3.4 Including Specific Items in a Disposal Group
The sections below provide guidance on determining whether certain items should be included in a
disposal group.
3.4.1 Goodwill
ASC 350-20
40-1 When a
reporting unit is to be disposed of in its entirety,
goodwill of that reporting unit shall be included in the
carrying amount of the reporting unit in determining the
gain or loss on disposal.
40-2 When a
portion of a reporting unit that constitutes a business (see
Section 805-10-55) or nonprofit activity is to be disposed
of, goodwill associated with that business or nonprofit
activity shall be included in the carrying amount of the
business or nonprofit activity in determining the gain or
loss on disposal.
40-3 The
amount of goodwill to be included in that carrying
amount shall be based on the relative fair values of the
business or nonprofit activity to be disposed of and the
portion of the reporting unit that will be retained. For
example, if a reporting unit with a fair value of $400
is selling a business or nonprofit activity for $100 and
the fair value of the reporting unit excluding the
business or nonprofit activity being sold is $300, 25
percent of the goodwill residing in the reporting unit
would be included in the carrying amount of the business
or nonprofit activity to be sold.
40-4 However,
if the business or nonprofit activity to be disposed of
was never integrated into the reporting unit after its
acquisition and thus the benefits of the acquired
goodwill were never realized by the rest of the
reporting unit, the current carrying amount of that
acquired goodwill shall be included in the carrying
amount of the business or nonprofit activity to be
disposed of.
40-5 That
situation might occur when the acquired business or
nonprofit activity is operated as a standalone entity or
when the business or nonprofit activity is to be
disposed of shortly after it is acquired.
40-6
Situations in which the acquired business or nonprofit
activity is operated as a standalone entity are expected
to be infrequent because some amount of integration
generally occurs after an acquisition.
40-7 When only a portion of
goodwill is allocated to a business or nonprofit
activity to be disposed of, the goodwill remaining in
the portion of the reporting unit to be retained shall
be tested for impairment in accordance with paragraphs
350-20-35-3A through 35-13 using its adjusted carrying
amount.
Entities may need to include goodwill in a disposal group even if goodwill was
not assigned to the asset group while the assets were classified as held and
used in accordance with ASC 360-10-35-26 (see Section 2.3.2).
The following table describes
how goodwill should be allocated to disposal groups in various
circumstances:
|
Assigning Goodwill to Disposal
Groups
| |
|---|---|
|
Disposal group is a reporting unit or a group of
reporting units.
|
The goodwill assigned to the reporting unit(s) is
included in the carrying amount of the disposal group in
accordance with ASC 350-20-40-1.
|
|
Disposal group represents a portion of one or more
reporting units and constitutes a business under ASC
805-10.
|
Goodwill should be allocated to the disposal group in
accordance with ASC 350-20-40-2 through 40-6, generally
on a relative fair value basis (unless the business was
never integrated into the reporting unit).
In addition, under ASC 350-20-40-7, the
goodwill remaining in the portion of the reporting unit
to be retained by the entity must be tested for
impairment.
|
|
Disposal group represents a portion of one or more
reporting units but does not constitute a business under
ASC 805-10.
|
Goodwill should not be allocated to the disposal group
because goodwill is only derecognized when a business is
disposed of or when goodwill is impaired.
However, the entity should consider
whether the disposal would result in a triggering event
and thus whether the entity would be required to perform
impairment testing of the goodwill of the reporting
unit(s) from which the assets were disposed of.
|
When a disposal group is classified as held for sale and meets the criteria for
reporting in discontinued operations, an entity must reclassify the assets and
liabilities of the disposal group in the prior-period balance sheets (see
Section 7.2).
We believe that goodwill related to a disposal group that is a reporting unit or
that meets the definition of a business should also be included with the assets
and liabilities of the discontinued operation in those prior periods.
When determining whether goodwill should be allocated to a
disposal of a portion of a reporting unit, entities should apply the definition
of a business, as clarified in ASU
2017-01, regardless of whether the assets disposed of were
acquired and determined to be a business under previous guidance. For more
information about determining whether a disposal group meets the definition of a
business in ASC 805-10, see Section 2.4 of
Deloitte’s Roadmap Business
Combinations.
In addition, see Section
7.4.1 for guidance on including goodwill impairment charges in
discontinued operations.
