on 1 january 2007 entity a acquired an investment in entity b which it accounts for 611090

Previous GAAP impairment of goodwill embedded in equity method investment

Scenario 1 – Impairment was recognised on the notional goodwill element embedded in the investment under previous GAAP

On 1 January 2007, Entity A acquired an investment in Entity B, which it accounts for using the equity method (the investment would qualify as an associate under IFRSs). The cost of investment was CU 1,500 compared to B”s identifiable net assets of CU 500; therefore, notional goodwill of CU 1,000 was included in the carrying value of the associate at that time. The previous GAAP required the entity to:

• Amortise the notional goodwill of the associate on a straight-line basis.
• Test the equity accounted investment for impairment at the investment level.
• Allocate and recognise the impairment loss (if any) against notional goodwill.

Goodwill impairments (including those on notional goodwill) are unable to be reversed and therefore affect future amortisation.

Therefore, under its previous GAAP, Entity A tested its investment in Entity B for impairment, and recognised an impairment loss of CU 500 in the year ended 31 December 2008. This reduced the notional goodwill to CU 500, which Entity A amortises over 10 years (CU 50 annually). By its date of transition to IFRS, 1 January 2012, notional goodwill had been amortised by 5 years × CU 50 (CU 250), reducing notional goodwill to CU 250. Net assets are unchanged since acquisition, leaving the investment with a carrying value of CU 750.

Entity A applies the exemption from retrospective restatement for past acquisitions of investments in associates. Therefore, at 1 January 2012, its transition date, Entity A also tests the investment for impairment in accordance with IAS 36. At 1 January 2012, the value of the investment in Entity B recovered, and is CU 1,500 based on its current listed share price. Under this scenario, the previous impairment to notional goodwill is not reversed, since the use of the business combination exemption as it applies to associates means that the goodwill determined under the earlier acquisition accounting together with the subsequent accounting up to the transition date is effectively grandfathered in a similar way in which a subsidiary”s goodwill would be, in accordance with paragraph C4(g) of IFRS 1. Therefore, the carrying value of the notional goodwill as determined under previous GAAP becomes the embedded notional goodwill at transition unless specifically required to be adjusted. [IFRS 1 Appendix C4(h)].

Scenario 2 – Impairment was recognised at the investment level under previous GAAP

Same as in Scenario 1, except that Entity A”s previous GAAP impairment test was performed at the investment level, using a test similar to that required under IAS 36. Because of applying this approach, when Entity A recognised an impairment loss of CU 500 in the year ended 31 December 2008, the carrying amount of the investment was CU 1,000, which remained the carrying amount at the date of transition, 1 January 2012. Similar to Scenario 1, at 1 January 2012, the value of the investment in Entity B has recovered, and is CU 1,500 based on its current listed share price.

Under this scenario, the previous impairment of notional goodwill, which is embedded in the full amount of the investment, is reversed. However, the impairment can only be reversed up to the pre-impairment equity accounted value that results from the application of the business combination exemption.