What approach would you take to allocate goodwill to cash-generating units (CGUs) in a goodwill impairment test when the CGUs are highly interconnected, and how would you determine the recoverable amount of each CGU considering these interconnections?
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 highly interconnected CGUs, it's essential to apply a systematic approach that considers the operational and financial relationships between the units. This may involve using a 'top-down' approach, where goodwill is allocated based on the relative fair values of the CGUs or their contributions to the group's overall cash flows. To determine the recoverable amount of each CGU, we would need to consider both the value-in-use (VIU) and the fair value less costs of disposal (FVLCD) approaches, taking into account the synergies and interdependencies between the CGUs. This might require developing detailed cash flow forecasts that reflect the integrated nature of the CGUs' operations.
WHAT INTERVIEWERS LISTEN FOR
- ✓Apply a systematic goodwill allocation approach
- ✓Consider interconnections between CGUs
- ✓Evaluate both VIU and FVLCD for recoverable amount
COMMON MISTAKES
- ✗Ignoring CGU interconnections
- ✗Failing to consider both VIU and FVLCD
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