Acquirer plc is a company that regularly purchases new subsidiaries. On 30 June 2000, the company acquired all the equity shares of Prospects plc for a cash payment of 260 million. The net assets of Prospects plc on 30 June 2000 were 180 million and no fair value adjustments were necessary upon consolidation of Prospects plc for the first time. Acquirer plc assessed the useful economic life of the goodwill that arose on consolidation of Prospects plc as 40 years and charged six months amortisation in its consolidated profit and loss account for the year ended 31 December 2000. Acquirer plc then charged a full years amortisation of the goodwill in its consolidated profit and loss account for the year ended 31 December 2001.

On 31 December 2001, Acquirer plc carried out a review of the goodwill on consolida- tion of Prospects plc for evidence of impairment. The review was carried out despite the fact that there were no obvious indications of adverse trading conditions for Prospects plc. The review involved allocating the net assets of Prospects plc into three income- generating units and computing the value in use of each unit. The carrying values of the individual units before any impairment adjustments are given below:

Patents	Unit A million 5	Unit B million	Unit C million
Tangible fixed assets	60	30	40
Net current assets	20	25	20
Value in use of unit	72	60	65

85 55 60

It was not possible to meaningfully allocate the goodwill on consolidation to the individual income-generating units, but all the other net assets of Prospects plc are allocated in the table shown above. The patents of Prospects plc have no ascertainable market value but all the current assets have a market value that is above carrying value. The value in use of Prospects plc as a single income-generating unit at 31 December 2001 is 205 million.

Required

(a) Explain why it was necessary to review the goodwill on consolidation of Prospects plc for impairment at 31 December 2001. (4 marks)

(b) Explain briefly the purpose of an impairment review and why the net assets of Prospects plc were allocated into income-generating units as part of the review of goodwill for impairment. (5 marks)

(c) Demonstrate how the impairment loss in unit A will affect the carrying value of the net assets of unit A in the consolidated financial statements of Acquirer plc.

(4 marks)

(d) Explain and calculate the effect of the impairment review on the carrying value of the goodwill on consolidation of Prospects plc at 31 December 2001. (7 marks)