U U N IT

3
Preparing Consolidated
Financial Statements – Goodwill
and Impairment

Unit Overview

Unit 3 looks at the concept of and treatment of Goodwill (Purchased Goodwill) which
arises in a business combination. We commence with the computation of goodwill
on acquisition. Next, we apply the principles of the revised International Accounting
Standard number 36 (IAS 36) - Impairment of Assets, International Financial Reporting
Standard number 3 (IFRS 3) - Business Combinations and International Financial
Reporting Standard number 10 (IFRS 10) - Consolidated Financial Statements. The
two methods of calculating goodwill impairment are reviewed and explained. This
Unit concludes with a look at the disclosure requirements for impaired goodwill.

Unit 3 Learning Objectives

At the end of this Unit, the student will be able to:

1. Compute goodwill arising from a business combination.

2. Explain the concept of goodwill impairment.

3. Assess whether goodwill has been impaired and calculate an impairment loss.

4. Identify the circumstances that may indicate that goodwill has been impaired.

5. Critically evaluate and analyze a cash generating unit (CGI) for going concern and
impairment issues.

6. Prepare disclosure requirements in accordance with IAS 36 intangible assets with

indefinite lives

28  © 2016 University of the West Indies Open Campus

 This Unit is divided into two sessions as follows:

Session 3.1: The Basic Principle for Measuring for Goodwill on Acquisition

Session 3.2: Impairment of Goodwill and Disclosure Requirements

READING
Required Readings and Resources

Hoyle, J., Schaefer, T., & Doupnik T. (2011). Chapter 4 in Advanced

Accounting (10th Edition). New York McGraw-Hill Irwin.
Available at https://thatsharefile.files.wordpress.com/2013/11/
advanced-accounting-10th-ed-j-hoyle-et-al-mcgraw-hill-2011.
pdf

Beams, F. A., Anthony, J. H., Bettinghaus, B., Smith, K. A. (2012).

Chapter 3 in Advanced Accounting, (11th Edition), United States
of America, Pearson Prentice Hall. Available at: http://www.
boostem.org/pdf/BUSINESS/Advanced_Accounting.pdf

Suggested Reading or Other Resources

1) International Accounting Standards Board (IASB)-IAS Plus

a) IFRS 10 – Consolidated Financial Statements. Available at:

http://www.iasplus.com/en/standards/ifrs/ifrs10

b) IAS 27 - Separate Financial Statements Available at:

http://www.iasplus.com/en/projects/completed/consol/ias-
27-equity-method-in-separate-financial-statements

c. IAS 36 – Impairment of Assets. Available at:

http://www.iasplus.com/en/standards/ias/ias36
You are also advised to locate and read: Additional papers
relevant to the topics covered.

ACCT3041 Advanced Financial Accounting – UNIT 3  29

 SSession 3.1

Basic Principles for Measuring Goodwill

on Acquisition

Introduction
In January 2008, revisions were made to International Financial Reporting Standards
number three (IFRS 3), Business Combinations and in 2011 revisions to International
Accounting Standards number 27 (IAS 27) Consolidated and Separate Financial
Statements. This standard has now been renamed Separate Financial Statements. At
the same time IFRS 10 Consolidated Financial Statements came into force. These three
standards address related issues of measurement and calculation of goodwill.

The revised standards provide entities with the option, on an individual transaction
basis to measure NCI at the fair value of their proportion of identifiable net assets or
at full fair value. This has increased the transparency of acquisitions in the financial
statements. There are now two ways of measuring goodwill that arises from the
acquisition of a subsidiary in a business combination. Both methods impact on the
annual goodwill impairment review. In this session we will review both methods of
measuring goodwill.

Session Objectives
After completing this session you will be able to:
1. Define two different methods of goodwill
2. Describe how goodwill is measured
3. Compute goodwill arising from a business combination using the traditional and
full goodwill methods.

