Measurement and allocation of goodwill impairment losses when there are non-controlling interests
An entity purchases 80% of a business for €160. The controlling and non-controlling interests share in profits on the basis of their ownership interests. The fair value of the net identifiable assets is €140 and the fair value of the non-controlling interest is €36. Goodwill is allocated to the business acquired.
Subsequent to the acquisition, the entity performs an impairment test and determines that the recoverable amount of the CGU is €160.
Scenario 1 – Non-controlling interest recorded at fair value
The entity elects to record the non-controlling interest at fair value, rather than the non-controlling interest’s proportionate share of the recognised amounts of the acquiree’s identifiable net assets. Accordingly, goodwill of €56 is recorded (= €160 + €36 – €140).
The initial carrying amount of the CGU is €196 (= €140 + €56). Assuming for simplicity that at the time of the impairment test the carrying amounts are unchanged, there is impairment of €36 (= €196 – €160). The entire impairment loss is applied against the goodwill balance of €56, reducing recorded goodwill to €20. The entity is required to allocate the impairment loss between the controlling and non-controlling interests.
Rational allocation: the goodwill impairment loss is allocated on a rational basis using a methodology that recognises the disproportionate sharing of the controlling and non-controlling interests in the goodwill book value. The rational allocation takes into account the acquirer’s control premium, if any. Goodwill of €48 (= €160 – (€140×80%)) relates to the controlling interest and goodwill of €8 (= €36 – (€140×20%)) relates to the non-controlling interest. Therefore, a rational allocation method would result in impairment of €48 / €56 × €36 = €31 being allocated to the controlling interest and impairment of €8 / €56 × €36 = €5 being allocated to the non-controlling interest.
Mechanical allocation: the goodwill impairment loss is allocated on the basis of ownership interests. Therefore, impairment of €29 (= €36 × 80%) is allocated to the controlling interest while impairment of €7 (= €36 × 20%) is allocated to the non-controlling interest [Note 1].
Scenario 2 – non-controlling interest recorded at fair value of identifiable assets
The entity elects to record non-controlling interest at its proportionate share of the fair value of the acquiree’s identifiable net assets, i.e. €28 (= €140 × 20%). Therefore, goodwill of €48 is recorded (= €160 + €28 – €140). In this case, the carrying amount of the CGU is €188 (= €140 + €48). The entity is required to gross up the carrying amount of the CGU for the purposes of determining whether the CGU is impaired.
Rational gross up and rational allocation: goodwill attributable to the non-controlling interest is calculated by grossing up the recognised goodwill using a factor which takes into account the premium, if any, relating to the fact that the entity has a controlling 80% interest. Assume the relevant gross up factor results in goodwill attributable to the non-controlling interest of €8 [Note 2]. Therefore, the adjusted carrying value of the reporting unit is €196 (= €188 + €8). There is impairment of €36 (= €196 – €160). The total impairment of €36 is then allocated between the controlling and non-controlling interest on a rational basis. Using the same rational allocation methodology as in Scenario 1 results in impairment of €31 being allocated to the controlling interest and impairment of €5 being allocated to the non-controlling interest. The impairment of €5 associated with the non-controlling interest is not recognised because no goodwill is recorded in the financial statements relating to the non-controlling interest.
Rational gross up and mechanical allocation: as above, assume the relevant gross up factor results in goodwill attributable to the non-controlling interest of €8 and the adjusted carrying value of the reporting unit is €196 (= €188 + €8). The total impairment of €36 is then allocated between the controlling and non-controlling interest based on their ownership interests, resulting in impairment of €29 (= €36 × 80%) being allocated to the controlling interest and impairment of €7 (= €36 × 20%) being allocated to the non-controlling interest. The impairment of €7 associated with the non-controlling interest is not recognised because no goodwill is recorded in the financial statements relating to the non-controlling interest.
Mechanical gross up and mechanical allocation: goodwill attributable to the non-controlling interest is €12 (= €48 ÷ (80/20)). Therefore, the adjusted carrying value of the reporting unit is €200 (= €188 + €12). There is impairment of €40 (= €200 (adjusted carrying value) less €160 (= recoverable amount). Impairment of €32 (= 80% × €40) is allocated to the controlling interest and impairment of €8 (= 20% × €40) is allocated to the non-controlling interest. The impairment of €8 associated with the non-controlling interest is not recognised because no goodwill is recorded in the financial statements relating to the non-controlling interest.
Note[1] As a further illustration of the difference between the two methods, suppose that the entity determined that the recoverable amount was nil. In this case, under Scenario 1, the non-controlling interest of €36 would be reduced to zero, as an impairment of €8 to goodwill and an impairment of €28 (= 20% of €140) to other identifiable assets would be each allocated to non-controlling interest. However, under Scenario 2, the non-controlling interest would be reduced by €39 (= 20% of the carrying value of €196) with the result being a debit balance of €3.
Note [2]: Note that this results in total adjusted goodwill of €56, which is the same goodwill figure that is recorded in Scenario 1 when non-controlling interest is recorded at fair value.