A company allocates goodwill to a reporting unit under US GAAP and, for comparison, allocates the same goodwill to a cash-generating unit under IFRS. In both cases the unit's carrying amount, including goodwill, exceeds what the company believes the unit is actually worth, so an impairment loss must be measured. Under ASC 350, and separately under IAS 36, how is the amount of that impairment loss calculated?
- Under IAS 36, impairment is measured only by comparing the carrying amount to fair value, with value in use never considered as an alternative; under ASC 350, impairment is measured as the carrying amount less the sum of undiscounted future cash flows
- Under ASC 350, impairment equals the excess of the reporting unit's carrying amount over its fair value, capped at the goodwill balance; under IAS 36, impairment equals the excess of the cash-generating unit's carrying amount over its recoverable amount, defined as the higher of fair value less costs of disposal and value in use
- Both frameworks require a first step comparing the unit's carrying amount to the sum of its undiscounted expected future cash flows before any impairment loss can be measured
- Neither framework limits the impairment loss to the amount of goodwill actually allocated to the unit being tested, so a loss can exceed the recorded goodwill balance
Why B? And why not the others?
Correct answer: B. Under ASC 350, impairment equals the excess of the reporting unit's carrying amount over its fair value, capped at the goodwill balance; under IAS 36, impairment equals the excess of the cash-generating unit's carrying amount over its recoverable amount, defined as the higher of fair value less costs of disposal and value in use
ASC 350, as simplified by ASU 2017-04, measures a goodwill impairment loss as the amount by which a reporting unit's carrying amount, including goodwill, exceeds its fair value, with the loss capped at the total goodwill assigned to that unit so it can never exceed the goodwill actually on the books. IAS 36 instead compares the cash-generating unit's carrying amount to its recoverable amount, defined as the higher of fair value less costs of disposal and value in use, where value in use is the present value of the unit's expected future cash flows; any resulting impairment loss is applied first to reduce the goodwill allocated to that unit before any other assets are written down. The option describing IAS 36 as ignoring value in use is wrong because value in use is one of the two amounts IAS 36 explicitly compares against fair value less costs of disposal when determining the recoverable amount. The option requiring an undiscounted-cash-flow screening step under both frameworks is wrong because neither ASC 350 nor IAS 36 uses an undiscounted-cash-flow recoverability test for goodwill; that screening step belongs to the impairment model for long-lived assets held and used, not goodwill. The option claiming no cap exists under either framework is wrong because ASC 350 explicitly limits the loss to the goodwill balance of the unit being tested.
Source: FASB Accounting Standards Codification ASC 350-20, as amended by Accounting Standards Update No. 2017-04 (goodwill impairment measured as excess of carrying amount over fair value, limited to goodwill balance); IFRS Foundation, IAS 36 Impairment of Assets, paragraphs 6, 18 and 104 (recoverable amount as the higher of fair value less costs of disposal and value in use; impairment allocated first to goodwill)