Example 3-3
Assigning Goodwill
to a Disposal Group
Company A acquires Company B in a
business combination. Company A retains B as a separate
subsidiary, and B elects to apply pushdown accounting in
its separate financial statements. Company A recognizes
goodwill of $200 from the acquisition of B in its
consolidated financial statements. In applying pushdown
accounting, B recognizes $200 of goodwill in its
separate financial statements. Company A determines that
B represents a separate reporting unit in accordance
with ASC 350-20.
On the basis of the expected synergies from the
acquisition of B, A assigns $150 of the $200 of
recognized goodwill to B and $50 to Subsidiary X, a
different reporting unit of A. For purposes of A’s
consolidated financial statements, when A tests its B
reporting unit for impairment, it will test goodwill of
$150, which was the amount assigned to the B reporting
unit. ASC 350-20 also requires that subsidiaries that
issue separate financial statements test goodwill at the
subsidiary level by using the subsidiary’s reporting
units. Subsidiary B will test the goodwill of $200
recognized in its separate financial statements. Any
impairment loss recognized in B’s separate financial
statements would not necessarily result in an impairment
loss in A’s consolidated financial statements, but it
may represent a triggering event for A.
If A were to dispose of B in its entirety, A would only
include the $150 of assigned goodwill in determining the
gain or loss on the disposal of B. To appropriately
account for the gain or loss on disposal in its
consolidated financial statements, A would therefore
need to make an adjustment at the consolidated level to
exclude $50 of goodwill assigned to X from the disposed
assets. Just as if A were to dispose of X in its
entirety, A would include the assigned goodwill amount
of $50 in calculating the gain or loss on the disposal.
To appropriately account for the gain or loss on
disposal, A would therefore need to make an adjustment
at the consolidated level to include the $50 of goodwill
assigned to X with X’s disposed assets.
3.4.2 Cumulative Translation Adjustment and Other Items of Accumulated Other Comprehensive Income
ASC 830-30-45-13 states, in part, that “an entity that has committed to a plan
that will cause the cumulative translation adjustment [CTA] for an equity method
investment or a consolidated investment in a foreign entity to be reclassified
to earnings shall include the [CTA] as part of the carrying amount of the
investment when evaluating that investment for impairment.” Therefore, the
carrying value of a disposal group should include the CTA that will be
eliminated upon sale once the disposal group is classified as held for sale. If
unrealized gains in AOCI are not included in the carrying amount of the disposal
group, a loss may be recognized in the period in which the disposal group is
classified as held for sale, and a subsequent gain may be recognized when the
disposition occurs. Alternatively, if unrealized losses in AOCI are not included
in the carrying amount of the disposal group, a loss that might otherwise be
measured might be deferred until the disposition occurs.
The CTA should remain classified in equity until the disposal group is sold (or
disposed of other than by sale) on the basis of the guidance in ASC 830-30-40-1,
which states:
Upon sale or upon complete or substantially
complete liquidation of an investment in a foreign entity, the amount
attributable to that entity and accumulated in the translation adjustment
component of equity shall be both:
-
Removed from the separate component of equity
-
Reported as part of the gain or loss on sale or liquidation of the investment for the period during which the sale or liquidation occurs.
For an illustration of how OCI would be treated in the testing of the disposal of
a foreign entity for impairment, see Example
5-24 in Deloitte’s Roadmap Foreign
Currency Matters.
Furthermore, the FASB’s implementation group regarding foreign currency matters indicated in its
meeting minutes that:
Paragraph 14 [of FASB Statement 52 (codified in ASC 830-30-40-1)] states that the translation component is
removed from equity and reported as part of the gain or loss on sale or complete or substantially complete
liquidation. We believe the timing of loss and gain recognition remains consistent with the provisions of [FASB
Statement 5 (codified in ASC 450)] and APB Opinion 30 (codified in ASC 225-20)].
Therefore, the CTA should be reclassified out of equity in the period in which the disposal occurs but the CTA balance related to prior periods should not be reclassified.
While ASC 830-30-40-1 and ASC 830-30-45-13 address foreign currency translation
adjustments, there is no specific U.S. GAAP guidance on the treatment of other
items included in AOCI (e.g., unrealized holding gains and losses on
available-for-sale debt securities, gains and losses related to postretirement
benefits) in the assessment of a disposal group for impairment. However, we
believe that it is appropriate to analogize to that guidance for all items of
AOCI. See Section
2.3.6 for more information about situations in which an asset
group does not yet meet the criteria to be classified as held for sale. For more
information about testing a foreign entity for impairment and the
reclassification of the CTA out of equity, see Deloitte’s Roadmap Foreign Currency
Matters.