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

 

 

A – Goodwill Can be Allocated on a Reasonable and Consistent Basis

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

 

A

B

C

Total

Net fair values	1,200	800	400	2,400
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)