Measuring Goodwill
The revised IFRS 3 Standard allows the parent company two methods to compute
goodwill arising from a business combination. They are:
1. The Traditional (proportional) method
2. The Full Goodwill method

30  ACCT3041 Advanced Financial Accounting – UNIT 3

 The Traditional Method
This method of measuring purchased goodwill on the acquisition of a subsidiary
computes purchased goodwill as the excess of the fair value of the consideration paid
by the parent company for the fair value of the parent company’s share of the net
assets acquired/ purchased.

Fair Value of consideration paid by parent company x

Fair Value of parent company’s share of the net identifiable assets (x)

= Goodwill on acquisition of Subsidiary (Parent Company’s share) x

The Traditional (Proportional) method of calculating goodwill arising from a business

combination, only recognizes and calculates goodwill attributable to the parent
company.

The Full Goodwill Method

This method of computing goodwill, calculates goodwill for the whole subsidiary (i.e.
the portion of goodwill due to the parent company and the portion of goodwill due to
the Non-Controlling Interest (NCI)).

The Full Goodwill method measures goodwill on the acquisition of a subsidiary as

the difference between the fair value of the entire subsidiary (i.e. fair value of the
consideration paid by the parent company and the fair value of the consideration paid
by the NCI) and the fair value of the net assets acquired/purchased.

According to IFRS 3.32, goodwill is measured as the difference between: The aggregate
of (i) the acquisition-date fair value of the consideration transferred, (ii) the amount of
any NCI, and (iii) in a business combination achieved in stages, the acquisition-date
fair value of the acquirer ’s previously held equity interest in the acquire; and the net
of the acquisition-date amounts of the identifiable assets acquired and the liabilities
assumed (measured in accordance with IFRS 3).

If the difference above is negative, the resulting gain is recognized as a bargain.

ACCT3041 Advanced Financial Accounting – UNIT 3  31

 Traditional and Full Goodwill Method
This is an example of the Traditional and Full Goodwill method. Notice how
goodwill is calculated in both methods. Working through this example will
help prepare you to compute goodwill.
Follow the steps for the below example, and observe Steps 2 and 3 in part A
and steps 3 and 4 in part B:

Example – Chelsea Corporation

Chelsea Corporation acquired 90% interest in the equity shares of the Maine
Corporation for $1.5 million on December 31st, 2008. The fair value of the
net assets of Maine Corporation at that date is $1.2 million. The fair value of
the NCI at that date (i.e. the fair value of the Maine Corporation shares not
acquired by Chelsea Corporation) is $300,000.

Required
A. Compute the value of goodwill arising on the acquisition of Maine
Corporation using the Traditional/Proportional method.
B. Compute the value of goodwill arising on the acquisition of Maine
Corporation using the Full Goodwill method.

Solution
Part A
STEP 1: Determine the consideration paid by the parent company - Chelsea
Corporation.

Fair value of consideration paid by Chelsea Corporation is $1.5million

STEP 2: Compute the parent’s share (Chelsea Corporation) of the

fair value of the net assets of the subsidiary (Maine Corporation)
acquired.

Fair Value of Maine Corporation net assets $1.2 million

% of Maine Corporation acquired by Chelsea Corporation 90%

Therefore, the Chelsea Corporation share of Maine

$1,080,000
Corporation net assets acquired {90% x $1,200,000}

32  ACCT3041 Advanced Financial Accounting – UNIT 3

 STEP 3: Compute the goodwill on acquisition of Maine Corporation
attributable to Chelsea Corporation.

Chelsea Corporation fair value of consideration paid

$1,500,000
(Chelsea) Corporation cost of investment)
Less: Chelsea Corporation share of the fair value of the
($1,080,000)
net assets of Maine Corporation acquired
Goodwill (Premium) on acquisition attributable to
$420,000
Chelsea Corporation

This is a premium purchase resulting in positive goodwill. Chelsea

Corporation would account for the positive goodwill as an intangible
asset in its consolidated financial statements and it will be subject to
annual impairment review in accordance with {IAS36.9}

Part B
STEP 1: Determine the consideration paid by the parent company – Chelsea
Corporation.

