Explain how you would allocate goodwill to cash-generating units (CGUs) in a goodwill impairment test when the CGUs are highly interconnected. What considerations should be given to the valuation of corporate assets in this context?
An advanced Group Accounting question — expect it in final rounds and case-heavy interviews (IB, PE, Big-4 Transaction Services).
THE SHORT ANSWER
When allocating goodwill to CGUs that are highly interconnected, it is essential to consider the synergies and interdependencies between the units. Corporate assets, such as head office functions, should be valued and allocated to the CGUs based on their usage and benefit. The valuation of corporate assets should be based on their recoverable amount, considering the future cash flows they are expected to generate.
WHAT INTERVIEWERS LISTEN FOR
- ✓Goodwill allocation to CGUs
- ✓Interconnected CGUs
- ✓Valuation of corporate assets
COMMON MISTAKES
- ✗Failure to consider synergies and interdependencies
- ✗Incorrect valuation of corporate assets
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