An Audit Services Guide to Testing Goodwill for Impairment

When a Dubai company takes over another UAE company, it can often create goodwill. It should be presented to the audit services as intangible assets. However, it is intangible property that cannot be sold.

Goodwill is a subject of strict IFRS standards. Audit services and financial auditor professionals, for example, must annually test goodwill for impairment.

However, assets other than those listed above can only be tested if there is an indicator. You can also contact experts like Farahat and co.

How can Auditors of Companies in Dubai and UAE test for Impairment Each Year use Goodwill?

This question is often answered, even though IAS 36 contains extensive rules regarding goodwill impairment. However, it’s not easy to understand the logic.

What is the Definition of Goodwill?

Before we explain how to test the impairment of goodwill let’s first define goodwill. Goodwill is defined by IFRS 3 Business Combos as “an asset representing future financial benefits arising out of assets acquired in a combination business”. (IFRS 3, Appendix B).

Imagine an investor purchasing all shares in a Dubai, UAE company for AED 120 000. The fair value of the company’s assets or net assets is equal to AED 100,000.

It seems that this investor paid more for the company than it was worth.

But why would he do that?

An investor might believe there is a hidden benefit, something he would be willing to pay for.

How Dubai Audit Firms Determine Goodwill for Impairment

This is Important to Remember

When a single asset is involved, it is difficult to determine if goodwill is impaired.

Goodwill cannot be valued because it isn’t something you can sell to another person – there is no fair market value. Goodwill is difficult to value as it doesn’t add any value to the company. It is simply a fact of life since acquisition.

You can also define it as an asset that generates no cash flow independently of other assets. Your business would be expected to produce the same revenue and expenses, regardless of its goodwill.

Instead of considering it a goodwill impairment, instead, consider it part of a business valuation. Auditors in Dubai and UAE must evaluate the company’s book value and its revenue-generating potential (whether projected profits or market values).

This can be translated into the IFRS language. It will compare the cash-generating units, including goodwill, with their recoverable value (the higher of its Fair Value less the cost of disposal and/or the value in Use).

Understanding CGU through Goodwill

A cash-generating unit is typically a company as an entire. However, if cash flows are generated by multiple divisions independently, the CGU is a division.

It is best to allocate the goodwill gained from a company that has many divisions to the cash-generating units that will be benefited from the business combination.

Each CGU to which goodwill is assigned must be at the lowest level for monitoring goodwill. It must not be greater than the operating segment as defined in IFRS 8. IAS 36 does not address the question of the appropriate way to allocate goodwill.

There are many other options. Auditors can assign goodwill on the basis of CGU’s fair values before and after the acquisition. Your allocated goodwill is the difference.

Goodwill can Cause CGU Losses

After identifying the CGUs, and assigning goodwill, the impairment test can be done.

It is important that you compare.

The carrying amount of CGU plus the goodwill

The CGU recoverable amount

Internal auditors should be able to recognize an impairment loss if the carrying amount exceeds the recoverable amount.

The impairment loss can be applied to multiple assets in the CGU, so the company audit team must allocate it the following way:

Reduce all Goodwill to Zero.

Next, allocate any impairment loss to assets within CGU according to pro-rata.

Audit specialists should not reduce an asset’s carrying value below its recoverable or zero value.

It is not possible to reverse any impairment to goodwill.

The partial NCI method does not cause goodwill impairment

The partial method measures Dubai’s NCI. Goodwill does not include the parent’s share.

Before testing for impairment, the company must gross up its goodwill to 100 percent. This is because it is necessary that you compare 100% of CGU’s carrying balance with goodwill and 100% of CGU’s recoverable amounts.

You will need to reduce any impairment loss in goodwill to a parent only.

For example, a parent might own 80% of a subsidiary. NCI can be measured using a partial method.

The carrying amount of goodwill is AED 100, while other assets are AED 1350. AED 100 is the recoverable goodwill amount.

It might seem like there is no impairment but you aren’t as quick and you haven’t yet earned all the goodwill.

How Experts Can Help

To learn more about IFRS and how you can implement it in your business contact experts like Farahat and co for a consultancy session.