Double counted losses At the end of 2013, an entity with a single CGU is carrying out an impairment review. The discounted forecast cash flows for years 2015 and onwards would be just enough to support the carrying value of the entity’s assets. However, 2014 is forecast to produce a loss and net cash outflow. The discounted value of this amount is accordingly written off […]

Identification of cash-generating units – grouping of assets Example A – A tour operator’s hotels A tour operator owns three hotels of a similar class near the beach at a large holiday resort. These hotels are advertised as alternatives in the operator’s brochure, at the same price. Holidaymakers are frequently transferred from one to another and there is a central booking system for independent travellers. […]

Reversal of impairment losses At the beginning of 2009 an entity acquires an asset with a useful life of 10 years for $1,000. The asset generates net cash inflows that are largely independent of the cash inflows of other assets or groups of assets. At the end of 2011, when the carrying amount after depreciation is $700, the entity recognises that there has been an […]

Identification of cash-generating units – internally-used products Example A – Plant for an Intermediate Step in a Production Process A significant raw material used for plant Y’s final production is an intermediate product bought from plant X of the same entity. X’s products are sold to Y at a transfer price that passes all margins to X. 60 per cent of X’s final production is […]

Allocation of corporate assets An entity comprises three CGUs and a headquarters building. The carrying amount of the headquarters building of 150 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 […]

BT Group plc (2008) Operating and financial review Technological advances Our continued success depends on our ability to exploit new technology rapidly. We operate in an industry with a recent history of rapid technological changes and we expect this to continue – new technologies and products will emerge, and existing technologies and products will develop further. We need continually to exploit next-generation technologies in order […]

Calculating a discount rate This example is based on determining the WACC for a listed company with a similar risk profile to the CGU in question. Because it is highly unlikely that such a company will exist, it will usually have to be simulated by looking at a hypothetical company with a similar risk profile. The following three elements need to be estimated for the […]

Different project risks and CGUs An aircraft manufacturer makes both civilian and military aircraft. The risks for both sectors are markedly different as they are much lower for defence contractors than for the civilian market. The assembly plants for civilian and military aircraft are separate CGUs. In this sector there are entities that are based solely in one or other of these markets, i.e. they […]

Effect of entity default risk on its WACC The formula for calculating the (post tax) WACC, as given in above, is where: t is the rate of tax relief available on the debt servicing payments D is the pre-tax cost of debt; E is the cost of equity; g is the gearing level (i.e. the ratio of debt to equity) for the sector. The cost […]

Testing for impairment of goodwill allocated in the period after acquisition after the annual impairment testing date Entity A prepares its financial statements for annual reporting periods ending on 31 December. It performs its annual impairment test for all cash-generating units (CGUs) to which it has allocated goodwill at 30 September. On 31 October 2011, Entity A acquires Entity B. Entity A completes the initial […]