Company “A” is a listed company, registered in Pakistan and having only one direct subsidiary (incorporated outside Pakistan) with share holding of 60.31%, hereinafter called Company “B”. Company “B” has several subsidiaries (herein referred as “indirect subsidiaries”). Some indirect subsidiaries have been directly identified as separate cash generating unit, whereas others indirect subsidiaries have been clubbed to form different cash generating units (CGU). At each CGU level, discounted cash flows have been determined. Then recoverable amount of entity B has been determined by clubbing the discounted cash flows of all the CGUs and, accordingly, impairment has been recorded in the books of company “A” on account of investment in company “B”. In other words, recoverable amount has not been assessed at CGU level.
The following diagram depicts the manner in which CGUs have been determined by Company “A”:
We would highly appreciate if you would provide your opinion on the following issues in the light of IAS 36 and any other relevant IAS:
1. Should recoverable amount be assessed at each CGU Level?
2. If recoverable amount is assessed at CGU level, how will the impairment be estimated by company “A”, as “A” holds investment in CGU through “B”?
3. Whether the treatment adopted by company “A” with respect to aggregation of discounted cash-flows of all CGUs at company “B” level to determine the recoverable value of “B” and then accordingly recording of impairment on account of investment in “B” by “A” is appropriate?
The Committee would like to draw your attention to the following paragraphs of IAS 36 ‘Impairment of Assets’:
22 Recoverable amount is determined for an individual asset, unless the asset does not generate cash inflows that are largely independent of those from other assets or groups of assets. If this is the case, recoverable amount is determined for the cash-generating unit to which the asset belongs (see paragraphs 65–103), unless either:
(a) the asset’s fair value less costs to sell is higher than its carrying amount; or
(b) the asset’s value in use can be estimated to be close to its fair value less costs to sell and fair value less costs to sell can be determine
66 If there is any indication that an asset may be impaired, recoverable amount shall be estimated for the individual asset. If it is not possible to estimate the recoverable amount of the individual asset, an entity shall determine the recoverable amount of the cash-generating unit to which the asset belongs (the asset’s cash-generating unit).
67 The recoverable amount of an individual asset cannot be determined if:
(a) the asset’s value in use cannot be estimated to be close to its fair value less costs to sell (for example, when the future cash flows from continuing use of the asset cannot be estimated to be negligible); and
(b) the asset does not generate cash inflows that are largely independent of those from other assets.
In such cases, value in use and, therefore, recoverable amount, can be determined only for the asset’s cash-generating unit.
74 The recoverable amount of a cash-generating unit is the higher of the cash-generating unit’s fair value less costs to sell and its value in use. For the purpose of determining the recoverable amount of a cash-generating unit, any reference in paragraphs 19–57 to ‘an asset’ is read as a reference to ‘a cash-generating unit’.
75 The carrying amount of a cash-generating unit shall be determined on a basis consistent with the way the recoverable amount of the cash-generating unit is determined.
In view of above, the response to your queries is as follows;
1. The Committee is of the opinion that that recoverable amount should be assessed at each CGU level. The CGUs could be a component part of an entity or a group of entities determined based on dependence or independence of cash generation from business operations.
2. The Committee would like to clarify that all the subsidiaries while preparing their financial statements would determine the impairment of the assets as well as recoverable amounts of impaired assets in accordance with IAS 36. Only the impairment loss on impaired assets would be recognised and surplus of any asset will not offset the loss on another asset. Thus the investment of subsidiary B in sub-subsidiaries would incorporate the impairment loss of sub-subsidiaries. Similarly A would also recognise impairment loss on investment in B as a result of B recognising impairment loss on its investment in sub-subsidiaries due to sub-subsidiaries recognising impairment loss on their assets or cash generating units.
3. The Committee is of the opinion that the impairment loss should be assessed at the asset level and where it is not possible then at each CGU level as required in IAS 36. Further, as explained in 2 above the simple aggregation of cash generating units which results in offsetting losses of independent assets or CGUs is not permitted.
(February 17, 2011)