGU that is part of a group of CGUs to which goodwill has been allocated.
AASB 136, paragraph 96
This is another ‘Blind Freddy’ error because impairment testing can be performed at any time during an annual period, provided the test is performed at the same time every year.
Only testing goodwill for impairment at the reporting date.
This is a ‘Blind Freddy’ error because impairment testing must be performed at the same time every year. Changing the timing of impairment testing is not permitted in AASB 136.
Changing the date of impairment testing of goodwill.
This is a ‘Blind Freddy’ error because goodwill must be tested for impairment even if it arises from an acquisition in the year.
Blind Freddy Error 11
Not testing goodwill acquired for impairment in the first year.
This is a ‘Blind Freddy’ error because goodwill must be tested for impairment when there is an impairment indicator, regardless if it has been tested earlier as part of the annual impairment testing cycle.
Blind Freddy Error 12
Not retesting goodwill for impairment when there has been an impairment indicator subsequent to the annual impairment test.
This is a ‘Blind Freddy’ error because goodwill must be tested for impairment when an impairment event has occurred, regardless if it will be tested later as part of the annual impairment testing cycle.
Blind Freddy Error 13
Not testing goodwill for impairment when there has been an impairment indicator prior to the scheduled annual testing.
At the time of impairment testing a cash-generating unit to which goodwill has been allocated, there may be an indication of an impairment of an asset within the unit containing the goodwill. In such circumstances, the entity tests the asset for impairment first, and recognises any impairment loss for that asset before testing for impairment the cash-generating unit containing the goodwill. Similarly, there may be an indication of an impairment of a cash-generating unit within a group of units containing the goodwill. In such circumstances, the entity tests the cash-generating unit for impairment first, and recognises any impairment loss for that unit, before testing for impairment the group of units to which the goodwill is allocated
AASB 136, paragraph 98
One of the buses is not performing to required standards on safety and omissions and is idle. It is estimated the bus will be sold for $50,000 and that a new replacement bus will cost $300,000.
This is a ‘Blind Freddy’ error and an impairment loss of $200,000 should have first been recognised in respect of the underperforming bus (i.e. $250,000 carrying value less $50,000 recoverable amount). Therefore the impairment test in respect of goodwill should have been $1.6 million compared to a CGU with a value of $1.55 million (goodwill of $1 million plus PPE of $550,000).
Blind Freddy Error 14
Writing down goodwill, rather than an individual asset.
Fixed assets – carrying amount (buses) 200 200 200 200 200 1,000
Recoverable amount 200 200 600 500 300 1,800
This is a ‘Blind Freddy’ error. The $200,000 impairment loss should have been recognised against goodwill and not the fixed assets as none of the fixed assets are impaired.
Writing down an individual asset, rather than goodwill.
This concludes our series of Blind Freddy articles on impairment of non-financial assets. We will recommence this series in the new year.
You can access all the previous Blind Freddy impairment articles on our web site:
Part 1 – Common errors in accounting for impairment (May 2016)
Part 2a – Common errors in accounting for impairment (June 2016)
Part 2b – Common errors in accounting for impairment (July 2016)
Part 2c – Errors in determining the discount rate (August 2016)
Part 3 – Errors when determining ‘fair value less costs of disposal’ (September 2016)
Part 4 – Not testing impairment at the correct unit of account (October 2016)