DO6. Professor Whittington believes that there are two aspects of the proposed impairment test that are particularly unsatisfactory. First, the failure to eliminate the shield from impairment provided by the internally generated goodwill of the acquiring entity at acquisition. This is discussed in paragraph DO7. Second, the lack of a subsequent cash flow test. This is discussed in paragraphs DO8-DO10. The inability to eliminate the shield from impairment provided by internally generated goodwill accruing after the acquisition date is also a problem. However, there is no obvious practical way of dealing with this problem within the framework of conventional impairment tests.

DO7. When an acquired business is merged with an acquirer's existing operations, the impairment test in IAS 36 does not take account of the acquirer's pre-existing internally generated goodwill. Thus, the pre-existing internally generated goodwill of the acquirer provides a shield against impairment additional to that provided by subsequent internally generated goodwill. Professor Whittington believes that the impairment test would be more rigorous if it included a requirement similar to that in UK Financial Reporting Standard 11 Impairment of Fixed Assets and Goodwill, which recognises, for purposes of impairment testing, the implied value of the acquirer's goodwill existing at the time of acquisition.
DO8. The subsequent cash flow test is discussed in paragraphs BC195-BC198 of the Basis for Conclusions on IAS 36. A subsequent cash flow test substitutes in past impairment tests the cash flows that actually occurred for those that were estimated at the time of the impairment tests, and requires a write-down if the revised estimates would have created an impairment loss for goodwill. It is thus a correction of an estimate. Such a test is incorporated in FRS 11.

DO9. The Board's reasons for rejecting the subsequent cash flow test are given in paragraph BC197(a)-(c). The preamble to paragraph BC197 claims that the subsequent cash flow test is misdirected because excessive write-downs of goodwill may be a problem that should be prevented. However, the subsequent cash flow test requires only realistic write-downs (based on actual outcomes), not excessive ones. If the statement in paragraph BC197 is correct, this may point to another deficiency in the impairment testing process that requires a different remedy.

DO10. Paragraph BC197(a) asserts that "it does not produce representationally faithful results" because it ignores other elements in the measurement of value in use. As explained above, it merely substitutes the outcome cash flow for the estimate, which should have a clear meaning and provides a safeguard against over-optimism in the estimation of cash flows. If corrections of estimates of other elements, such as variations that have occurred in interest rates, were considered important in this context, they could be incorporated in the calculation. Paragraph BC197(b) seems to raise the same point as paragraph BC197(a), as to the meaning of the impairment loss under the test. Paragraph BC197(c) complains about the excessive burden that a subsequent cash flow test might impose. Professor Whittington notes that the extent of the burden depends, of course, upon the frequency with which the test is applied. He also notes that the extensive disclosure requirements currently associated with the impairment test might be reduced if the subsequent cash flow test were in place.
Illustrative Examples - IAS 36 Impairment of Assets

Contents
Example 1 - IDENTIFICATION OF CASH-GENERATING UNITS IE1-IE22
A - Retail Store Chain IE1-IE4
B - Plant for an Intermediate Step in a Production Process IE5-IE10
C - Single Product Entity IE11-IE16
D - Magazine Titles IE17-IE19
E - Building Half-Rented to Others and Half-Occupied for Own Use IE20-IE22
Example 2 - CALCULATION OF VALUE IN USE AND RECOGNITION OF AN IMPAIRMENT LOSS IE23-IE32
Example 3 - DEFERRED TAX EFFECTS IE33-IE37
A - Deferred Tax Effects of the Recognition of an Impairment Loss IE33-IE35
B - Recognition of an Impairment Loss Creates a Deferred Tax Asset IE36-IE37
Example 4 - REVERSAL OF AN IMPAIRMENT LOSS IE38-IE43
Example 5 - TREATMENT OF A FUTURE RESTRUCTURING IE44-IE53
Example 6 - TREATMENT OF FUTURE COSTS IE54-IE61
Example 7 - IMPAIRMENT TESTING CASH-GENERATING UNITS WITH GOODWILL AND MINORITY INTERESTS IE62-IE68
Example 8 - ALLOCATION OF CORPORATE ASSETS IE69-IE79
Example 9 - DISCLOSURES ABOUT CASH-GENERATING UNITS WITH GOODWILL OR INTANGIBLE ASSETS WITH INDEFINITE USEFUL LIVES IE80-IE89

Illustrative Examples
These examples accompany, but are not part of, IAS 36. All the examples assume that the entities concerned have no transactions other than those described. In the examples monetary amounts are denominated in 'currency units' (CU).

