This article discusses those two methods. It then discusses the impact of this difference when performing an impairment review.

How to calculate goodwill

When calculating goodwill arising on the acquisition of a subsidiary, there are two ways of measuring the non-controlling interest (NCI):

1. at its proportion of the fair value of the subsidiary’s identifiable net assets, or
2. at fair value.

The first method is sometimes referred to as the proportionate method. It means that the goodwill which is calculated and recognised in the consolidated statement of financial position is solely attributable to the parent company.

The second method is sometimes referred to as the full goodwill method. It means that the goodwill which is calculated and recognised in the consolidated statement of financial position relates to the whole of the subsidiary, ie the goodwill which is both attributable to the parent’s interest and the NCI.

Example – goodwill calculation
Borough acquired an 80% interest in the equity shares of High for consideration of $500. The fair value of the identifiable net assets of High at that date was $400. The fair value of the NCI at that date (ie the fair value of High’s shares not acquired by Borough) was $100.

Required
(1) Calculate goodwill arising on the acquisition of High if the NCI at acquisition was measured at its proportionate share of the fair value of High’s identifiable net assets.
(2) Calculate goodwill arising on the acquisition of High if the NCI at acquisition was measured at its fair value.

Solution
(1) Proportionate goodwill

(2) Full goodwill

Basic principles of impairment

An asset is impaired when its carrying amount exceeds its recoverable amount. The recoverable amount is defined as the higher of the fair value less costs of disposal and the value in use. Value in use is the present value of the future net cash flows expected to be derived from using the asset.

Most assets are subject to an impairment review only if there are indicators of impairment. IAS 36, Impairment of Assets lists sources of information which would trigger an impairment review.

External sources

• market value declines
• negative changes in technology, markets, economy, or laws
• increases in market interest rates
• company share price is below the carrying amount 

Internal sources

• obsolescence or physical damage
• asset is part of a restructuring or held for disposal
• worse economic performance than expected

However, some assets, such as goodwill arising on a business combination and intangible assets which are not amortised, are subject to an annual impairment review.

Example – impairment of an asset
A company has an asset, correctly classified as property, plant and equipment, which has a carrying amount of $800. The asset has not been revalued. The asset is subject to an impairment review. If the asset was sold then it would sell for $610 and there would be associated selling costs of $10. The estimate of the present value of the future cash flows to be generated by the asset if it were kept is $750.

Required
Determine the outcome of the impairment review.

Solution
An asset is impaired when its carrying amount exceeds the recoverable amount, where the recoverable amount is the higher of the fair value less costs of disposal and the value in use. In this case, with a fair value less costs of disposal is $600 ($610 - $10) and the value in use is $750. The recoverable amount will be the higher of the two, which is $750.
 

The asset is written down from $800 to $750, with an impairment loss of $50 reported in the operating category of the statement of profit or loss.

In the event that the recoverable amount had exceeded the carrying amount then no impairment loss would have been recognised.

Goodwill and impairment

The goodwill arising on the acquisition of a subsidiary is subject to an annual impairment review. This requirement ensures that goodwill is not overstated in the consolidated financial statements.

Goodwill cannot be sold separately from a business, nor does it generate cash flows independently. Therefore, goodwill must be tested for impairment as part of a cash-generating unit, that is to say a collection of assets which together create an independent stream of cash. The cash-generating unit will normally be assumed to be the subsidiary. In this way, when conducting the impairment review, the carrying amount will be that of the net assets and the goodwill of the subsidiary compared with the recoverable amount of the subsidiary.

When looking to assign the impairment loss to particular assets within the cash-generating unit, unless there is an asset which is specifically impaired, it is goodwill that is written off first. Any further impairment is allocated to the other assets in proportion to each asset’s carrying amount. An asset cannot be written down below its recoverable amount, if determinable.

Proportionate goodwill and the impairment review

When the NCI at acquisition has been measured at its share of the fair value of the subsidiary’s identifiable net assets, then the goodwill which has been calculated and recognised in the consolidated financial statements is solely attributable to the parent company. For the purposes of conducting the impairment review, it is therefore necessary to gross up goodwill to include an unrecognised notional goodwill attributable to the NCI.

Any impairment loss that arises is first allocated against the total of recognised and unrecognised goodwill in the proportion that the parent and NCI share profits and losses.

Any amounts written off against the notional goodwill will not affect the consolidated financial statements and NCI. Any amounts written off against the recognised goodwill will be attributable to the parent only, without affecting the NCI.

If the total amount of impairment loss exceeds the amount allocated against recognised and notional goodwill, the excess will be allocated against the other assets in proportion to their carrying amounts. This further loss will be shared between the parent and the NCI in the proportion that they share profits and losses.

Example – impairment of proportionate goodwill
At the year-end, an impairment review is being conducted on a 60%-owned subsidiary. At the date of the impairment review, the carrying amount of the subsidiary’s net assets was $250 and the carrying amount of goodwill was $300. The NCI at acquisition was measured at its share of the fair value of the subsidiary’s identifiable net assets. The recoverable amount of the subsidiary was $700.

Required
Determine the outcome of the impairment review.

Solution
In conducting the impairment review, it is first necessary to gross up goodwill to include the unrecognised share attributable to the NCI.

For the purposes of the impairment review, the goodwill of $500 together with the net assets of $250 form the carrying amount of the cash-generating unit. The calculation of the impairment review is as follows:

The impairment loss does not exceed the total of the recognised and unrecognised goodwill so therefore it is only goodwill that has been impaired. The other assets are not impaired. As proportionate goodwill is only attributable to the parent, the impairment loss will not impact NCI.

Only the parent’s share of the goodwill impairment loss will be recorded, which amounts to $30 (60% x $50).

The impairment loss will be allocated to goodwill. It will be written down to $270 ($300 – $30) in the consolidated statement of financial position.

In the consolidated statement of profit or loss, the impairment loss of $30 will be charged as an expense in the operating category. There is no impact on the NCI.

In the consolidated statement of financial position, retained earnings will be reduced by $30. There is no impact on the NCI.

Full goodwill and the impairment review

If goodwill has been calculated by measuring the NCI at acquisition at its fair value, then all the amounts needed in the impairment review process are already recognised in the consolidated financial statements. Any impairment loss (whether it relates to goodwill or the other assets) will be allocated between the parent and the NCI in the normal proportion in which they share profits and losses.

Example – impairment of full goodwill
At the year-end, an impairment review is being conducted on an 80%-owned subsidiary. At the date of the impairment review, in the consolidated financial statements, the carrying amount of the subsidiary’s net assets were $400 and the carrying amount of goodwill was $300. The NCI at acquisition was measured at is fair value. The recoverable amount of the subsidiary at the year-end was $500.

Required
Determine the outcome of the impairment review.

Solution
The subsidiary, including its goodwill, is a cash-generating unit. The calculation of the impairment arising is as follows:

The impairment loss will firstly be allocated to goodwill, which will be written down to $100 ($300 – $200) in the consolidated statement of financial position.

In the statement of profit or loss, the impairment loss of $200 will be charged as an expense in the operating category. Of this, $160 (80% x $200) is attributable to the owners of the parent company, and $40 (20% x $200) is attributable to the NCI.

In the equity section of the consolidated statement of financial position, retained earnings will be reduced by the parent’s share of the impairment loss, which is $160 (80% x $200). The NCI will be reduced by $40 (20% x $200).

Originally written by Sally Baker and Tom Clendon (updated by a member of the SBR examining team)