Illustration 8 – Allocation of Corporate Assets :
In this illustration tax effects are ignored.
Background
Enterprise M has three cash-generating units: A, B and C. There are adverse changes in the technological environment in which M operates. Therefore, M conducts impairment tests of each of its cash-generating units. At the end of 20X0, the carrying amounts of A, B and C are Rs. 100 lakhs, Rs. 150 lakhs and Rs. 200 lakhs respectively.
The operations are conducted from a headquarter. The carrying amount of the headquarter assets is Rs. 200 lakhs: a headquarter building of Rs. 150 lakhs and a research centre of Rs. 50 lakhs. The relative carrying amounts of the cash-generating units are a reasonable indication of the proportion of the head-quarter building devoted to each cash-generating unit. The carrying amount of the research centre cannot be allocated on a reasonable basis to the individual cash-generating units.
The remaining estimated useful life of cash-generating unit A is 10 years. The remaining useful lives of B, C and the headquarter assets are 20 years. The headquarter assets are depreciated on a straight-line basis.
There is no basis on which to calculate a net selling price for each cash-generating unit. Therefore, the recoverable amount of each cashgenerating unit is based on its value in use. Value in use is calculated using a pre-tax discount rate of 15%.
Identification of Corporate Assets
In accordance with paragraph 85 of this Standard, M first identifies all the corporate assets that relate to the individual cash-generating units under review. The corporate assets are the headquarter building and the research centre.
M then decides how to deal with each of the corporate assets:
(a) the carrying amount of the headquarter building can be allocated on a reasonable and consistent basis to the cash-generating units under review. Therefore, only a ‘bottom-up’ test is necessary; and
(b) the carrying amount of the research centre cannot be allocated on a reasonable and consistent basis to the individual cashgenerating units under review. Therefore, a ‘top-down’ test will be applied in addition to the ‘bottom-up’ test.
Allocation of Corporate Assets
The carrying amount of the headquarter building is allocated to the carrying amount of each individual cash-generating unit. A weighted allocation basis is used because the estimated remaining useful life of A’s cash-generating unit is 10 years, whereas the estimated remaining useful lives of B and C’s cash-generating units are 20 years.
Schedule 1. Calculation of a weighted allocation of the carrying amount of the headquarter building (Amount in Rs. lakhs)
End of 20X0 | A | B | C | Total |
Carrying amount | 100 | 150 | 200 | 450 |
Useful life | 10 years | 20 years | 20 years | |
Weighting based on useful life | 1 | 2 | 2 | |
Carrying amount after weighting | 100 | 300 | 400 | 800 |
Pro-rata allocation of the building | 12.5% | 37.5% | 50% | 100% |
(100/800) | (300/800) | (400/800) | ||
Allocation of the carrying amount of the building (based on pro-rata above) | 19 | 56 | 75 | 150 |
Carrying amount (after allocation of the building) | 119 | 206 | 275 | 600 |
Determination of Recoverable Amount
A75. The ‘bottom-up’ test requires calculation of the recoverable amount of each individual cash-generating unit. The ‘top-down’ test requires calculation of the recoverable amount of M as a whole (the smallest cash-generating unit that includes the research centre).
Schedule 2. Calculation of A, B, C and M’s value in use at the end of 20X0 (Amount in Rs. lakhs)
A | B | C | M | |||||
Year | Future cash flows | Discount at 15% | Future cash flows | Discount at 15% | Future cash flows | Discount at 15% | Future cash flows | Discount at 15% |
cash flows | at 15% | cash flows | at 15% | cash flows | at 15% | cash flows | at 15% | |
1 | 2 | 3 | 4 | 5 | 6 | 7 | 8 | 9 |
1 | 18 | 16 | 9 | 8 | 10 | 9 | 39 | 34 |
2 | 31 | 23 | 16 | 12 | 20 | 15 | 72 | 54 |
3 | 37 | 24 | 24 | 16 | 34 | 22 | 105 | 69 |
4 | 42 | 24 | 29 | 17 | 44 | 25 | 128 | 73 |
5 | 47 | 24 | 32 | 16 | 51 | 25 | 143 | 71 |
6 | 52 | 22 | 33 | 14 | 56 | 24 | 155 | 67 |
7 | 55 | 21 | 34 | 13 | 60 | 22 | 162 | 61 |
8 | 55 | 18 | 35 | 11 | 63 | 21 | 166 | 54 |
9 | 53 | 15 | 35 | 10 | 65 | 18 | 167 | 48 |
10 | 48 | 12 | 35 | 9 | 66 | 16 | 169 | 42 |
11 | 36 | 8 | 66 | 14 | 132 | 28 | ||
12 | 35 | 7 | 66 | 12 | 131 | 25 | ||
13 | 35 | 6 | 66 | 11 | 131 | 21 | ||
14 | 33 | 5 | 65 | 9 | 128 | 18 | ||
15 | 30 | 4 | 62 | 8 | 122 | 15 | ||
16 | 26 | 3 | 60 | 6 | 115 | 12 | ||
17 | 22 | 2 | 57 | 5 | 108 | 10 | ||
18 | 18 | 1 | 51 | 4 | 97 | 8 | ||
19 | 14 | 1 | 43 | 3 | 85 | 6 | ||
20 | 10 | 1 | 35 | 2 | 71 | 4 | ||
Value in use | 199 | 164 | 271 | 720(1) |
(1) It is assumed that the research centre generates additional future cash flows for the enterprise as a whole. Therefore, the sum of the value in use of each individual cash-generating unit is less than the value in use of the business as a whole. The additional cash flows are not attributable to the headquarter building.
Calculation of Impairment Losses
In accordance with the ‘bottom-up’ test, M compares the carrying amount of each cash-generating unit (after allocation of the carrying amount of the building) to its recoverable amount. Schedule 3. Application of ‘bottom-up’ test (Amount in Rs. lakhs)
End of 20X0 | A | B | C |
Carrying amount (after allocation of the building) (Schedule 1) | 119 | 206 | 275 |
Recoverable amount (Schedule 2) | 199 | 164 | 271 |
Impairment loss | 0 | (42) | (4) |
The next step is to allocate the impairment losses between the assets of the cash-generating units and the headquarter building.
Schedule 4. Allocation of the impairment losses for cash-generating units B and C (Amount in Rs. lakhs)
Cash-generating unit | B | C |
To headquarter building | (12) (42*56/206) | (1) (4*75/275) |
To assets in cash-generating unit | (30) (42*150/206) | (3) (4*200/275) |
(42) | (4) |
In accordance with the ‘top-down’ test, since the research centre could not be allocated on a reasonable and consistent basis to A, B and C’s cash-generating units, M compares the carrying amount of the smallest cash-generating unit to which the carrying amount of the research centre can be allocated (i.e., M as a whole) to its recoverable amount.
Schedule 5. Application of the ‘top-down’ test (Amount in Rs. lakhs)
End of 20X0 |
A |
B |
C |
Building Research M centre |
||
Carrying amount |
100 |
150 | 200 | 150 | 50 |
650 |
Impairment loss arising from the ‘bottom-up’ test |
— |
(30) | (3) | (13) | — |
(46) |
Carrying amount after the ‘bottom-up’ test |
100 |
120 | 197 | 137 | 50 |
604 |
Recoverable amount | ||||||
(Schedule 2) |
720 |
|||||
Impairment loss arising from ‘top-down’ test |
|
0 |
=
Therefore, no additional impairment loss results from the application of the ‘top-down’ test. Only an impairment loss of Rs. 46 lakhs is recognised as a result of the application of the ‘bottom-up’ test.