Starting from 2005, goodwill acquired in business combinations accomplished by companies listed all over European financial markets shall be tested for impairment, at least annually, in compliance with IAS 36 – Impairment of Assets. The impairment test is realized by means of a comparison between the carrying amount and the recoverable amount of an asset (IAS 36, par. 59), where the latter value is defined as the higher of an asset’s fair value less costs to sell and its value in use (IAS 36, par. 18). However, goodwill presents peculiar characteristics and, differently from most of assets, it does not generate independent streams of cash flows; therefore, for impairment testing purposes, it shall be allocated to the cash-generating units (CGUs) that are expected to benefit from it. As a consequence, impairment testing for goodwill becomes a matter of estimating the recoverable amount of certain groups of assets – the CGUs themselves –, which at the same time shall represent the lowest level at which the goodwill is monitored for internal management purposes and not be larger than an operating segment on which the segment reporting is based (IAS 36, par. 80). After all, subsequently to the initial recognition, the amount of goodwill exposed in financial statement is related to the value of each CGU to which it is allocated, as impairment losses on goodwill are recognized whenever the recoverable amount of a CGU is less than its carrying amount, that is whenever the capability of the CGU to generate future cash flows and/or its market value are impaired, compared to the previous evaluation. As for the potential effects of the impairment test on performance figures, it shall be considered that estimating the recoverable amount of each CGU means – first of all – estimating the possible consequences of changes in the economic environment in which the entity operates. Therefore, in the current market turmoil we have been dealing with starting from 2008 impairment test becomes an increasingly relevant accounting procedure. The financial crisis, for a number of different reasons, has in fact produced massive effects on financial markets and the global economy. In other words, we expect that the recent financial crisis has evidently exercised a strong influence on the recoverable amount of firm assets, and especially of goodwill. As a matter of fact, goodwill represents the future economic benefits arising from assets acquired in a business combination that are not individually identified and separately recognized. Such future economic benefits are generally regarded as the prospective manifestation of streams of positive cash flows and profits, and these could have been hugely affected by the economic effects of the crisis. As underlined by financial press and political institutions, an industry particularly hit from the financial crisis is the banks and insurance one. Moreover, in the last few years the financial press has reported about the large flow of mergers and acquisitions (M&As) in such industries - which have been flourishing in a rush towards market’s consolidation and have also led to an increase in the amount of goodwill accounted in their financials, thus adding material to the stimulating debate about the value-relevance of M&A and goodwill. Considering together the lively M&As activity, the large amount of goodwill acquired by B&ICs and the subsequent financial crisis, it is reasonable to think about the effects of the crisis itself on the intangible asset mentioned within the financial industry. That said, our paper focuses on the Italian B&ICs listed on the Milan Stock Exchange and included in the FTSE MIB index, with the aim of answering to the following questions. a) What are the results of the impairment test procedure on goodwill for the financial year 2007-2008-2009? b) What is the size of the CGUs in the financial year 2007-2008-2009?
Goodwill and cash-generating units: Some evidence from the bank industry
FLORIO, Cristina;
2010-01-01
Abstract
Starting from 2005, goodwill acquired in business combinations accomplished by companies listed all over European financial markets shall be tested for impairment, at least annually, in compliance with IAS 36 – Impairment of Assets. The impairment test is realized by means of a comparison between the carrying amount and the recoverable amount of an asset (IAS 36, par. 59), where the latter value is defined as the higher of an asset’s fair value less costs to sell and its value in use (IAS 36, par. 18). However, goodwill presents peculiar characteristics and, differently from most of assets, it does not generate independent streams of cash flows; therefore, for impairment testing purposes, it shall be allocated to the cash-generating units (CGUs) that are expected to benefit from it. As a consequence, impairment testing for goodwill becomes a matter of estimating the recoverable amount of certain groups of assets – the CGUs themselves –, which at the same time shall represent the lowest level at which the goodwill is monitored for internal management purposes and not be larger than an operating segment on which the segment reporting is based (IAS 36, par. 80). After all, subsequently to the initial recognition, the amount of goodwill exposed in financial statement is related to the value of each CGU to which it is allocated, as impairment losses on goodwill are recognized whenever the recoverable amount of a CGU is less than its carrying amount, that is whenever the capability of the CGU to generate future cash flows and/or its market value are impaired, compared to the previous evaluation. As for the potential effects of the impairment test on performance figures, it shall be considered that estimating the recoverable amount of each CGU means – first of all – estimating the possible consequences of changes in the economic environment in which the entity operates. Therefore, in the current market turmoil we have been dealing with starting from 2008 impairment test becomes an increasingly relevant accounting procedure. The financial crisis, for a number of different reasons, has in fact produced massive effects on financial markets and the global economy. In other words, we expect that the recent financial crisis has evidently exercised a strong influence on the recoverable amount of firm assets, and especially of goodwill. As a matter of fact, goodwill represents the future economic benefits arising from assets acquired in a business combination that are not individually identified and separately recognized. Such future economic benefits are generally regarded as the prospective manifestation of streams of positive cash flows and profits, and these could have been hugely affected by the economic effects of the crisis. As underlined by financial press and political institutions, an industry particularly hit from the financial crisis is the banks and insurance one. Moreover, in the last few years the financial press has reported about the large flow of mergers and acquisitions (M&As) in such industries - which have been flourishing in a rush towards market’s consolidation and have also led to an increase in the amount of goodwill accounted in their financials, thus adding material to the stimulating debate about the value-relevance of M&A and goodwill. Considering together the lively M&As activity, the large amount of goodwill acquired by B&ICs and the subsequent financial crisis, it is reasonable to think about the effects of the crisis itself on the intangible asset mentioned within the financial industry. That said, our paper focuses on the Italian B&ICs listed on the Milan Stock Exchange and included in the FTSE MIB index, with the aim of answering to the following questions. a) What are the results of the impairment test procedure on goodwill for the financial year 2007-2008-2009? b) What is the size of the CGUs in the financial year 2007-2008-2009?
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