Some assets or liabilities may be employed in or relate to the operations of multiple reporting units. This may include intangible assets, such as trade names, technology, patents, and customer lists; tangible assets, such as shared manufacturing facilities; or liabilities, such as debt and pension obligations for active employees. In developing a reasonable and supportable methodology to assign such assets and liabilities to reporting units, an entity may consider the relative benefit received by the different reporting units or the relative fair values of the different reporting units. Other criteria may include specific measurable relationships. In the case of some pension items, for example, a pro rata assignment based on payroll expense might be used.
An entity’s methodology to assign to reporting units those assets and liabilities that are employed in multiple reporting units should be consistent and established in tandem with how the entity determines the reporting units’ fair values. An entity normally should base its determination of a reporting unit’s fair value on assumptions that market participants would use to estimate fair value. These assumptions include the likely structure of a sale of that reporting unit, and whether (and if so how) an asset employed in multiple reporting units would be included in the transaction. If the asset would not be included in the sale but its continued use would be necessary to maximize the value of the reporting unit, the cash flow projections used to estimate the fair value of the reporting unit may need to include a cash outflow representing the payment at fair value for the continued use of the asset (similar to a rental or usage fee). This would be the case even if the entity does not presently have intercompany charges for the usage across reporting units.
Conversely, if the asset is included in the reporting unit, it may be necessary to include cash inflows as payments at fair value from the entity’s other reporting units that use the asset. The objective is to ensure that the approach to assigning assets and liabilities to reporting units is consistent with how the fair value of the reporting unit is determined. Otherwise, an entity may determine inappropriately that it has passed or failed step one of its goodwill impairment test.
Question BCG 9-1 considers how pension assets and liabilities should be attributed to a company’s report units.
Question BCG 9-1
If a company has multiple reporting units, how should pension assets and liabilities be attributed to its reporting units?
The objective is to ensure that the approach of assigning assets and liabilities to reporting units is consistent with how the fair value of the reporting unit would be determined. In making this assessment, it is necessary to understand the assumptions a market participant would make in determining the fair value of the reporting unit and whether it is likely that the pension asset or liability would be included in a transaction to sell the reporting unit. The allocation of pension expense to reporting units does not automatically mean that pension assets and liabilities should also be attributed to reporting units. For example, if a reporting unit participates in a multi-employer plan, pension expense would be allocated to the reporting unit; however, no pension asset or liability would be attributed to the reporting unit as a pension asset or liability would not transfer to an acquirer in a sale of the reporting unit.
Example BCG 9-2 illustrates a method for assigning the carrying amount of an intangible asset employed in multiple reporting units.
EXAMPLE BCG 9-2
Assignment of an intangible asset employed in multiple reporting units
A parent company owns an acquired trade name that is used by several of its reporting units. The parent company is determining the appropriate assignment of the trade name’s recorded amount to the reporting units that use the name (i.e., the trade name is maintained at the parent company level but the trade name benefits multiple reporting units). The parent company may not sell that trade name if the parent company were to sell only one of the reporting units to a market participant. Rather, in exchange for a royalty on future product sales, the parent company might grant an acquirer the right to continue using the trade name. The parent company has determined that the assignment should be driven by the assumptions applied in establishing the fair value of the reporting units.
How should the value of the trade name employed in multiple reporting units be assigned to each reporting unit?
It is likely that an estimate of the reporting unit’s fair value would be based on the assumption that the trade name will be licensed to the acquirer instead of sold. Therefore, the parent company generally would not assign a portion of the trade name’s carrying amount to the reporting unit. Instead, a royalty at fair value would be imputed as a cash outflow of the reporting unit that uses the trade name for purposes of determining the reporting unit’s fair value. Further, assuming the trade name is not a corporate asset but is assigned to another reporting unit, that reporting unit would impute royalty income as a cash inflow from the reporting unit using the trade name.
In certain circumstances, depending on the facts, there may be other methods to performing this assignment, such as assigning based on the relative fair values of the reporting units or benefits received by the reporting units. In determining whether the carrying amount of an asset that is used in multiple reporting units should be assigned to one or more reporting units, an entity will need to evaluate the relevant facts and circumstances in light of how the fair values of its reporting units are being estimated.