When impairment testing is performed, to what should goodwill be allocated?

When impairment testing is performed, to what should goodwill be allocated?

• A. To liabilities.
• B. To revenue streams.
• C. To cash-generating units (CGUs).
• D. To individual assets.

Answer: (C)

Goodwill from a business combination is tied to the future cash flows the acquired entity is expected to generate, not to any single asset. For impairment testing, you assess the value at the cash-generating unit level—the smallest group of assets that produces cash inflows largely independently. Allocate the goodwill to the CGUs that are expected to benefit from the acquisition so that the test reflects the actual expected cash flows of those units. When an impairment is identified, the loss is charged first to the goodwill allocated to the CGU, and then to other assets of that unit if needed. This is why goodwill is tested and allocated to cash-generating units, rather than to liabilities, revenue streams, or individual assets.

Goodwill from a business combination is tied to the future cash flows the acquired entity is expected to generate, not to any single asset. For impairment testing, you assess the value at the cash-generating unit level—the smallest group of assets that produces cash inflows largely independently. Allocate the goodwill to the CGUs that are expected to benefit from the acquisition so that the test reflects the actual expected cash flows of those units. When an impairment is identified, the loss is charged first to the goodwill allocated to the CGU, and then to other assets of that unit if needed. This is why goodwill is tested and allocated to cash-generating units, rather than to liabilities, revenue streams, or individual assets.