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The fair value less cost to sell of the oil platform is $14 million, which is the $16 million offered minus the disposal costs. The value-in-use of the platform
will be $24 million minus $10 million, which is $14 million. The carrying amount of the platform is $20 million minus $10 million, which is $10 million.
Therefore, the recoverable amount of the cash-generating unit exceeds its carrying amount, and it is not impaired.
If an entity disposes of an operation within the cash-generating unit, the goodwill associated with that operation will be included in the carrying amount of the
operation when calculating the gain or loss on disposal. The amount included in the gain or loss on disposal will be based on the proportion of the cash-generating unit
that is disposed of.
PRACTICAL INSIGHT
Fraport AG, a German entity, discloses in its accounts that evidence of its internal reporting suggested that the economic performance of an asset was
going to be worse than expected. A review of the assets revealed that earnings performance had been lower than expected, and impairments of €38 million
were recognized against property, plant, and equipment.
Sometimes an entity may reorganize its business so that changes will be made to the composition of the cash-generating units. If this is the case, goodwill will be
reallocated to new cash-generating units based on their relative values.
Facts
CASE STUDY 8
An entity has an oil platform in the sea. The entity has to decommission the platform at the end of its useful life, and a provision was set up at the
commencement of production. The carrying value of the provision is $8 million. The entity has received an offer of $20 million (selling costs $1 million)
for the rights to the oil platform, which reflects the fact that the owners have to decommission it at the end of its useful life. The value-in-use of the oil
platform is $26 million ignoring the decommissioning costs. The current carrying value of the oil platform is $28 million.
Required
Determine whether the value of the oil platform is impaired.
Solution
The fair value less costs to sell is $(20 – 1) million, or $19 million.
The value-in-use is $(26 – 8) million, or $18 million.
The carrying value is $(28 – 8) million, or $20 million.
Therefore, the recoverable amount ($19 million) is less than its carrying value ($20 million), and the asset is impaired.
A cash-generating unit to which goodwill has been allocated will be tested for impairment annually and also when there is an indication that the unit might be
impaired.
GOODWILL
An entity has the option of measuring noncontrolling interest (NCI) at fair value or its proportionate share of the acquiree’s identifiable net assets at the acquisition
date. If the fair value method is chosen, the amount of goodwill recognized will increase. Thus the valuation method chosen will have ongoing consequences for the
impairment testing of goodwill
For the purpose of impairment testing, if the proportionate method is used then the carrying amount of goodwill is grossed up to include the goodwill attributable to
NCI. This notionally adjusted figure is then compared with the recoverable amount of the unit to decide whether the cash-generating unit is impaired.
CASE STUDY 9