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Allocate an Impairment Loss to a CGU — IAS 36 Worked Example | CALC SERIES #09

Once you've calculated a CGU impairment loss, IAS 36 requires you to allocate it in a specific order: goodwill absorbs the hit first, then the remaining loss spreads pro-rata across other assets. Here's the full two-step allocation with numbers and journal entries.

Explained by Maya, your IFRS Tutor presenter · Calc Series

Allocate an Impairment Loss to a CGU — IAS 36 Worked Example | CALC SERIES #09

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In this video

  1. 0:00 Introduction — what the CGU allocation rule does
  2. 0:18 The scenario — CGU carrying amount €500k, recoverable €320k, impairment €180k
  3. 0:48 IAS 36 para 104 — allocate to goodwill first
  4. 1:10 Step 1: goodwill fully absorbed — Dr Impairment loss €80k / Cr Goodwill €80k
  5. 1:38 Step 2: remaining €100k allocated pro-rata to other CGU assets
  6. 2:10 Pro-rata calculation — building €60k, equipment €40k
  7. 2:45 Full journal entry for both steps
  8. 3:15 Common mistake — allocating pro-rata before writing off goodwill
  9. 3:45 Recap — the two-step allocation sequence

Key terms in plain English

Cash-generating unit (CGU)
The smallest identifiable group of assets that generates cash inflows largely independent of other assets. IAS 36 requires impairment testing at the level of the CGU when individual assets cannot be tested in isolation.
Goodwill impairment
The portion of a CGU impairment loss allocated to goodwill first, before any other CGU asset is written down. Under IAS 36 para 104, goodwill is always the first to absorb a CGU-level loss. Once written down, goodwill impairment cannot be reversed.
Pro-rata allocation
After goodwill is fully written off, the remaining impairment loss is spread across other CGU assets in proportion to their carrying amounts, subject to the floor that no individual asset is written below its recoverable amount.
Recoverable amount
The higher of fair value less costs of disposal and value in use. It is the benchmark against which the CGU's carrying amount is compared to determine the impairment loss.

Full explanation

Why CGU impairment has an allocation step

When a cash-generating unit is tested for impairment under IAS 36, the recoverable amount is compared with the combined carrying amount of all assets in the CGU including any goodwill allocated to it. If the carrying amount exceeds the recoverable amount, the difference is the impairment loss. That loss then has to be allocated to reduce the carrying amounts of individual assets — because it is individual asset balances that appear on the balance sheet.

IAS 36 paragraph 104 establishes a strict sequence. The impairment loss must first be allocated to reduce any goodwill allocated to the CGU, because goodwill has no independent recoverable amount — it can only be tested at CGU level. Once goodwill is eliminated or there is no goodwill, any remaining loss is allocated to the other assets on a pro-rata basis using their carrying amounts.

The scenario: CGU carrying amount €500k, recoverable amount €320k

The CGU contains three assets: goodwill €80,000; building €250,000; equipment €170,000. Total carrying amount: €500,000. The CGU's recoverable amount is €320,000. The impairment loss is €500,000 minus €320,000 = €180,000.

Step 1 — allocate to goodwill first

The first €80,000 of the impairment loss is allocated to the goodwill: Dr Impairment loss €80,000 / Cr Goodwill €80,000. Goodwill is now written off entirely. Remaining impairment loss to allocate: €180,000 minus €80,000 = €100,000.

Step 2 — pro-rata allocation to other assets

The remaining €100,000 is spread across the building and equipment in proportion to their carrying amounts. Building: €250,000 / (€250,000 + €170,000) = 59.5% × €100,000 = €59,524. Equipment: €170,000 / €420,000 = 40.5% × €100,000 = €40,476.

Journal entry — Dr Impairment loss €100,000 / Cr Building €59,524 / Cr Equipment €40,476. After allocation: building carrying amount €190,476; equipment carrying amount €129,524; goodwill nil. Total €320,000 = recoverable amount.

The floor on individual asset write-downs

IAS 36 paragraph 105 sets a floor: an individual asset within the CGU cannot be written below the highest of its fair value less costs of disposal, value in use, and zero. If the pro-rata allocation would breach this floor for any asset, that excess is reallocated to the other assets in the CGU. This refinement rarely affects simple worked examples but is important in practice when one asset in a CGU has a readily determinable individual recoverable amount.

Common mistake: skipping the goodwill step

The mistake that appears in exam answers and in practice: allocating the full €180,000 pro-rata across all three assets including goodwill. Under this approach, goodwill would absorb only (80/500) × €180,000 = €28,800 — not the €80,000 required. The other two assets absorb less than they should, and overall asset values on the balance sheet are overstated. IAS 36 is explicit: goodwill must be eliminated first.

Why goodwill goes first

The rationale behind the sequence is that goodwill is the most subjective asset in a CGU. It arises from the premium paid on acquisition and represents future economic benefits that cannot be individually identified and separately recognised. It has no floor — there is no independent fair value or value in use to protect it. The pro-rata assets, by contrast, each have an individual recoverable amount that imposes a lower bound. IAS 36 therefore resolves the sequencing question by absorbing the most subjective asset first.