Example 1 - Identification of Cash-generating Units
The purpose of this example is:
(a) to indicate how cash-generating units are identified in various situations; and
(b) to highlight certain factors that an entity may consider in identifying the cash-generating unit to which an asset belongs.
A - Retail Store Chain
Background
IE1 Store X belongs to a retail store chain M. X makes all its retail purchases through M's purchasing centre. Pricing, marketing, advertising and human resources policies (except for hiring X's cashiers and sales staff) are decided by M. M also owns five other stores in the same city as X (although in different neighbourhoods) and 20 other stores in other cities. All stores are managed in the same way as X. X and four other stores were purchased five years ago and goodwill was recognised.
What is the cash-generating unit for X (X's cash-generating unit)?
Analysis
IE2 In identifying X's cash-generating unit, an entity considers whether, for example:
(a) internal management reporting is organised to measure performance on a store-by-store basis; and
(b) the business is run on a store-by-store profit basis or on a region/city basis.
IE3 All M's stores are in different neighbourhoods and probably have different customer bases. So, although X is managed at a corporate level, X generates cash inflows that are largely independent of those of M's other stores. Therefore, it is likely that X is a cash-generating unit.
IE4 If X's cash-generating unit represents the lowest level within M at which the goodwill is monitored for internal management purposes, M applies to that cash-generating unit the impairment test described in paragraph 90 of IAS 36. If information about the carrying amount of goodwill is not available and monitored for internal management purposes at the level of X's cash-generating unit, M applies to that cash-generating unit the impairment test described in paragraph 88 of IAS 36.

B - Plant for an Intermediate Step in a Production Process
Background
IE5 A significant raw material used for plant Y's final production is an intermediate product bought from plant X of the same entity. X's products are sold to Y at a transfer price that passes all margins to X. Eighty per cent of Y's final production is sold to customers outside of the entity. Sixty per cent of X's final production is sold to Y and the remaining 40 per cent is sold to customers outside of the entity.
For each of the following cases, what are the cash-generating units for X and Y?
Case 1: X could sell the products it sells to Y in an active market. Internal transfer prices are higher than market prices.
Case 2: There is no active market for the products X sells to Y.
Analysis
Case 1

IE6 X could sell its products in an active market and, so, generate cash inflows that would be largely independent of the cash inflows from Y. Therefore, it is likely that X is a separate cash-generating unit, although part of its production is used by Y (see paragraph 70 of IAS 36).
IE7 It is likely that Y is also a separate cash-generating unit. Y sells 80 per cent of its products to customers outside of the entity. Therefore, its cash inflows can be regarded as largely independent.
IE8 Internal transfer prices do not reflect market prices for X's output.
Therefore, in determining value in use of both X and Y, the entity adjusts financial budgets/forecasts to reflect management's best estimate of future prices that could be achieved in arm's length transactions for those of X's products that are used internally (see paragraph 70 of IAS 36).
Case 2

IE9 It is likely that the recoverable amount of each plant cannot be assessed independently of the recoverable amount of the other plant because:
(a) the majority of X's production is used internally and could not be sold in an active market. So, cash inflows of X depend on demand for Y's products. Therefore, X cannot be considered to generate cash inflows that are largely independent of those of Y.
(b) the two plants are managed together.
IE10 As a consequence, it is likely that X and Y together are the smallest group of assets that generates cash inflows that are largely independent.
C - Single Product Entity
Background
IE11 Entity M produces a single product and owns plants A, B and C.
Each plant is located in a different continent. A produces a component that is assembled in either B or C. The combined capacity of B and C is not fully utilised. M's products are sold worldwide from either B or C. For example, B's production can be sold in C's continent if the products can be delivered faster from B than from C. Utilisation levels of B and C depend on the allocation of sales between the two sites.
For each of the following cases, what are the cash-generating units for A, B and C?
Case 1: There is an active market for A's products.
Case 2: There is no active market for A's products.
Analysis
Case 1