How is goodwill tested for impairment under IAS 36.99?

Under IAS 36 goodwill impairment testing, goodwill acquired in a business combination must be allocated to cash-generating units (CGUs) and tested for impairment annually — and whenever there is an indication of impairment — by comparing the CGU's carrying amount (including allocated goodwill) to its recoverable amount, with any shortfall recognised immediately in profit or loss and never reversed. - Allocation to CGUs (IAS 36.80–.81): Goodwill must be allocated to each CGU or group of CGUs expected to benefit from the synergies of the combination. The allocation ceiling is the lowest level at which goodwill is monitored for internal management purposes, and must not exceed a single operating segment before aggregation under IFRS 8. - Annual impairment test — no trigger required (IAS 36.96): Unlike other non-financial assets, goodwill is not amortised; instead it is tested for impairment at least annually. The test may be performed at any time during the year, provided it is performed at the same time each year. Different CGUs may be tested at different times (IAS 36.97). - Recoverable amount determination (IAS 36.18): Recoverable amount is the higher of (a) fair value less costs of disposal (FVLCD) and (b) value in use (VIU). VIU is the present value of estimated future cash flows from the CGU, discounted at a pre-tax rate reflecting current market assessments of the time value of money and asset-specific risks (IAS 36.55–.56). - Impairment loss allocation (IAS 36.104): If the CGU's carrying amount exceeds its recoverable amount, the impairment loss is allocated first to reduce goodwill to zero, then pro-rata to other assets in the CGU based on carrying amount, subject to each asset not being reduced below the highest of its FVLCD, VIU, or zero.

How should a pre-tax discount rate be derived for a VIU calculation when market data only provides post-tax WACCs?

- No reversal of goodwill impairment (IAS 36.124): An impairment loss recognised on goodwill cannot be reversed in a subsequent period, even if the circumstances that caused the write-down have changed. This is a hard prohibition — not a rebuttable presumption. - Disclosure (IAS 36.134): For each CGU carrying significant goodwill, entities must disclose the carrying amount of goodwill allocated, key assumptions used in recoverable amount calculations (growth rates, discount rates), and sensitivity analysis showing the amount by which a key assumption must change for the recoverable amount to equal the carrying amount. Scenario: Entity A acquired a subsidiary generating €8m goodwill, allocated entirely to CGU "Retail South." At 31 December 20X4, management performs the annual test: | | € 000 | |---|---| | Carrying amount — net identifiable assets | 22,000 | | Carrying amount — goodwill | 8,000 | | Total carrying amount of CGU | 30,000 | | Recoverable amount (VIU) | 24,500 | | Impairment loss | 5,500 | The €5,500k loss is first absorbed by goodwill (limited to €8,000k available):

If a CGU's recoverable amount is based on FVLCD using a discounted cash flow model, what adjustments distinguish it from a VIU calculation under IAS 36?

| Account | Dr (€000) | Cr (€000) | |---|---|---| | Impairment loss — P&L | 5,500 | | | Accumulated impairment — Goodwill | | 5,500 | Goodwill carrying amount after the test: €2,500k. No other assets in the CGU are written down because the impairment is fully absorbed by goodwill. If the impairment were €9,000k instead, goodwill would be eliminated (Dr 8,000k to goodwill impairment) and the remaining €1,000k allocated pro-rata to other identifiable assets. - Incorrect CGU boundary definition: Practitioners frequently set CGU boundaries too broadly (e.g., at the legal entity level rather than the lowest level at which independent cash flows are generated per IAS 36.68–.69), which can mask impairment by offsetting a loss-making unit against profitable ones. - Stale or optimistic VIU assumptions: Discount rates are often understated (using post-tax rates without grossing up, or applying a group WACC that doesn't reflect CGU-specific risk), and terminal growth rates routinely exceed long-run GDP growth without justification — both are common audit focus areas.

How is goodwill impairment testing affected when a partially-owned subsidiary's CGU includes a non-controlling interest under IAS 36.C4–C9?

- Forgetting to include corporate assets (IAS 36.102): When testing a CGU, entities must allocate a reasonable portion of corporate assets (e.g., headquarters, shared IT) that support the CGU. Omitting these understates the carrying amount and can make a CGU appear more robust than it is. - IAS 36.80–.81 — Mandatory allocation of goodwill to CGUs and group-of-CGUs ceiling linked to operating segment level. - IAS 36.96–.97 — Annual impairment test requirement, timing flexibility, and same-time-each-year consistency rule. - IAS 36.104 — Impairment loss allocation sequence: goodwill first, then pro-rata to other assets. - IAS 36.124 — Absolute prohibition on reversal of goodwill impairment losses. - IAS 36.134 — Disclosure requirements for significant goodwill CGUs, including sensitivity analysis on key assumptions.

