a parent acquired 100 of the issued shares of a company that operates autonomously a 612440

Monitoring goodwill arising from acquisitions by subsidiaries

A parent acquired 100% of the issued shares of a company that operates autonomously and is required to prepare IFRS-compliant financial statements. The subsidiary has acquired various businesses both before and after becoming part of the group. Those business combinations have included significant amounts of goodwill.

The subsidiary’s management monitors its acquired goodwill at the level of the subsidiary’s operating segments identified in accordance with IFRS 8. However, management of the parent/group monitors its acquired goodwill at the level of the group’s operating segments, which is a higher level than the subsidiary’s operating segments. The subsidiary’s operations form part of two of the group’s six operating segments.

The subsidiary’s goodwill comprises goodwill arising on its acquisitions, some of which took place before, and some after, the subsidiary became part of the group.

In contrast, the goodwill recognised by the group comprises:

• Goodwill acquired by the parent in the acquisition of the subsidiary;
• Goodwill acquired by the subsidiary since becoming part of the group;
• Goodwill acquired by the parent in other operating combinations (i.e. goodwill that relates to other subsidiaries and businesses that make up the group).

The goodwill acquired in the acquisition of the subsidiary that is recognised by the parent in its consolidated financial statements is therefore different from the goodwill recognised by the subsidiary (which relates only to the acquisitions made by the subsidiary itself and was measured at the date of the acquisition concerned, as any other goodwill would be internally generated goodwill from the subsidiary’s perspective and therefore not recognised by the subsidiary).

In such circumstances the actions of the subsidiary’s management in deciding the level at which it tests its goodwill for impairment will not cause the group to be ‘locked in’ to testing goodwill at the same level in the consolidated financial statements.

Rather, the group should test its goodwill for impairment at the level at which management of the group (i.e. of the parent) monitors its various investments in goodwill, namely, in this example, at the group’s operating segment level.