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Hi Mike,
Hope this finds you well..I would appreciate your help in this below example from technical article related to IFRS3 *Business combination*.
I don’t know where the problem comes from! but I am a little confused of his way in answering this.
EXAMPLE 2
Parent owns 80% of Subsidiary (a CGU). Its identifiable net assets at 31 March 2010 are $500.Scenario 1
Net assets included in the consolidated statement of financial position $500
Consolidated goodwill
(calculated under method (i)) $200NCI $140
Scenario 2
Net assets included in the consolidated statement of financial position $500
Consolidated goodwill
(calculated under method(ii)) $160NCI $100
An impairment review of Subsidiary was carried out at 31 March 2010.
Required:
For scenarios 1 and 2, calculate the impairment losses and show how they would be allocated if the recoverable amount of Subsidiary at 31 March 2010 if the impairment review concluded that the recoverable of Subsidiary was:
(i) $450
(ii) $550Thanks in advance.
It looks like the impairment loss in scenario 1 is $250 ($700 – $450) and that should be allocated against the goodwill figure first to eliminate it in full leaving zero goodwill. The remaining $50 should be allocated to the other net assets
In scenario 2, there is no goodwill attributable to the nci – their valuation is proportionate to their share of the identifiable net assets (20% x $500) but we need to apply the concept of notional goodwill. In the case in the question the nci own 20% and the parent 80%.
The argument goes that if 80% holding has $160 goodwill attributable, then a 20% holding must have notional goodwill of $40
The investment in the subsidiary is $560 from the parent and $100 from the nci – a total of $660 and together with the notional goodwill that gives a total of $700.
The recoverable amount is now down to $550 – a fall of $150
This amount should be allocated in the ratio 80/20 to write down the goodwill and notional goodwill first of all
So 80% x $150 = $120 against the $160 goodwill attributable to the parent leaving $160 – $120 = $40 and … oh! The nci has only notional goodwill attributable to them.
So allocate a notional $30 (20% x $150) against the nci’s notional goodwill figure of $40 bringing that down to $10 … but that notional $10 does not appear anywhere in the financial statements! It’s notional. It’s a pretend value
The idea behind this is to restrict / calculate the amount of goodwill impairment to the parent’s relative share where the nci has been valued on a proportionate basis
Is that anywhere close to the article answer?
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