Illustration 8 – Allocation of Corporate Assets :

In this illustration tax effects are ignored.

Background

Enterprise M has three cash-generating units: A, B and C. There are adverse changes in the technological environment in which M operates. Therefore, M conducts impairment tests of each of its cash-generating units. At the end of 20X0, the carrying amounts of A, B and C are Rs. 100 lakhs, Rs. 150 lakhs and Rs. 200 lakhs respectively.

The operations are conducted from a headquarter. The carrying amount of the headquarter assets is Rs. 200 lakhs: a headquarter building of Rs. 150 lakhs and a research centre of Rs. 50 lakhs. The relative carrying amounts of the cash-generating units are a reasonable indication of the proportion of the head-quarter building devoted to each cash-generating unit. The carrying amount of the research centre cannot be allocated on a reasonable basis to the individual cash-generating units.

The remaining estimated useful life of cash-generating unit A is 10 years. The remaining useful lives of B, C and the headquarter assets are 20 years. The headquarter assets are depreciated on a straight-line basis.

There is no basis on which to calculate a net selling price for each cash-generating unit. Therefore, the recoverable amount of each cashgenerating unit is based on its value in use. Value in use is calculated using a pre-tax discount rate of 15%.

 

Identification of Corporate Assets

In accordance with paragraph 85 of this Standard, M first identifies all the corporate assets that relate to the individual cash-generating units under review. The corporate assets are the headquarter building and the research centre.

M then decides how to deal with each of the corporate assets:

(a) the carrying amount of the headquarter building can be allocated on a reasonable and consistent basis to the cash-generating units under review. Therefore, only a ‘bottom-up’ test is necessary; and

(b) the carrying amount of the research centre cannot be allocated on a reasonable and consistent basis to the individual cashgenerating units under review. Therefore, a ‘top-down’ test will be applied in addition to the ‘bottom-up’ test.

Allocation of Corporate Assets

The carrying amount of the headquarter building is allocated to the carrying amount of each individual cash-generating unit. A weighted allocation basis is used because the estimated remaining useful life of A’s cash-generating unit is 10 years, whereas the estimated remaining useful lives of B and C’s cash-generating units are 20 years.

Schedule 1. Calculation of a weighted allocation of the carrying amount of the headquarter building (Amount in Rs. lakhs)

End of 20X0	A	B	C	Total
Carrying amount	100	150	200	450
Useful life	10 years	20 years	20 years
Weighting based on useful life	1	2	2
Carrying amount after weighting	100	300	400	800
Pro-rata allocation of the building	12.5%	37.5%	50%	100%
	(100/800)	(300/800)	(400/800)
Allocation of the carrying amount of the building (based on pro-rata above)	19	56	75	150
Carrying amount (after allocation of the building)	119	206	275	600

 

Determination of Recoverable Amount

A75. The ‘bottom-up’ test requires calculation of the recoverable amount of each individual cash-generating unit. The ‘top-down’ test requires calculation of the recoverable amount of M as a whole (the smallest cash-generating unit that includes the research centre).

Schedule 2. Calculation of A, B, C and M’s value in use at the end of 20X0 (Amount in Rs. lakhs)

	A		B		C		M
Year	Future cash flows	Discount at 15%	Future cash flows	Discount at 15%	Future cash flows	Discount at 15%	Future cash flows	Discount at 15%

 

	cash flows	at 15%	cash flows	at 15%	cash flows	at 15%	cash flows	at 15%
1	2	3	4	5	6	7	8	9
1	18	16	9	8	10	9	39	34
2	31	23	16	12	20	15	72	54
3	37	24	24	16	34	22	105	69
4	42	24	29	17	44	25	128	73
5	47	24	32	16	51	25	143	71
6	52	22	33	14	56	24	155	67
7	55	21	34	13	60	22	162	61
8	55	18	35	11	63	21	166	54
9	53	15	35	10	65	18	167	48
10	48	12	35	9	66	16	169	42
11			36	8	66	14	132	28
12			35	7	66	12	131	25
13			35	6	66	11	131	21
14			33	5	65	9	128	18
15			30	4	62	8	122	15
16			26	3	60	6	115	12
17			22	2	57	5	108	10
18			18	1	51	4	97	8
19			14	1	43	3	85	6
20			10	1	35	2	71	4
Value in use		199		164		271		720(1)

 

(¹) It is assumed that the research centre generates additional future cash flows for the enterprise as a whole. Therefore, the sum of the value in use of each individual cash-generating unit is less than the value in use of the business as a whole. The additional cash flows are not attributable to the headquarter building.

Calculation of Impairment Losses

In accordance with the ‘bottom-up’ test, M compares the carrying amount of each cash-generating unit (after allocation of the carrying amount of the building) to its recoverable amount. Schedule 3. Application of ‘bottom-up’ test (Amount in Rs. lakhs)

End of 20X0	A	B	C
Carrying amount (after allocation of the building) (Schedule 1)	119	206	275
Recoverable amount (Schedule 2)	199	164	271
Impairment loss	0	(42)	(4)

 

The next step is to allocate the impairment losses between the assets of the cash-generating units and the headquarter building.

Schedule 4. Allocation of the impairment losses for cash-generating units B and C (Amount in Rs. lakhs)

Cash-generating unit	B	C
To headquarter building	(12) (42*56/206)	(1) (4*75/275)
To assets in cash-generating unit	(30) (42*150/206)	(3) (4*200/275)
	(42)	(4)

 

In accordance with the ‘top-down’ test, since the research centre could not be allocated on a reasonable and consistent basis to A, B and C’s cash-generating units, M compares the carrying amount of the smallest cash-generating unit to which the carrying amount of the research centre can be allocated (i.e., M as a whole) to its recoverable amount.

 

Schedule 5. Application of the ‘top-down’ test (Amount in Rs. lakhs)

End of 20X0	A	B	C	Building Research M centre
Carrying amount	100	150	200	150	50	650
Impairment loss arising from the ‘bottom-up’ test	—	(30)	(3)	(13)	—	(46)
Carrying amount after the ‘bottom-up’ test	100	120	197	137	50	604
Recoverable amount
(Schedule 2)						720
Impairment loss arising from ‘top-down’ test						0

=

Therefore, no additional impairment loss results from the application of the ‘top-down’ test. Only an impairment loss of Rs. 46 lakhs is recognised as a result of the application of the ‘bottom-up’ test.