minny12/12 and trailer 6/13

Kerri, I’m not sure that I understand you here! It seems to me that two goodwills are as calculated, fair values of net assets are given in the question within the two respective statements of financial position, two fair value adjustments attributable to non-depreciable land are calculated and recoverable amounts are given in the questions.

So, where’s the problem? Or maybe it’s me that is missing something?

2,220 net assets is in the question, 35 fair value adjustment is as calculated, 80 goodwill is as calculated and recoverable amount is given.

“Total equity 2,220”
“The recoverable amount of the net assets of Park was $2,088 million.”
“The excess in fair value is due to non-depreciable land.” (calculated as 35 in working 1 “FV adjustment – land (balance) 35”

“Fair value of consideration for 60% interest 1,250
Fair value of identifiable net assets acquired:
Share capital 1,210
Retained earnings 650
OCE 55
FV adjustment – land (balance) 35
1,950 x 60% 1,170
Goodwill 80”

???????????????

I understand Kerri totally, I have the same problem. You see Mike let me make the problem clearer to you. In Trailer we are told “Goodwill of Park and Caller was impairment tested at 31 May 2013. There was no impairment relating to Caller. The recoverable amount of the net assets of Park was $2,088 million. There was no impairment of the net assets of Park before this date and any impairment loss has been determined to relate to goodwill and property, plant and equipment.”

So when we want to get the impairment here we take the net assets at y/e & then we add goodwill (and proportional goodwill, in this case because we are told to use the proportional goodwill method, but otherwise we wouldn’t gross it up). So we take 2255 + 133.3 (goodwill, grossed up in total) and then compare this with the recoverable amount of 2088 to get impairment of 300.3

Now in Minny, we don’t follow this style or this method. Why?

In Minny, we are told as follows:

“Both Bower and Heeny were impairment tested at 30 November 2012. The recoverable amounts of both cash generating units as stated in the individual financial statements at 30 November 2012 were Bower, $1,425 million, and Heeny, $604 million, respectively. The directors of Minny felt that any impairment of assets was due to the poor performance of the intangible assets. The recoverable amount has been determined without consideration of liabilities which all relate to the financing of operations.”

Now the net assets, at y/e of Heeny, for instance, were $400 and then the goodwill for Heeny was 23 so why not just add this two figures together to get 423 and compare with 604 to get no impairment since recoverable amount is greater than carrying value.

Instead, what the answer does, is that it look on to the “total assets” in the original balance sheet (or statement of financial position, given in the question above) so in the published balance sheet of Heeny in the original questions for total assets is that we are given ” 595″ + goodwill of “23” and then fair value adjustments of “36” and then compare the total of all these figures (654) with 604 to then get an impairment (50) to set off against goodwill and then intangible assets .

Why are there two different approaches to impairments? Why this discrepancy between the 2012 Dec exam and the 2013 June exam? How will we know in the exam to decide which approach to follow. There are two methods, conflicting with each other and giving differing results. Could you kindly explain this to me and Kerry, please?

Kerri, we gross up the Trailer values for the notional goodwill attributable to the nci but then we deduct that notional goodwill further down in the same working (from memory the parent held 60% and the nci 40%) If 80 is the goodwill attributable to 60% then the nci must have notional goodwill of 53.33. But since the nci have not been allocated any goodwill, we cannot allocate any of the impairment loss of goodwill against them.

However, we can allocate some of the impairment loss attributable to the INCA against the nci (40% x (247 – 80) )

Me (and Kerri) the question states that “The recoverable amount has been determined without consideration of liabilities which all relate to the financing of operations.” What does the recoverable amount become when the liabilities are also taken into account?

The lesson here is that it is vital that you read very carefully (and understand fully) the question and the information that the examiner is giving you. In the two questions, the information is slightly different

Does that help?

Because recoverable amount is overstated (““The recoverable amount has been determined without consideration of liabilities which all relate to the financing of operations.”) we need to reconsider / recalculate the recoverable amount in order to be able to compare the adjusted figure with the fair valued net assets

Does that make it better?

No, the notional grossing up is merely to determine whether the investment is impaired.\
instead of grossing up, I believe we could consider the parent’s percentage of the recoverable amount and compare that with the parent’s investment

Re the “total asset / total equity” issue we would normally take total equity because capital employed (ie total equity) = net assets

In Minny the asset value is given, not the net assets. And we need net assets

Are we there yet?

If we already know that goodwill is 20 and that impairment is 20, and we know that nci is proportional …….

The reason why we would gross up for the notional goodwill of the proportionate nci is to determine whether there has been an impairment when compared with recoverable amount.

So your question precludes the necessity to gross up because you already have given the figure of 20 as the impairment

If we needed to gross up (because you didn’t know the impairment amount), we would consider the fair values of the identifiable net assets, add on our 20 goodwill, add on the notional goodwill attributable to the nci (13.33 in your example) compare that total with recoverable amount, calculate the value of the impairment, deduct the notional value of the nci goodwill and charge the resultant amount against the parent goodwill (Dr PorL Impairment, Cr Goodwill)

In your figures above, we won’t credit nci with 13.33 and we won’t debit nci with 5.32. The only entry that you would need is to debit PorL, probably in cost of sales, with the parent’s share of the impairment. Because the nci is proportional, the parent’s share is 100% so Dr PorL Impairment CoSales and Cr Goodwill

Getting there?

Agreed impairment of $10.33 – that’s comparing identifiable net assets + goodwill + notional goodwill with recoverable amount

That’s an interesting journal entry you have up there! You appear to be missing a debit of $3.20

Suspense Account maybe? 🙂

See my next post below

Kerri – do you have a calculator?

$10.33 goodwill less $5.33 attributable to nci notional goodwill leaves $5 to be impaired (equivalent to your $4.67!)

Dr Retained earnings Cr Goodwill $5

and nothing goes against the nci

Are we now sorted?

You’re welcome