Company ABC has goodwill with a carrying amount of ₹120 crores at the beginning of the year. During the year, the following information is obtained for the cash‑generating unit (CGU) to which the goodwill belongs: Fair value less costs of disposal of the CGU = ₹100 crores; Value in use of the CGU = ₹110 crores. Assuming the recoverable amount is the higher of the two, calculate the impairment loss, record the journal entry, and state how the loss should be disclosed in the financial statements.
Answer
Impairment loss = ₹10 crores; journal entry: Dr Impairment loss ₹10 crores, Cr Goodwill ₹10 crores; disclosed as an expense in the profit and loss account and detailed in the notes to accounts.
Step-by-step solution
- Recoverable amount = higher of fair value less costs (₹100 crores) and value in use (₹110 crores) = ₹110 crores.
- Compare recoverable amount with the carrying amount of goodwill (₹120 crores). Since ₹120 > ₹110, an impairment exists.
- Impairment loss = carrying amount – recoverable amount = ₹120 crores – ₹110 crores = ₹10 crores.
- Record the loss: Dr Impairment loss ₹10 crores, Cr Goodwill ₹10 crores.
- In the profit and loss account the loss is shown under 'Other expenses' and the notes disclose the CGU, recoverable amount, carrying amount and the amount of impairment.
Common mistake: Using the lower of fair value and value in use instead of the higher to determine recoverable amount
Concept tested: Impairment testing of goodwill
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