A company is testing a CGU for impairment at the end of 2020. The CGU has a carrying amount of $820 million which includes $350 million of goodwill. The cash flow forecast is for 10 years. The net cash flow from the CGU is expected to be $90 million in 2021, and to grow by 6% every year until 2025, and then grow by 3% every year from 2025 to 2030. The fair value of the CGU is $750 million (assume cost to sell in inconsequential). The company estimates that its discount rate (to be used in value-in-use calculations) is 7%.

a.     What is the goodwill impairment charge under IFRS?

b.     Assume the CGU is also a Reporting Unit (RU) under U.S. GAAP. What is the goodwill impairment charge under U.S. GAAP?

c.     Repeat parts a and b, but now assume that the carrying value of the goodwill is only $35 million (out of the total $820 carrying value of the CGU/RU). In addition to calculating the goodwill impairment under IFRS and US GAAP, calculate the impairment required for the other identifiable assets in the CGU under IFRS, and explain why you may not have enough information to calculate the impairment required for the other identifiable assets in the RU under US GAAP.

d.     Go back to assuming that the carrying value of the goodwill is $350 million. Now assume that the company wants to sensitivity analysis and check what would be the goodwill impairment charge if assumptions were a bit more conservative, and specifically, if the growth of cash flow until 2025 would be 5% a year instead of 6%, and the growth in the years 2026-2030 would be zero instead of 3%. Solve parts a and b again with these new, more conservative, assumptions.

Answer rating: 100% (QA)

a Under IFRS the impairment test for goodwill is conducted by comparing the carrying amount of the CGU Cash Generating Unit with its recoverable amount The recoverable amount is the higher of the CGUs ... View the full answer