Fair value of consideration paid by Chelsea Corporation $1.5 million

STEP 2: Determine the fair value of the NCI.

Fair value of the NCI is $300,000.

STEP 3: Compute the aggregate acquisition-date fair value of the

consideration paid for the subsidiary.

Parent (Chelsea Corporation) fair value of

$1,500,000
consideration paid
Fair value of the NCI $ 300,000
Aggregate fair value of consideration given $1,800,000

STEP 4: Compute the total/aggregate goodwill on acquisition of Maine

Corporation

ACCT3041 Advanced Financial Accounting – UNIT 3  33

 Parent (Chelsea Corporation) fair value of
$1,500,000
consideration paid
Fair value of the NCI $ 300,000
Aggregate fair value of consideration given $1,800,000
Less: Fair value of the net assets of the subsidiary
$1,200,000)
(Maine Corporation)
Total Goodwill $ 600,000

Portion of total goodwill attributable to parent

$ 420,000
company (Chelsea Corporation)
Portion of total goodwill attributable to NCI $ 180,000

This is a premium purchase resulting in positive goodwill. Chelsea Corporation

would account for the positive goodwill as an intangible asset in its consolidated
financial statements and it will be subject to annual impairment review in
accordance with {IAS36.96}

VIDEOS
Please watch the video below explaining the treatment of goodwill
in a Business Combination after acquisition to gain a better
understanding of the process in calculating goodwill.

Rivers N. (2011, September 4), “An Example Problem of Accounting

for Business Combination Involving Goodwill”. [YouTube].
Available at: https://www.youtube.com/watch?v=eQ_Q0AzaPzc
Here is another video that discusses goodwill in detail and offers a
better understanding of it.

Preston P, (2012, July 18) What Is Goodwill on Balance

Sheet [YouTube]. Available at https://www.youtube.com/
watch?v=Dl9ysfotNzY

34  ACCT3041 Advanced Financial Accounting – UNIT 3

 LEARNING ACTIVITY 3.1
Accounting for Goodwill
Please attempt this problem on goodwill and post your response to
the discussion forum for discussion with your tutor.
Laser Vision Company
On July 1, 2009 Sharp Image Corporation purchased Laser Vision by
paying $500,000 cash and issuing a $300,000 note payable. At July 1,
2009, the balance sheet of Laser Vision Company was as follows:

Laser Vision Company Balance Sheet

as at July 2009
Liabilities and Stockholders’
Equity
Assets: Liabilities:
Cash 100,000 Accounts payable 100,000
Accounts 180,000 Long-term notes 300,000
receivable payable
Inventory 200,000 Total Liabilities 400,000
Land 80,000 Shareholders’ Equity:
Buildings (net) 150,000 Common stock $1 par 400,000
Equipment (net) 140,000 Retained earnings 70,000
Trademarks 20,000 Total shareholders’ 470,000
Equity
Total liabilities and
Total Assets 870,000 870,000
shareholder ’s Equity

The recorded amounts all approximate current values except for

land (fair value of $160,000), inventory (fair value of $125,000), and
trademarks (fair value of $15,000).
Required:

1. Determine the value of goodwill on acquisition.

2. Prepare the July 1, 2009 entry for Sharp Image Corporation to record
the purchase.

Session 3.1 Summary

In this session we reviewed the treatment of goodwill in a business combination.
We referred to the revised IFRS 3 Standard, which allows the parent company two
methods to compute goodwill arising from a business combination. In this regard we
explored the traditional (proportional) method and the Full Goodwill method.

ACCT3041 Advanced Financial Accounting – UNIT 3  35

 SSession 3.2

Impairment of Goodwill and Disclosure

Requirements

Introduction
The concept of purchased goodwill does not exist in isolation. Because it arises from
a business combination, it is not separated from the net assets of the subsidiary
acquired. Consequently, the annual impairment review of goodwill occurs at the cash-
generating unit level, which reflects a collection of assets that generate a stream of cash
flows and incurs expenses in generating those cash flows. When reviewing goodwill
impairment in a business combination, it is customary to associate a cash-generating
unit with a subsidiary (i.e. a subsidiary is assumed to be a close approximation to a
cash- generating unit.).

