Example 7 - Application of the 'Bottom-Up' and 'Top-Down' Tests to Goodwill

In this example, tax effects are ignored.

1. At the end of 20X0, enterprise M acquired 100% of enterprise Z for RM3,000. Z has 3 cash-generating units A, B and C with net fair values of RM1,200, RM800 and RM400 respectively. M recognises goodwill of RM600 (RM3,000 less RM2,400) that relates to Z.

2. At the end of 20X5,A makes significant losses. Its recoverable amount is estimated to be RM1,400. Carrying amounts are detailed below.

Schedule 1. Carrying amounts at the end of 20X5

End of 20X5	A RM	B RM	C RM	Goodwill RM	Total RM
Net carrying amount	1,300	1,200	800	450	3,750

A - Goodwill Can Be Allocated on a Reasonable and Consistent Basis

1. At the date of acquisition of Z, the net fair values of A, B and C are considered a reasonable basis for a pro-rata allocation of the goodwill to A, B and C.

   Schedule 2. Allocation of goodwill at the end of 20X5

End of 20X0	A RM	B RM	C RM	Total RM
Net fair values	1,200	800	400	2,400
Pro-data	50%	33%	17%	100%
End of 20X5
Net carrying amount	1,300	1,200	800	3,300
Allocation of goodwill (using the pro-rata above)	225 ____	150 ____	75 ____	450 ____
Net carrying amount (after allocation of goodwill)	1,525 ====	1,350 ====	875 ====	3,750 ====

1. In accordance with the 'bottom-up' test in paragraph 82(a) of FRS 136₂₀₀₄, M compares A's recoverable amount to its carrying amount after the allocation of the carrying amount of goodwill.

   Schedule 3. Application of 'bottom-up' test

End of 20X5	A RM
Carrying amount after allocation of goodwill (Schedule 2)	1,525
Recoverable amount	1,400 ____
Impairment loss	125 =====

1. M recognises an impairment loss of RM125 for A. The impairment loss is fully allocated to the goodwill in accordance with paragraph 90 of FRS 136₂₀₀₄.

B - Goodwill Cannot Be Allocated on a Reasonable and Consistent Basis

1. There is no reasonable way to allocate the goodwill that arose on the acquisition of Z to A, B and C. At the end of 20X5, Z's recoverable amount is estimated to be RM3,500.

2. At the end of 20X5, M first applies the 'bottom-up' test in accordance with paragraph 82(a) of FRS 136₂₀₀₄. It compares A's recoverable amount to its carrying amount excluding the goodwill.

   Schedule 4. Application of 'bottom-up' test

End of 20X5	A RM
Carrying amount	1,300
Recoverable amount	1,400
Impairment loss	_____ 0 =====

1. Therefore, no impairment loss is recognised for A as a result of the 'bottom-up 'test.

2. Since the goodwill could not be allocated on a reasonable and consistent basis to A, M also performs a 'top-down' test in accordance with paragraph 82(b) of FRS 136₂₀₀₄. It compares the carrying amount of Z as a whole to its recoverable amount (Z as a whole is the smallest cash generating unit that includes A and to which goodwill can be allocated on a reasonable and consistent basis).

   Schedule 5. Application of the ' top-down' test

End of 20X5	A RM	B RM	C RM	Goodwill RM	Z RM
Carrying amount	1,300	1,200	800	450	3,750
Impairment loss arising from the 'bottom-up' test	0	-	-	-	0
Carrying amount after the 'bottom-up' test	_____ 1,300 =====	_____ 1,200 =====	_____ 800 =====	_____ 450 =====	_____ 3,750 =====
Recoverable amount					3,500
Impairment loss arising from 'top-down' test					(250) =====

1. Therefore, M recognises an impairment loss of RM250 that it allocates fully to goodwill in accordance with paragraph 90 of FRS 136₂₀₀₄.

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