How Impairment Losses Are Allocated
When a cash-generating unit (CGU) is impaired, IAS 36 does not leave the loss as a single number. It must be spread across the unit's assets so that each asset's carrying amount, depreciation and deferred tax can be updated. IAS 36.104-108 sets the order:
- Goodwill first. The loss reduces any goodwill allocated to the CGU.
- Then the other assets, pro rata. Any remaining loss is allocated to the other assets within the scope of IAS 36, in proportion to their carrying amounts.
- Subject to a floor. No asset may be reduced below the highest of its fair value less costs of disposal (if measurable), its value in use (if determinable) and zero.
- Reallocate the excess. Any amount an asset cannot absorb because of the floor is allocated pro rata to the other assets in the unit.
- Ignore what cannot be allocated. If all assets have reached their floor, the remainder is not recognised, unless another standard requires a liability.
How the CGU's recoverable amount and carrying amount are measured, and when a CGU must be tested, is explained in impairment of assets under IAS 36.
Out-of-scope assets do not absorb losses
Inventories, receivables, contract assets and other assets outside IAS 36 are measured under their own standards first. They may sit in the CGU's carrying amount when the recoverable amount includes their cash flows, but none of the impairment loss is allocated to them.
Each amount allocated to an asset is an impairment loss on that asset. For an asset carried at a revalued amount, it is first debited to that asset's revaluation surplus in other comprehensive income, as described in recognising an impairment loss.
The Order of Testing
The sequence in which assets and units are tested affects the result, so IAS 36 prescribes it:
- Measure out-of-scope assets under their own standards, such as inventory at the lower of cost and net realisable value.
- Test individual assets first. Where an asset in the CGU shows an indication of impairment and its recoverable amount can be determined individually, it is tested and written down on its own. Its reduced carrying amount is then used in the CGU test.
- Test the CGU, including the goodwill and the portion of corporate assets that can be allocated to it on a reasonable basis, and allocate any loss as set out above.
- Test the larger group of CGUs for goodwill and corporate assets that could not be allocated to an individual CGU. The group's carrying amount includes the reduced carrying amounts from step 3.
Testing the individual asset first matters. Without step 2, the asset's own decline would be included in the CGU loss and allocated to goodwill first, overstating the goodwill impairment and understating the impairment of the asset that caused it.
Practical Example: Allocating a CGU Impairment
A retail store is a CGU with the following carrying amounts at year-end. Goodwill of 120,000 from the acquisition of the store chain has been allocated to it. The store's recoverable amount is 945,000, determined including the cash flows from selling its inventory.
The building's fair value less costs of disposal is 585,000. The recoverable amounts of the refrigeration equipment and shelving cannot be determined individually.
| Asset | Carrying amount | Floor |
|---|---|---|
| Goodwill | 120,000 | - |
| Building | 600,000 | 585,000 |
| Refrigeration equipment | 200,000 | 0 |
| Shelving | 100,000 | 0 |
| Inventory (measured under IAS 2) | 90,000 | Not allocated |
| Carrying amount of the CGU | 1,110,000 | |
| Recoverable amount | (945,000) | |
| Impairment loss | 165,000 |
Step 1: Goodwill. Goodwill absorbs 120,000 and is reduced to nil, leaving 45,000 to allocate.
Step 2: Pro rata allocation. The 45,000 is allocated to the building, refrigeration equipment and shelving in proportion to their carrying amounts of 600,000, 200,000 and 100,000. Inventory is excluded.
Step 3: Apply the floor. The building cannot be reduced below 585,000, so it absorbs only 15,000. The remaining 15,000 is reallocated to the refrigeration equipment and shelving in proportion to their carrying amounts (2:1).
| Asset | Initial allocation | Limited by floor | Reallocation | Impairment loss | Revised carrying amount |
|---|---|---|---|---|---|
| Goodwill | 120,000 | - | - | 120,000 | - |
| Building | 30,000 | (15,000) | - | 15,000 | 585,000 |
| Refrigeration equipment | 10,000 | - | 10,000 | 20,000 | 180,000 |
| Shelving | 5,000 | - | 5,000 | 10,000 | 90,000 |
| Inventory | - | - | - | - | 90,000 |
| Total | 165,000 | (15,000) | 15,000 | 165,000 | 945,000 |
| Account | Debit | Credit | |
|---|---|---|---|
| Dr | Impairment loss (P/L) | 165,000 | |
| Cr | Goodwill (SFP) | 120,000 | |
| Cr | Accumulated impairment losses: Building (SFP) | 15,000 | |
| Cr | Accumulated impairment losses: Refrigeration equipment (SFP) | 20,000 | |
| Cr | Accumulated impairment losses: Shelving (SFP) | 10,000 |
The reallocation does not require the whole calculation to be repeated: the amount the building cannot absorb is simply spread over the remaining assets. If those assets had also reached their floors, the unallocated amount would not have been recognised.