The carrying amount (carrying value) is the net assets of the subsidiary and the
goodwill of the subsidiary. (Refer to IAS.36 74-76)

IFRS 3 prohibits the amortization of goodwill acquired in a business combination and

instead requires that goodwill be tested annually for impairment, or more frequently
if events or changes in circumstances indicate that the assets might be impaired.

Goodwill recognized in a business combination has an indefinite life and therefore

is not amortized. Rather paragraph 90 of IAS 36 - Impairment of Assets specifies
that a cash-generating unit to which goodwill has been allocated, must be tested for
impairment annually, and whenever there is an indication of potential impairment.
If the recoverable amount of the unit exceeds its carrying amount, the unit and the
goodwill allocated to that unit are considered not to be impaired. However, if the
carrying amount of the unit exceeds the recoverable amount of the unit, the entity
must recognize an impairment loss.

The carrying amount is the net assets of the subsidiary and the goodwill of the
subsidiary. (Refer to IAS.36 74-76).

IAS 36 – Impairment of Goodwill

• Goodwill is impaired when the recoverable amount is less than the carrying amount.
• When goodwill is deemed to be impaired, reduce the carrying amount of the
intangible asset, goodwill to the recoverable amount.
• Recognize the impairment loss as an expense.

In this session we review the issue of impairment of goodwill and examine disclosure
requirements for impairment of goodwill.

36  ACCT3041 Advanced Financial Accounting – UNIT 3

 Session Objectives
After completing this session you will be able to:
1. Assess whether goodwill has been impaired and calculate impairment loss.
2. Identify the circumstances that may indicate that goodwill has been impaired.
3. Prepare disclosure requirements in accordance with IAS 36 for intangible assets
with indefinite long lives.

Testing for Goodwill Impairment

Goodwill should be tested for impairment annually. IAS 36.96 requires that goodwill
arising on a business combination in the current year be tested for the impairment
before the end of the current year. This ensures that the intangible asset of goodwill is
not overstated in the consolidated financial statements.

To test for impairment, goodwill must be allocated to each of the acquirer ’s cash-
generating units, or groups of cash-generating units, that are expected to benefit from
the synergies of the combination, irrespective of whether other assets or liabilities of
the acquire are assigned to those units or groups of units. Each unit or group of units
to which goodwill is so allocated shall (IAS 36.80):

Represent the lowest level within the entity at which the goodwill is monitored for
internal management purposes, and;
• Not be larger than an operating segment determined in accordance with IFRS 8
Operating Segments.

A cash-generating unit to which goodwill has been allocated shall be tested for
impairment at least annually by comparing the carrying amount of the unit. (IAS
36.90).
• If the recoverable amount of the unit exceeds the carrying amount of the unit, the
unit and the goodwill allocated to that unit is not impaired.
• If the carrying amount of the unit exceeds the recoverable amount of the unit, the
entity must recognize an impairment loss.

ACCT3041 Advanced Financial Accounting – UNIT 3  37

 READINGS
Please read the following article on IAS 36 Impairment of Assets to
be familiar with standards. Ensure you understand the disclosure
requirements.

IAS 36 – Impairment of Assets (IAS Plus) Available at http://www.

iasplus.com/en/standards/ias/ias36http://www.iasplus.com/en/
standards/ias/ias36
Text book: pages 103 - 106 Read through the discussion question
and study the steps when testing for impairment.

