Goodwill Impairment Testing: A Practical Guide Under IAS 36

Goodwill impairment testing under IAS 36 Impairment of Assets is one of the most important — and judgemental — areas of financial reporting. Because goodwill cannot be amortised, IAS 36 requires it to be tested regularly to ensure it isn't carried at more than it's worth. This practical guide explains how impairment works under IAS 36, the recoverable amount, the special rules for goodwill, how the testing is carried out using cash-generating units, and why it matters — in clear, plain language. It's a core topic in ACCA and group-accounting study.

What is impairment under IAS 36?

IAS 36 exists to ensure that an entity's assets are not carried at more than their recoverable amount. An asset is impaired when its carrying amount (the value in the accounts) exceeds the amount that can be recovered from it. When that happens, the asset must be written down, and the impairment loss recognised. The standard applies to most non-current assets, including goodwill, with some exceptions covered by other standards.

Recoverable amount: the key measure

The heart of IAS 36 is the recoverable amount, defined as the higher of:

• Fair value less costs of disposal — essentially the net amount obtainable from selling the asset; and
• Value in use — the present value of the future cash flows expected to be derived from continuing to use the asset.

If the carrying amount is higher than this recoverable amount, the difference is the impairment loss, recognised in profit or loss (or, for a revalued asset, first against any revaluation surplus relating to that asset).

Why goodwill is special

Goodwill — the premium paid in a business combination over the fair value of the net assets acquired — receives special treatment because it has an indefinite life and cannot be amortised. Instead, IAS 36 requires goodwill to be tested for impairment at least annually, regardless of whether there is any indicator of impairment (and additionally whenever an indicator does arise). This annual test is the mechanism that keeps goodwill from being overstated on the balance sheet indefinitely.

How goodwill is tested: cash-generating units

Goodwill doesn't generate cash flows on its own, so it can't be tested in isolation. Instead, it is allocated to cash-generating units (CGUs) — the smallest identifiable groups of assets that generate cash inflows largely independent of other assets. The impairment test compares the carrying amount of the CGU (including its allocated goodwill) with the CGU's recoverable amount. If the carrying amount is higher, an impairment loss arises, and it is allocated first to reduce the goodwill of the CGU, and then to the other assets of the CGU on a pro-rata basis.

A crucial rule: no reversal for goodwill

One of the most important rules is that an impairment loss on goodwill can never be reversed in a later period. While impairment losses on most other assets can be reversed if circumstances improve (subject to limits), goodwill impairment is permanent. This reflects a prudent concern that any apparent recovery would really be internally generated goodwill, which cannot be recognised.

Why it matters

Goodwill impairment testing matters because goodwill is often a very large balance-sheet item, and an impairment can have a major effect on reported profit — sometimes signalling that an acquisition has not delivered the value expected. Because the test relies on estimates of future cash flows and discount rates, it involves significant judgement and is an area of close scrutiny by auditors and regulators. For accountants, understanding recoverable amount, CGUs and the special goodwill rules is essential and frequently examined.

Frequently asked questions

What is impairment under IAS 36?

An asset is impaired when its carrying amount exceeds its recoverable amount — the higher of fair value less costs of disposal and value in use. The excess is written off as an impairment loss.

How often is goodwill tested for impairment?

At least annually, regardless of whether there is an indicator of impairment, and additionally whenever an indicator arises. Goodwill cannot be amortised, so this regular test is essential to keep it from being overstated.

What is a cash-generating unit (CGU)?

The smallest identifiable group of assets that generates cash inflows largely independent of other assets. Goodwill is allocated to CGUs and tested at that level, since it generates no cash flows alone.

Can a goodwill impairment be reversed?

No. Goodwill impairment losses are never reversed. Impairments of most other assets can be reversed if circumstances improve, but goodwill is an exception.

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How often is goodwill tested for impairment?

Under IAS 36, goodwill is tested for impairment at least annually, and more frequently if there is an indication it may be impaired. The test compares the recoverable amount of the relevant cash-generating unit with its carrying amount. Always apply the current standard.