Each asset is then depreciated on its revised carrying amount, and the related deferred tax is adjusted. No deferred tax arises on the goodwill impairment, because no deferred tax is recognised on goodwill.
Corporate Assets and Goodwill Across Several CGUs
Corporate assets, such as a head office building, a research centre or a shared IT platform, contribute to the cash flows of several CGUs but generate no independent cash inflows. IAS 36.102 requires them to be tested as follows:
- The portion that can be allocated to a CGU on a reasonable and consistent basis is included in that CGU's carrying amount and tested with it.
- A portion that cannot be allocated reasonably is tested by first testing the CGU without it, and then testing the smallest group of CGUs to which it can be allocated.
Goodwill follows the same pattern. It is allocated to the lowest level at which management monitors it for internal purposes, which may be a group of CGUs, but no larger than an operating segment. A loss at the group level is allocated using the same order: goodwill first, then the other assets pro rata.
Practical Example
An entity has two divisions, North and South, each a CGU. A shared IT platform with a carrying amount of 1,500,000 is allocated 40% to North and 60% to South based on usage. Goodwill of 2,000,000 is monitored only at the level of the entity as a whole.
Step 1: Test each division with its share of the IT platform.
| North | South | |
|---|---|---|
| Division assets | 4,800,000 | 4,000,000 |
| Allocated IT platform | 600,000 | 900,000 |
| Carrying amount | 5,400,000 | 4,900,000 |
| Recoverable amount | 4,500,000 | 5,200,000 |
| Impairment loss | 900,000 | - |
North's loss of 900,000 is allocated pro rata (4,800,000 : 600,000): 800,000 to North's assets and 100,000 to the IT platform, assuming no asset's floor is reached.
Step 2: Test the entity as a whole, including goodwill.
| Amount | |
|---|---|
| North (4,800,000 − 800,000) | 4,000,000 |
| South | 4,000,000 |
| IT platform (1,500,000 − 100,000) | 1,400,000 |
| Goodwill | 2,000,000 |
| Carrying amount | 11,400,000 |
| Recoverable amount of the entity | (10,600,000) |
| Impairment loss allocated to goodwill | 800,000 |
The total impairment loss is 1,700,000: 800,000 on North's assets, 100,000 on the IT platform and 800,000 on goodwill, which is reduced to 1,200,000.
Goodwill and Non-Controlling Interests
How a subsidiary's goodwill is tested depends on how the non-controlling interest (NCI) was measured under IFRS 3, as explained in how to calculate goodwill.
| NCI at proportionate share | NCI at fair value | |
|---|---|---|
| Goodwill recognised | Parent's share only | 100% (parent and NCI) |
| Goodwill used in the test | Grossed up notionally to 100% | As recognised |
| Goodwill impairment recognised | Parent's share of the notional loss | Full loss |
| NCI share of goodwill impairment | None | On the same basis as profit or loss |
| NCI share of impairment of other assets | Yes | Yes |
The gross-up is needed because the CGU's recoverable amount reflects the cash flows of the whole subsidiary, including the synergies attributable to the NCI. Comparing it with a carrying amount that contains only the parent's share of goodwill would understate the impairment.
Practical Example
A parent acquires 75% of a subsidiary for 3,600,000 when its identifiable net assets have a fair value of 4,000,000. The subsidiary is a single CGU. At the next year-end, its identifiable assets are carried at 4,100,000 and its recoverable amount is 3,800,000.
NCI at proportionate share. NCI is 1,000,000 (25% × 4,000,000), and recognised goodwill is 600,000 (3,600,000 + 1,000,000 − 4,000,000). For the test, goodwill is grossed up to 800,000 (600,000 ÷ 75%).
| Amount | |
|---|---|
| Identifiable assets | 4,100,000 |
| Notional goodwill (100%) | 800,000 |
| Notional carrying amount | 4,900,000 |
| Recoverable amount | (3,800,000) |
| Impairment loss | 1,100,000 |
The loss is allocated 800,000 to notional goodwill and 300,000 to the identifiable assets. Only the parent's 75% of the goodwill loss is recognised, writing off the recognised goodwill of 600,000. The 300,000 on the identifiable assets is recognised in full.
| Account | Debit | Credit | |
|---|---|---|---|
| Dr | Impairment loss (P/L) | 900,000 | |
| Cr | Goodwill (SFP) | 600,000 | |
| Cr | Accumulated impairment losses: PPE (SFP) | 300,000 | |
| Dr | Non-controlling interest (SFP) (25% × 300,000) | 75,000 | |
| Cr | Profit attributable to non-controlling interest | 75,000 |
The NCI does not share in the goodwill impairment, because the recognised goodwill belongs entirely to the parent.