Hoyle, J., Schaefer, T., & Doupnik T. (2011). Read pages 103 -
106 in Chapter 3 in Advanced Accounting (10th Edition). New
York McGraw-Hill Irwin. Available at https://thatsharefile.files.
wordpress.com/2013/11/advanced-accounting-10th-ed-j-hoyle-
et-al-mcgraw-hill-2011.pdf

VIDEO
Listen to and watch the videos below on Impairment of Assets,
how to test for impairment and how to account for it. Understand
the testing and accounting for impairment. It will be useful when
attempting activity 3.2

Silvia, M. (2013, November 12). IAS 36 Impairment of

Assets. [YouTube]. Available at https://www.youtube.com/
watch?v=vJD9Pmdag8E

Bond, D. (2014, Apr 6). Accounting for Impairment of PPE.

[YouTube]. Available at https://www.youtube.com/
watch?v=vJD9Pmdag8E

IAS 36 - Disclosure Requirements

IAS 136.126 requires the following disclosures:-

(a) The amount of impairment losses recognized in profit or loss during the period
and the line item(s) of the statement of comprehensive income.

(b) The amount of reversals of impairment losses recognized in profit or loss during
the period and the line item(s) of the statement of comprehensive income in
which those impairment losses are reversed.

(c) The amount of impairment losses on revalued assets recognized in other

comprehensive income during the period.

(d) The amount of reversals of impairment losses on revalued assets recognized in

other comprehensive income during the period.

38  ACCT3041 Advanced Financial Accounting – UNIT 3

 An entity shall disclose the following information for the aggregate impairment losses
and the aggregate reversals of impairment losses recognized during the period for
which no information is disclosed in accordance with paragraph 130:

(a) The main classes of assets affected by impairment losses and the main classes
of assets affected by reversals of impairment losses.

(b) The main events and circumstances that led to the recognition of these
impairment losses and reversals of impairment losses.

If some or all of the carrying amount of goodwill or intangible assets with indefinite
useful lives is allocated across multiple cash-generating units (groups of units), and
the amount so allocated to each unit (group of units) is not significant in comparison
with the entity’s total carrying amount of goodwill or intangible assets with indefinite
useful lives, that fact shall be disclosed, together with the aggregate carrying amount
of goodwill or intangible assets with indefinite useful lives allocated to those units
(groups of units). In addition, if the recoverable amounts of any of those units
(groups of units) are based on the same key assumption(s) and the aggregate carrying
amount of goodwill or intangible assets with indefinite useful lives allocated to them
is significant in comparison with the entity’s total carrying amount of goodwill or
intangible assets with indefinite useful lives, an entity shall disclose that fact, together
with:

(a) The aggregate carrying amount of goodwill allocated to those units (groups of
units).

(b) The aggregate carrying the amount of intangible assets with indefinite useful
lives allocated to those units (groups of units).

(c) A description of the key assumption(s).

(d) A description of management’s approach to determining the value(s) assigned

to the key assumption(s), whether those value(s) reflect past experience or, if
appropriate, are consistent with external sources of information, and, if not, how
and why they differ from past experience or external sources of information.

(e) If a reasonably possible change in the key assumption(s) would cause the
aggregate of the units’ (groups of units’) carrying amounts to exceed the
aggregate of their recoverable amounts:

i. The amount by which the aggregate of the units’ (groups of units’)

recoverable amounts exceeds the aggregate of their carrying amounts.

ii. The value(s) assigned to the key assumption(s).

iii. The amount by which the value(s) assigned to the key assumption(s) must
change, after incorporating any consequential effects of the change on
the other variables used to measure recoverable amount, in order for the
aggregate of the units’ (groups of units’) recoverable amounts to be equal
to the aggregate of their carrying amounts.

ACCT3041 Advanced Financial Accounting – UNIT 3  39

 LEARNING ACTIVITY 3.2
Goodwill & Impairment of Goodwill
Attempt the following problem on Goodwill and Goodwill
Impairment. Post your response in the discussion forum and
discuss the answer with your tutor.

