Case Law on Treatment of Impairment Loss on Cash Generating Unit (CGU) & Its Reversal

A company has acquired another company for the purpose of expansion and has also generated goodwill on account of higher purchase consideration than the net asset value of the vendor company. The acquired company is considered as one cash generating unit by the acquirer company. After two years, the assets of the acquired company are seized by the government because of violation of environmental clearances.

Para 9 of Ind AS 36, Impairment of Assets, requires that an entity shall assess at the end of each reporting period whether there is any indication that an asset may be impaired. If any such indication exists, the entity shall estimate the recoverable amount of the asset and shall impair the assets with the difference of its carrying amount over recoverable amount.

The company wants to know impairment due to this violation on acquired company. Whether the acquired goodwill will also be impacted by such impairment loss.

Para 110 requires that an entity shall assess at the end of each reporting period whether there is any indication that an impairment loss recognized in prior periods for an asset other than goodwill may no longer exist or may have decreased. Any reversal of an impairment loss shall be allocated to the assets of the CGU, except for goodwill, pro rata with the carrying amounts of those assets.

This case study also analyse the treatment of the reversal of the impairment loss and whether the acquired goodwill be restored on release of the restrictions imposed by the government.

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