In what order is an impairment loss allocated to assets within a CGU under IAS 36?

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AcadiFi · Accepted Answer

IAS 36 prescribes a strict allocation hierarchy when an impairment loss is recognized at the CGU level. Getting the order and limitations right is a common exam topic. **Allocation Sequence** 1. **First — Reduce goodwill** allocated to the CGU to zero. 2. **Then — Allocate the remaining loss** to other assets in the CGU on a **pro rata basis** according to their carrying amounts. **Important Constraint:** No individual asset can be written down below the highest of: - Its fair value less costs of disposal - Its value in use - Zero **Worked Example — Northvale Consumer Products (CGU):** Northvale's food-products CGU has a carrying amount of $60 million and a recoverable amount of $41 million. The impairment loss is $19 million. | Asset | Carrying Value | Allocation | |---|---|---| | Goodwill | $8,000,000 | Written to $0 (−$8M) | | Remaining loss to allocate | | $11,000,000 | | Plant & equipment | $30,000,000 | Pro rata: −$30M/$52M × $11M = −$6,346,000 | | Customer relationships | $14,000,000 | Pro rata: −$14M/$52M × $11M = −$2,962,000 | | Inventory (FVLCD = $7.5M) | $8,000,000 | Pro rata share = −$1,692,000; but floor is $7.5M, so only −$500,000 | | Unallocated remainder | | $1,192,000 redistributed to plant & customer relationships | \`\`\`mermaid flowchart TD A["Total Impairment = $19M"] --> B["Step 1: Eliminate Goodwill
−$8M"] B --> C["Remaining = $11M"] C --> D["Step 2: Pro Rata to
Other Assets"] D --> E["Plant: −$6.35M"] D --> F["Customer Rel: −$2.96M"] D --> G["Inventory: Limited by
FVLCD Floor ($7.5M)"] G --> H["Excess $1.19M
Reallocated to Others"] \`\`\` **Key Rules:** 1. Goodwill is **always eliminated first** because it cannot be independently measured. 2. The pro rata allocation uses **carrying amounts** as weights. 3. The floor constraint prevents assets from being written below their individual recoverable amounts — any unallocated excess is redistributed to remaining assets. 4. Assets already at or below their individual recoverable amounts receive **no further allocation**. 5. If the total loss exceeds all allocable amounts (including goodwill), a liability is recognized only if required by another standard. **GAAP Difference:** Under ASC 350, goodwill impairment is capped at the goodwill balance — there is no cascade to other assets in the reporting unit. For step-by-step allocation practice, see our CFA Level II FRA course materials.

In what order is an impairment loss allocated to assets within a CGU under IAS 36?

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