How would you determine the recoverable amount of a cash-generating unit (CGU) that includes significant corporate assets, and what considerations should be given to the valuation of these corporate assets in the context of a goodwill impairment test?
An advanced Group Accounting question — expect it in final rounds and case-heavy interviews (IB, PE, Big-4 Transaction Services).
THE SHORT ANSWER
Determining the recoverable amount of a CGU with significant corporate assets involves considering both the value-in-use (VIU) and the fair value less costs of disposal (FVLCD) approaches. Corporate assets, which are not directly attributable to a specific CGU, are allocated to the CGU based on a reasonable and consistent method. The valuation of corporate assets should reflect their utility to the CGU and the group as a whole. In practice, the VIU approach is more commonly used, as it better reflects the CGU's ability to generate cash flows from the continued use of its assets, including corporate assets. The recoverable amount is then compared to the CGU's carrying amount to determine if goodwill impairment is necessary.
WHAT INTERVIEWERS LISTEN FOR
- ✓Apply both VIU and FVLCD approaches
- ✓Allocate corporate assets based on a reasonable method
- ✓Consider utility of corporate assets to the CGU
COMMON MISTAKES
- ✗Failing to consider corporate assets in CGU valuation
- ✗Incorrect allocation of corporate assets
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