Key Points
- Goodwill must be tested for impairment at least once every reporting period, even when no indicators of impairment exist.
- The impairment loss is allocated to goodwill first, before reducing any other assets in the CGU.
- Unlike other IAS 36 impairment losses, a goodwill impairment can never be reversed in a subsequent period.
- Goodwill must be allocated to CGUs (or groups of CGUs) no larger than an operating segment before the first annual test after acquisition.
What is Goodwill Impairment?
IAS 36.80 requires an entity to allocate goodwill acquired in a business combination to each CGU (or group of CGUs) expected to benefit from the synergies of that combination. The allocation must be completed before the end of the first annual period beginning after the acquisition date. Once allocated, the entity tests each goodwill-bearing CGU annually by comparing its carrying amount (including goodwill) to its recoverable amount. IAS 36.10(b) mandates this annual test regardless of whether impairment indicators exist.
The recoverable amount is the higher of fair value less costs of disposal and value in use. When the carrying amount exceeds recoverable amount, IAS 36.104 requires the resulting loss to be allocated first to goodwill within the CGU. Only after goodwill is reduced to zero does the remaining loss flow to other assets on a pro-rata basis. The prohibition on reversal in IAS 36.124 makes the write-down permanent. ISA 540.13(a) requires the auditor to evaluate whether management's method for estimating recoverable amount is appropriate, and for goodwill-heavy CGUs this means stress-testing the discount rate, terminal growth assumptions, and cash flow projections that underpin the value-in-use model.
Worked example: Groupe Lefèvre S.A.
Client: Belgian holding company, FY2025, revenue €185M, IFRS reporter. Groupe Lefèvre acquired a Dutch logistics subsidiary in 2021 for €46M, recognising goodwill of €12M. The logistics CGU's carrying amount at 31 December 2025 (including the €12M goodwill) is €39M. During 2025, the subsidiary lost two long-term contracts representing 30% of its revenue.
Step 1 — Confirm CGU identification and goodwill allocation
The logistics subsidiary operates independently from Groupe Lefèvre's other divisions (industrial packaging and warehousing). It maintains separate customer contracts, drivers, fleet, and management. The subsidiary is a single CGU, and the full €12M of goodwill is allocated to it per IAS 36.80.
Step 2 — Estimate value in use
Management projects five-year cash flows reflecting the contract losses. Year-one net operating cash flow is €3.1M (down from €5.4M in FY2024), recovering to €4.2M by year five as replacement contracts phase in. The terminal growth rate is 1.0%, and the pre-tax discount rate is 11.6%, built from a risk-free rate of 3.2%, an equity risk premium of 5.8%, a sector beta of 0.95, and an asset-specific adjustment of 1.1% for contract concentration risk. The resulting value in use is €30.5M.
Step 3 — Assess fair value less costs of disposal
Groupe Lefèvre obtains a broker valuation of the logistics subsidiary at €28M, with estimated disposal costs of €1.4M. Fair value less costs of disposal is €26.6M. Value in use of €30.5M is higher.
Step 4 — Recognise and allocate the impairment loss
The carrying amount of €39M exceeds recoverable amount of €30.5M by €8.5M. Under IAS 36.104(a), the €8.5M loss is allocated first to goodwill. Goodwill of €12M absorbs the full loss, reducing goodwill to €3.5M. No allocation to other CGU assets is required.
Conclusion: the logistics CGU carries a goodwill impairment of €8.5M, defensible because the value-in-use calculation reflects identified contract losses, uses a discount rate built from observable inputs with a documented asset-specific adjustment, and is cross-checked against an independent broker valuation.
Why it matters in practice
Teams frequently perform the annual goodwill impairment test using a group-wide WACC rather than a discount rate reflecting the specific risks of the CGU carrying the goodwill. IAS 36.55–56 requires a pre-tax rate that captures the risks specific to the asset. ISA 540.13(b) requires the auditor to evaluate whether assumptions (including the discount rate) are appropriate for the method. Accepting the group rate without adjustment when the CGU operates in a different risk profile overstates recoverable amount and conceals impairment.
The FRC's 2023 thematic review of IAS 36 disclosures found that entities routinely failed to disclose the key assumptions used in goodwill impairment testing, particularly the discount rate and terminal growth rate. IAS 36.134(d)(iv)–(v) requires disclosure of each key assumption and the approach used to determine its value. Auditors who accept boilerplate goodwill notes without reconciling them to the actual model inputs leave a disclosure gap that inspection teams flag repeatedly.
Goodwill impairment vs. amortisation of goodwill
| Dimension | Goodwill impairment (IAS 36) | Amortisation of goodwill |
|---|---|---|
| IFRS treatment | Mandatory annual test; write-down when carrying amount exceeds recoverable amount | Not permitted. IFRS 3.BC131–BC140 rejected amortisation because useful life cannot be determined reliably. |
| Local GAAP treatment | Applies under HGB, RJ, and other frameworks that also require impairment testing alongside amortisation | HGB Section 253(3) requires amortisation over the useful life (maximum 10 years). RJ 216.237 requires amortisation over the estimated useful life. |
| Reversibility | Never reversible under IAS 36.124 | Amortisation is a systematic charge; no reversal mechanism exists |
| Audit focus | Forward-looking assumptions in the value-in-use model; discount rate, growth rate, CGU identification | Useful life estimate; whether the period chosen is supportable given the nature of the acquisition |
The distinction matters on engagements involving subsidiaries that report under local GAAP but consolidate under IFRS. An entity amortising goodwill in its HGB statutory accounts must still perform an annual impairment test in the IFRS consolidation. Auditors who see a declining goodwill balance in the local books sometimes skip the IFRS impairment test, assuming the amortisation provides sufficient coverage. ISA 540 still requires the auditor to evaluate the reasonableness of the IFRS recoverable amount estimate independently.
Related terms
Frequently asked questions
When do I have to test goodwill for impairment?
At least annually, and additionally whenever impairment indicators exist at the reporting date. IAS 36.96 permits the annual test at any point during the reporting period, provided the entity performs it at the same time each year. If goodwill was acquired partway through the period, IAS 36.97 requires the first test before the end of that annual period.
What happens if goodwill cannot be allocated to a single CGU?
IAS 36.81 permits allocation to the smallest group of CGUs that includes the acquired business, as long as the group does not exceed an operating segment under IFRS 8. The entity must document why a non-arbitrary allocation to individual CGUs is not possible. Auditors should challenge whether the grouping genuinely reflects how the entity monitors the synergies or whether it masks impairment at a more granular level.
Does goodwill impairment affect deferred tax?
It depends on whether the goodwill has a tax base. IAS 12.21A prohibits recognising a deferred tax liability on initial recognition of goodwill. However, in jurisdictions where goodwill is tax-deductible (such as the Netherlands under certain conditions), a goodwill impairment that reduces the accounting carrying amount below the remaining tax base can create a deductible temporary difference. The auditor must verify the tax treatment with reference to local law before concluding on the deferred tax effect.