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In this month’s column, PwC authors answer technical questions on business combinations and the recognition of goodwill; and on related party disclosures

This article was first published in the June 2012 International edition of Accounting and Business magazine.


Entity A acquired entity B some time ago and recognised goodwill on that business combination. The goodwill was then allocated to entity B’s two cash-generating units (CGU Y and CGU Z) based on the synergies that were expected to be derived from the acquisition. During the current year, entity A announced a restructuring plan of its global operations. The restructuring will result in most of CGU Z’s assets being transferred into a new division that is separate from entity B. CGU Z’s remaining assets do not support the originally allocated goodwill; management is therefore considering impairment. Is management’s thinking right?


Not necessarily. IAS 36, Impairment of Assets, requires reallocation of purchased goodwill when an entity reorganises its reporting structure, and that reorganisation changes the composition of one or more cash-generating units. The reallocation should be based on a ‘relative value approach’ unless management can demonstrate some other method that better reflects the goodwill associated with the reorganised units.

The restructuring of the CGU Z appears to be a reasonable trigger for entity A’s management to consider the reallocation of goodwill. The standard is not prescriptive about how this reallocation should be performed. If entity A’s management chooses the ‘relative value approach’ because there is no better method available, it must establish a reasonable method for determining relative value. The reallocation might be performed, for example, based on relative ‘value in use’ or ‘fair value less costs to sell’ measures or even on the existing carrying values of the two cash-generating units. It is likely that some – possibly all – of the goodwill in CGU Z should be transferred to the new division.


XYZ Ltd has entered into an arrangement with its finance director in the year ended 31 December 2011. The entity is in the process of relocating its head office and requires the FD to move to another location. It has agreed that it will purchase the FD’s residential property from her in the event that she is unable to find a buyer for it before 31 June 2012. XYZ Ltd is preparing its accounts for the year ended 31 December 2011. Is disclosure of this agreement required in the financial statements?


IAS 24, Related Party Disclosures, includes members of key management personnel within the definition of related parties. The standard also notes that ‘key management personnel’ includes all directors of the entity (whether executive or otherwise). So the FD is a related party of XYZ Ltd, and the agreement between the two parties should be disclosed in XYZ Ltd’s financial statements if it meets the definition of a related-party transaction.

IAS 24 was amended for annual periods commencing on or after 1 January 2011. As part of this amendment, a requirement was added for an entity to disclose commitments with related parties, including ‘a commitment to do something if a particular event occurs or does not occur in the future’. The arrangement for XYZ Ltd to purchase the property from the FD if she is not able to sell it should therefore be disclosed in the accounts under this requirement, even though the actual purchase of the property has not occurred during the financial year.

This month’s solutions were compiled by Imre Guba, Richard Tattershall and Iain Selfridge of PwC’s Accounting Consulting Services

Last updated: 21 Mar 2014