Goodwill Impairment Under IFRS Vodafone Group Public Limited Company's (UK) Annual Report reports the following informa- tion (year ended March 31, 2014): 2014 m ............................. Revenue ...... Cost of sales............ Gross profit. ............ Selling and distribution expenses ........... Administrative expenses. Share of results of equity accounted associates and joint ventures........... Impairment losses ......... Other income and expense ........... Operating (loss)/profit... Non-operating income and expense......... Investment income............................ Financing costs........................... (Loss)/profit before taxation ...................... Income tax credit/(expense)........................................ Profit/(loss) for the financial year from continuing operations........ Profit for the financial year from discontinued operations ............ Profit for the financial year. ......... $38,346 (27,942) 10,404 (3,033) (4,245) 278 (6,600) (717) (3,913) (149) 346 (1,554) (5,270) 16,582 11,312 48,108 $59,420 The company also provides the following disclosures in the notes to their financial statements: Impairment reviews IFRS requires management to perform impairment tests annually for indefinite lived assets and, for finite lived assets, if events or changes in circumstances indicate that their carrying amounts may not be recoverable. Impairment testing requires management to judge whether the carrying value of assets can be supported by the net present value of future cash flows that they generate. Calculating the net present value of the future cash flows requires assumptions to be made in respect of highly uncertain matters... Accounting Policies-Goodwill Goodwill is not subject to amortisation but is tested for impairment annually or whenever there is an indica- tion that the asset may be impaired. For the purpose of impairment testing, assets are grouped at the lowest levels for which there are separately identifiable cash flows, known as cash-generating units. If the recover- able amount of the cash-generating unit is less than the carrying amount of the unit, the impairment loss is allocated first to reduce the carrying amount of any goodwill allocated to the unit and then to other assets of the unit pro-rata on the basis of the carrying amount of each asset in the unit. Impairment losses recognised for goodwill are not reversible in subsequent periods. The recoverable amount is the higher of fair value less costs to sell and value in use. In assessing value in use, the estimated future cash flows are discounted to their present value using a pre-tax discount rate that reflects current market assessments of the time value of money and the risks specific to the asset for which the estimates of future cash flows have not been adjusted. Assets Goodwill and other intangible assets Our total intangible assets increased to 46.7 billion from 44.1 billion. The increase primarily arose as a result of 11.5 billion additions as a result of the Group's acquisitions ... partially offset by 6.6 billion of goodwill impairments, reductions of 2.6 billion as a result of unfavourable movements in foreign exchange rates and 3.5 billion of amortisation. REQUIRED a. Briefly describe the general goodwill impairment rules that Vodafone used relative to those that would apply under U.S. GAAP. Are they very different? b. How would you treat the goodwill impairment if you were a financial analyst evaluating the company? How did the charge affect pre-tax income for Vodafone? c. How does such an impairment charge affect the cash flows of the company? Goodwill Impairment Under IFRS Vodafone Group Public Limited Company's (UK) Annual Report reports the following informa- tion (year ended March 31, 2014): 2014 m ............................. Revenue ...... Cost of sales............ Gross profit. ............ Selling and distribution expenses ........... Administrative expenses. Share of results of equity accounted associates and joint ventures........... Impairment losses ......... Other income and expense ........... Operating (loss)/profit... Non-operating income and expense......... Investment income............................ Financing costs........................... (Loss)/profit before taxation ...................... Income tax credit/(expense)........................................ Profit/(loss) for the financial year from continuing operations........ Profit for the financial year from discontinued operations ............ Profit for the financial year. ......... $38,346 (27,942) 10,404 (3,033) (4,245) 278 (6,600) (717) (3,913) (149) 346 (1,554) (5,270) 16,582 11,312 48,108 $59,420 The company also provides the following disclosures in the notes to their financial statements: Impairment reviews IFRS requires management to perform impairment tests annually for indefinite lived assets and, for finite lived assets, if events or changes in circumstances indicate that their carrying amounts may not be recoverable. Impairment testing requires management to judge whether the carrying value of assets can be supported by the net present value of future cash flows that they generate. Calculating the net present value of the future cash flows requires assumptions to be made in respect of highly uncertain matters... Accounting Policies-Goodwill Goodwill is not subject to amortisation but is tested for impairment annually or whenever there is an indica- tion that the asset may be impaired. For the purpose of impairment testing, assets are grouped at the lowest levels for which there are separately identifiable cash flows, known as cash-generating units. If the recover- able amount of the cash-generating unit is less than the carrying amount of the unit, the impairment loss is allocated first to reduce the carrying amount of any goodwill allocated to the unit and then to other assets of the unit pro-rata on the basis of the carrying amount of each asset in the unit. Impairment losses recognised for goodwill are not reversible in subsequent periods. The recoverable amount is the higher of fair value less costs to sell and value in use. In assessing value in use, the estimated future cash flows are discounted to their present value using a pre-tax discount rate that reflects current market assessments of the time value of money and the risks specific to the asset for which the estimates of future cash flows have not been adjusted. Assets Goodwill and other intangible assets Our total intangible assets increased to 46.7 billion from 44.1 billion. The increase primarily arose as a result of 11.5 billion additions as a result of the Group's acquisitions ... partially offset by 6.6 billion of goodwill impairments, reductions of 2.6 billion as a result of unfavourable movements in foreign exchange rates and 3.5 billion of amortisation. REQUIRED a. Briefly describe the general goodwill impairment rules that Vodafone used relative to those that would apply under U.S. GAAP. Are they very different? b. How would you treat the goodwill impairment if you were a financial analyst evaluating the company? How did the charge affect pre-tax income for Vodafone? c. How does such an impairment charge affect the cash flows of the company