Powerglide Corporation has two subsidiaries, Langrova Inc. and Ascot

Gardens Inc.
Langrova Inc. is a 90% owned subsidiary and Powerglide
Corporation’s investment in Ascot Inc is 80%.
At June 30, 2009, the Consolidated Financial Statements include the
following information on each subsidiary:

Langrova Inc.
Consolidated goodwill (Powerglide Corporation share) $250,000
Identifiable net assets $80,000
Ascot Gardens Inc.
Identifiable net assets $1,000,000
Consolidated goodwill (Powerglide Corporation share) ($320,000)

Required:
In accordance with IAS 36, Powerglide Corporation conducted its
annual impairment assessment as at June 30, 2009.
A. Compute the impairment loss for Langrova Inc. and show how it
would be allocated if the recoverable amount for Langrova Inc. at
June 30, 2009 was:
I. $225,000
II. $275,000

B. Compute the impairment loss for Ascot Gardens Inc. and show
how it would be allocated if the recoverable amount for Ascot
Gardens Inc. at June 30, 2009 was:
I. $900,000
II. $1,100,000
C. In accordance with IAS 36, show how the impairment loss for
Langrova Inc. and Ascot Gardens Inc. would be reflected in the
Consolidated Financial Statements of Powerglide Corporation at
June 30, 2009.

40  ACCT3041 Advanced Financial Accounting – UNIT 3

 Session 3.2 Summary
IAS 36—Impairment of Assets specifies that a cash-generating unit to which goodwill
has been allocated, must be tested for impairment annually. In this session we
discussed the testing for goodwill impairment and reviewed videos on accounting
for impairment loss. We also discussed reversing impairment loss and disclosure
requirements.

Unit 3 Summary

This Unit dealt with the treatment of goodwill (Purchased Goodwill) which arises in
a business combination. We discussed the two ways of measuring goodwill that arises
from the acquisition of a subsidiary in a business combination based on the revisions
made to International Financial Reporting Standards number three (IFRS 3), Business
Combinations and International Accounting Standards number twenty-seven (IAS
27), Separate Financial Statements as well as new IFRS 10. In session 2 we reviewed
testing for goodwill impairment and we discussed disclosure requirements. In Unit
4 we will look at Intercompany transactions and the consolidated Income statement.

ACCT3041 Advanced Financial Accounting – UNIT 3  41

 References
Beams, F. A., Anthony, J. H., Bettinghaus, B., Smith, K. A. (2012) Advanced
Accounting, (11th Edition), United States of America, Pearson Prentice Hall.
Retrieved from: http://www.boostem.org/pdf/BUSINESS/Advanced_
Accounting.pdf
Bond, D. (2014, April 6). Accounting for Impairment of PPE. [YouTube]. Retrieved
from https://www.youtube.com/watch?v=vJD9Pmdag8E
Hoyle, J., Schaefer, T., & Doupnik T. (2011). Advanced Accounting (10th Edition).
New York McGraw-Hill Irwin. Retrieved from https://thatsharefile.files.
wordpress.com/2013/11/advanced-accounting-10th-ed-j-hoyle-et-al-
mcgraw-hill-2011.pdf
IAS 27 - Separate Financial Statements Retrieved from http://www.iasplus.com/
en/projects/completed/consol/ias-27-equity-method-in-separate-financial-
statements
IAS 36 – Impairment of Assets Retrieved from http://www.iasplus.com/en/
standards/ias/ias36http://www.iasplus.com/en/standards/ias/ias36
IFRS 10 – Consolidated Financial Statements Retrieved from http://www.iasplus.
com/en/standards/ifrs/ifrs10
Preston, P. (2012, July 18). What Is Goodwill on Balance Sheet? [YouTube]. Retrieved
from https://www.youtube.com/watch?v=Dl9ysfotNzY
Rivers, N. (2011, September 4). An Example Problem of Accounting for Business
Combination Involving Goodwill. [YouTube]. Retrieved from https://www.
youtube.com/watch?v=eQ_Q0AzaPzc
Silvia, M. (2013, November 12). IAS 36 Impairment of Assets. [YouTube]. Retrieved
from https://www.youtube.com/watch?v=vJD9Pmdag8E

42  ACCT3041 Advanced Financial Accounting – UNIT 3