Goodwill Impairment Testing: A Practical Guide Under IAS 36
How goodwill impairment testing works in practice — CGU allocation, recoverable amount, and disclosure requirements.
Why Goodwill Impairment Testing Is Important
Goodwill arising on business combinations under IFRS 3 is not amortised — instead, it must be tested for impairment at least annually, regardless of whether there are indicators of impairment. This makes the goodwill impairment test one of the most significant and judgemental disclosures in IFRS financial statements, and a persistent focus of audit scrutiny and regulatory challenge.
Allocating Goodwill to Cash-Generating Units
Goodwill cannot be tested at the overall entity level — it must be allocated to the lowest level of CGU (cash-generating unit) at which goodwill is monitored for internal management purposes. This CGU cannot be larger than an operating segment as defined under IFRS 8. The allocation of goodwill to CGUs is itself a significant judgement — particularly for acquisitions that span multiple operating units or geographies.
The Impairment Test: Recoverable Amount vs Carrying Amount
The recoverable amount of the CGU (the higher of its fair value less costs of disposal and its value in use) is compared to its carrying amount (including the allocated goodwill). If the carrying amount exceeds the recoverable amount, an impairment loss is recognised — first reducing goodwill to zero, then reducing other assets pro-rata. Goodwill impairment cannot be reversed in future periods.
Value in Use: Key Assumptions
Value in use is calculated as the present value of future cash flows expected from the CGU. Key inputs requiring judgement: the cash flow forecast (typically using management's approved budget/plan for years 1-5, then a terminal growth rate), the discount rate (a pre-tax rate reflecting the specific risks of the CGU — often a WACC adjusted for unlisted company risk), and the terminal growth rate (should not exceed the long-term average growth rate for the market in which the CGU operates — typically 2-3% for mature markets).
Disclosure Requirements
IAS 36 requires extensive disclosures for CGUs to which goodwill has been allocated: the carrying amount of goodwill, the basis of recoverable amount used, key assumptions, and — critically — sensitivity analysis showing what change in a key assumption would cause the recoverable amount to equal the carrying amount. These sensitivity disclosures are heavily scrutinised by auditors and investors.
Further Reading
Study with Learnsignal: Financial reporting CPD for qualified accountants. Browse CPD.
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