Illustration 7 – Application of the ‘Bottom-Up’ and ‘Top-Down’ Tests to Goodwill
In this illustration, tax effects are ignored.
At the end of 20X0, enterprise M acquired 100% of enterprise Z for Rs. 3,000 lakhs. Z has 3 cash-generating units A, B and C with net fair values of Rs. 1,200 lakhs, Rs. 800 lakhs and Rs. 400 lakhs respectively. M recognises goodwill of Rs. 600 lakhs (Rs. 3,000 lakhs less Rs. 2,400 lakhs) that relates to Z.
At the end of 20X4, A makes significant losses. Its recoverable amount is estimated to be Rs. 1,350 lakhs. Carrying amounts are detailed below.
Schedule 1. Carrying amounts at the end of 20X4 (Amount in Rs. lakhs)
|
End of 20X4 |
A | B | C | Goodwill |
Total |
| Net carrying amount |
1,300 |
1,200 | 800 | 120 |
3,420 |
At the date of acquisition of Z, the net fair values of A, B and C are considered a reasonable basis for a pro-rata allocation of the goodwill to A, B and C
Schedule 2. Allocation of goodwill at the end of 20X4
| End of 20X4 | A | B | C | Total | ||
| Net fair values | 1,200 | 800 | 400 | 2400 | ||
| Pro-rata | 50% | 33% | 17% | 100% | ||
| End of 20X4 | ||||||
| Net carrying amount | 1,300 | 1,200 | 800 | 3,300 | ||
| Allocation of goodwill (using the pro-rata above) | 60 | 40 | 20 | 120 | ||
| Net carrying amount (after allocation of goodwill) | 1,360 | 1,240 | 820 | 3,420 | ||
In accordance with the ‘bottom-up’ test in paragraph 78(a) of this Standard, M compares A’s recoverable amount to its carrying amount after the allocation of the carrying amount of goodwill.
Schedule 3. Application of ‘bottom-up’ test (Amount in Rs. lakhs)
| End of 20X4 |
A |
| Carrying amount after allocation of goodwill (Schedule 2) |
1,360 |
|
Recoverable amount |
1,350 |
| Impairment loss |
10 |
M recognises an impairment loss of Rs. 10 lakhs for A. The impairment loss is fully allocated to the goodwill in accordance with paragraph 87 of this Standard.
B – Goodwill Cannot Be Allocated on a Reasonable and Consistent Basis
There is no reasonable way to allocate the goodwill that arose on the acquisition of Z to A, B and C. At the end of 20X4, Z’s recoverable amount is estimated to be Rs. 3,400 lakhs.
At the end of 20X4, M first applies the ‘bottom-up’ test in accordance with paragraph 78(a) of this Standard. It compares A’s recoverable amount to its carrying amount excluding the goodwill.
Schedule 4. Application of ‘bottom-up’ test (Amount in Rs. lakhs)
|
End of 20X4 |
A |
| Carrying amount | 1,300 |
| Recoverable amount | 1,350 |
| Impairment loss | 0 |
Therefore, no impairment loss is recognised for A as a result of the ‘bottom-up’ test.
Since the goodwill could not be allocated on a reasonable and consistent basis to A, M also performs a ‘top-down’ test in accordance with paragraph 78(b) of this Standard. It compares the carrying amount of Z as a whole to its recoverable amount (Z as a whole is the smallest cash-generating unit that includes A and to which goodwill can be allocated on a reasonable and consistent basis)
Schedule 5. Application of the ‘top-down’ test (Amount in Rs. lakhs)
| End of 20X4 | A | B | C | Goodwill | Z |
| Carrying amount | 1,300 | 1,200 | 800 | 120 | 3,420 |
| Impairment loss arising from the ‘bottom-up’ test | __0__ | __-___ | __-___ | ___-__ | __0__ |
| Carrying amount after the ‘bottom-up’ test | _1,300_ | _1,200_ | _800_ | _120_ | _3,420_ |
| Recoverable amount | 3,400 | ||||
| Impairment loss arising from ‘top-down’ test | 20 |
Therefore, M recognises an impairment loss of Rs. 20 lakhs that it allocates fully to goodwill in accordance with paragraph 87 of this Standard.