IAS 36 Goodwill Impairment Testing

IAS 36 Goodwill Impairment Testing — Core Rule

Under IAS 36 goodwill impairment testing, goodwill acquired in a business combination must be allocated to cash-generating units (CGUs) and tested for impairment annually — and whenever there is an indication of impairment — by comparing the CGU's carrying amount (including allocated goodwill) to its recoverable amount, with any shortfall recognised immediately in profit or loss and never reversed.

How IAS 36 Goodwill Impairment Testing Works

Allocation to CGUs (IAS 36.80–.81): Goodwill must be allocated to each CGU or group of CGUs expected to benefit from the synergies of the combination. The allocation ceiling is the lowest level at which goodwill is monitored for internal management purposes, and must not exceed a single operating segment before aggregation under IFRS 8.

Annual impairment test — no trigger required (IAS 36.96): Unlike other non-financial assets, goodwill is not amortised; instead it is tested for impairment at least annually. The test may be performed at any time during the year, provided it is performed at the same time each year. Different CGUs may be tested at different times (IAS 36.97).

Recoverable amount determination (IAS 36.18): Recoverable amount is the higher of (a) fair value less costs of disposal (FVLCD) and (b) value in use (VIU). VIU is the present value of estimated future cash flows from the CGU, discounted at a pre-tax rate reflecting current market assessments of the time value of money and asset-specific risks (IAS 36.55–.56).

Impairment loss allocation (IAS 36.104): If the CGU's carrying amount exceeds its recoverable amount, the impairment loss is allocated first to reduce goodwill to zero, then pro-rata to other assets in the CGU based on carrying amount, subject to each asset not being reduced below the highest of its FVLCD, VIU, or zero.

No reversal of goodwill impairment (IAS 36.124): An impairment loss recognised on goodwill cannot be reversed in a subsequent period, even if the circumstances that caused the write-down have changed. This is a hard prohibition — not a rebuttable presumption.

Disclosure (IAS 36.134): For each CGU carrying significant goodwill, entities must disclose the carrying amount of goodwill allocated, key assumptions used in recoverable amount calculations (growth rates, discount rates), and sensitivity analysis showing the amount by which a key assumption must change for the recoverable amount to equal the carrying amount.

IAS 36 Goodwill Impairment Testing — Practical Example

Scenario: Entity A acquired a subsidiary generating €8m goodwill, allocated entirely to CGU "Retail South." At 31 December 20X4, management performs the annual test:

	€ 000
Carrying amount — net identifiable assets	22,000
Carrying amount — goodwill	8,000
Total carrying amount of CGU	30,000
Recoverable amount (VIU)	24,500
Impairment loss	5,500

The €5,500k loss is first absorbed by goodwill (limited to €8,000k available):

Account	Dr (€000)	Cr (€000)
Impairment loss — P&L	5,500
Accumulated impairment — Goodwill		5,500

Goodwill carrying amount after the test: €2,500k. No other assets in the CGU are written down because the impairment is fully absorbed by goodwill.

If the impairment were €9,000k instead, goodwill would be eliminated (Dr 8,000k to goodwill impairment) and the remaining €1,000k allocated pro-rata to other identifiable assets.

IAS 36 Goodwill Impairment Testing — Common Pitfalls

Incorrect CGU boundary definition: Practitioners frequently set CGU boundaries too broadly (e.g., at the legal entity level rather than the lowest level at which independent cash flows are generated per IAS 36.68–.69), which can mask impairment by offsetting a loss-making unit against profitable ones.

Stale or optimistic VIU assumptions: Discount rates are often understated (using post-tax rates without grossing up, or applying a group WACC that doesn't reflect CGU-specific risk), and terminal growth rates routinely exceed long-run GDP growth without justification — both are common audit focus areas.

Forgetting to include corporate assets (IAS 36.102): When testing a CGU, entities must allocate a reasonable portion of corporate assets (e.g., headquarters, shared IT) that support the CGU. Omitting these understates the carrying amount and can make a CGU appear more robust than it is.

IAS 36 Goodwill Impairment Testing — Key Paragraphs

IAS 36.80–.81 — Mandatory allocation of goodwill to CGUs and group-of-CGUs ceiling linked to operating segment level.
IAS 36.96–.97 — Annual impairment test requirement, timing flexibility, and same-time-each-year consistency rule.
IAS 36.104 — Impairment loss allocation sequence: goodwill first, then pro-rata to other assets.
IAS 36.124 — Absolute prohibition on reversal of goodwill impairment losses.
IAS 36.134 — Disclosure requirements for significant goodwill CGUs, including sensitivity analysis on key assumptions.