NCI at fair value. If the NCI's fair value at acquisition was 1,250,000, goodwill is 850,000 (3,600,000 + 1,250,000 − 4,000,000) and no gross-up is needed. The carrying amount is 4,950,000, and the impairment loss of 1,150,000 is allocated 850,000 to goodwill and 300,000 to the identifiable assets. The whole loss is recognised, and the NCI's 25% share of 287,500 is attributed to it.
When the CGU is larger than the subsidiary
If the subsidiary's goodwill is tested as part of a larger CGU that also contains the parent's own assets, the goodwill impairment is first split between the parts of the CGU with and without an NCI, on the basis of the relative carrying values of their goodwill. The NCI shares only in losses on the part it has an interest in, never in impairment of the parent's own assets.
Reversing Impairment Losses in a CGU
When the recoverable amount of a previously impaired CGU increases because of a change in estimates, the reversal is allocated in a mirror image of the original allocation, with three differences:
- Goodwill is excluded. An impairment loss on goodwill is never reversed.
- Pro rata to carrying amounts. The reversal is allocated to the unit's other assets in proportion to their carrying amounts.
- Ceiling instead of floor. No asset may be increased above the lower of its recoverable amount (if determinable) and the carrying amount, net of depreciation, it would have had without the impairment loss. Any excess is allocated pro rata to the other assets; any amount that still cannot be allocated is not recognised.
Where an asset in the unit has a determinable recoverable amount, it is tested on its own first, as for an impairment loss.
Example
A store CGU was impaired in a prior year, which wrote its goodwill off in full. Improved trading forecasts now increase its recoverable amount to 38,800 above its carrying amount.
| Asset | Carrying amount | Ceiling (carrying amount without impairment) | Initial allocation (5%) | Reallocation | Reversal |
|---|---|---|---|---|---|
| Building | 560,000 | 576,000 | 28,000 | (12,000) | 16,000 |
| Refrigeration equipment | 144,000 | 160,000 | 7,200 | 8,000 | 15,200 |
| Shelving | 72,000 | 80,000 | 3,600 | 4,000 | 7,600 |
| Total | 776,000 | 38,800 | - | 38,800 |
The building is capped at 576,000, so 12,000 of its initial allocation is reallocated to the refrigeration equipment and shelving (2:1). Both remain below their ceilings after the reallocation. The reversal of 38,800 is recognised in profit or loss, and future depreciation is based on the new carrying amounts.
Reversals for individual assets, and the rule that the passage of time alone does not justify one, are covered in reversing an impairment loss.
Quick Reference Summary
| Question | Answer |
|---|---|
| What absorbs a CGU impairment loss first? | Goodwill allocated to the CGU. |
| How is the remainder allocated? | To the other assets within the scope of IAS 36, pro rata to their carrying amounts. |
| What is the floor for each asset? | The highest of fair value less costs of disposal, value in use and zero. |
| What happens to amounts above the floor? | They are reallocated pro rata to the other assets. Any amount that cannot be allocated is not recognised. |
| Do inventories and receivables absorb losses? | No. They are measured under their own standards. |
| What is tested first? | Individual assets with a determinable recoverable amount, then CGUs, then groups of CGUs. |
| How are corporate assets tested? | Allocated to CGUs on a reasonable basis, or tested with the smallest group of CGUs to which they can be allocated. |
| How is goodwill treated with NCI at proportionate share? | Grossed up to 100% for the test; only the parent's share of the goodwill loss is recognised. |
| How are reversals allocated? | Pro rata to assets other than goodwill, capped at the lower of recoverable amount and carrying amount without the impairment. |
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Conclusion
An impairment loss on a cash-generating unit is allocated first to goodwill and then to the unit's other IAS 36 assets in proportion to their carrying amounts. No asset is reduced below its own recoverable amount or zero, and any amount an asset cannot absorb is spread over the others. Testing individual assets before the CGU, and CGUs before groups of CGUs, keeps the loss with the assets that caused it.
Corporate assets and goodwill are tested at the lowest level to which they can reasonably be allocated, and goodwill in a partly owned subsidiary is grossed up when the NCI is measured at its proportionate share. For how the recoverable amount itself is measured, see impairment of assets under IAS 36.
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