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Germany

IAS 36 impairment testing in Germany: IAS 36 as adopted by the EU (for IFRS reporters); HGB Section 253 (for German GAAP reporters)

Germany's reporting environment splits between IFRS reporters (listed entities required by EU regulation to prepare consolidated accounts under EU-adopted IFRS) and HGB reporters (the vast majority of mid-market German entities). For IFRS reporters, IAS 36 applies in full as adopted by the EU, with no local modifications. For HGB reporters, impairment testing follows HGB Section 253, which takes a different approach. Under HGB, fixed assets must be written down to the lower of cost and "fair value" when the impairment is expected to be permanent (Section 253(3) sentence 5 for financial assets; sentence 3 for fixed assets). This permanent impairment test is less structured than IAS 36's VIU framework and doesn't require a formal DCF model. However, for goodwill, HGB Section 246(1) sentence 4 read with Section 253(3) sentence 4 requires systematic amortisation, reducing (but not eliminating) the need for impairment testing. The practical consequence for auditors working in Germany is that they may apply IAS 36's full framework for a listed client's consolidated accounts while applying HGB's simpler model for the same entity's statutory accounts and for mid-market HGB-only clients. This guide focuses on the IAS 36 application, but German auditors should note that DPR enforcement actions often arise from inconsistencies between the IFRS consolidated accounts and HGB statutory accounts (for example, an asset impaired under IAS 36 at group level but not written down in the HGB statutory accounts, without adequate documentation of why the HGB "permanent impairment" threshold has not been met).

Regulatory context: Bundesanstalt für Finanzdienstleistungsaufsicht (BaFin); Abschlussprüferaufsichtsstelle (APAS) for audit oversight; Deutsche Prüfstelle für Rechnungslegung (DPR/FREP) for financial reporting enforcement

The DPR (Deutsche Prüfstelle für Rechnungslegung, also known as the Financial Reporting Enforcement Panel or FREP) examined impairment testing as part of its enforcement priorities in multiple years. Its 2023 activity report noted that goodwill impairment testing remained one of the most frequent areas of findings, with 18% of error findings related to IAS 36 or IAS 38 matters. Common DPR findings include: discount rates that were not derived from current market data, cash flow projections exceeding the five-year limit without justification under IAS 36.33, and disclosure failures under IAS 36.134 (particularly the requirement to disclose key assumptions and the basis for determining recoverable amount). APAS (the German audit oversight body that took over inspection functions from the former APAK) has focused on how auditors challenge management's impairment models. APAS inspection reports have noted that German audit firms frequently lack documentation of their independent assessment of discount rates and that auditors rely too heavily on management's experts (typically corporate finance advisory firms hired to prepare the impairment model) without adequately evaluating those experts' competence and objectivity under ISA 620. BaFin, as the securities regulator, sets thematic priorities that often include goodwill and intangible asset accounting. Its supervisory priorities letter for 2024 explicitly referenced the quality of impairment testing for entities in cyclical sectors.

Practical guidance for Germany

German entities applying IAS 36 typically derive discount rates from the CAPM using German-specific inputs. The risk-free rate is based on Bundesanleihe (German government bond) yields, which have historically served as the eurozone's benchmark. The equity risk premium for the German market is typically estimated at 5.5% to 6.5% based on long-run studies (the Dimson/Marsh/Staunton data for Germany shows higher historical risk premia than the UK due to wartime destruction of capital). Industry betas are sourced from comparable listed companies on the Frankfurt Stock Exchange or broader European peers. The IDW (Institut der Wirtschaftsprüfer) has published IDW S 1 on business valuation, which provides detailed guidance on discount rate derivation. While IDW S 1 isn't mandatory for IAS 36 purposes, German auditors commonly reference it as best practice for WACC calculation. For the forecast period, German entities often use their five-year "Mittelfristplanung" (medium-term plan) as the basis for IAS 36 projections. German corporate planning culture tends toward detailed five-year forecasts, which aligns well with IAS 36.33's default. The terminal growth rate should not exceed the long-term growth rate for the German economy, which the Bundesbank projects at approximately 1.0% to 1.5% nominal. For exporters (Germany's Mittelstand is heavily export-oriented), the terminal growth should reflect the weighted average of growth rates in the entity's key markets, not just German GDP.

Audit expectations

APAS inspection teams expect German auditors to demonstrate independent engagement with each key assumption. Specifically, they look for the auditor's own WACC calculation (not just a review of management's), evidence that revenue projections were cross-referenced to order books and market data, and documentation that the auditor evaluated the competence of any management expert used in the impairment model. For entities in sectors affected by the Energiewende (energy transition), APAS expects auditors to verify that VIU models reflect the entity's specific exposure to regulatory changes, carbon pricing, and energy cost developments. Generic assumptions about "energy transition risk" without entity-specific analysis have been flagged as insufficient.

Germany-specific considerations

German tax law creates a specific interaction with impairment testing. Under the German Income Tax Act (EStG), goodwill is amortised over 15 years for tax purposes (Section 7(1) sentence 3 EStG). This creates a difference between the tax base and the accounting carrying amount that affects deferred tax under IAS 12. When IAS 36 requires goodwill impairment, the tax base (which continues to amortise over 15 years) may exceed the accounting carrying amount, potentially creating a deferred tax asset that the entity must assess for recoverability. Germany's industrial structure (the Mittelstand of medium-sized, often family-owned manufacturing businesses) means many impairment tests involve manufacturing CGUs with specialised assets. These assets often have no active market, making FVLCOD difficult to determine and VIU the primary basis for recoverable amount. German entities also frequently operate "Organschaft" structures (tax-consolidation groups) that affect how cash flows and tax positions are allocated across group entities. When testing impairment of investments in subsidiaries in the parent's statutory HGB accounts, auditors must consider whether the subsidiary's stand-alone cash flows or the consolidated cash flows (including Organschaft benefits) are the appropriate basis.

Common inspection findings

Auditors relied on management's expert for the impairment model without evaluating the expert's competence and objectivity under ISA 620 (APAS inspection 2023)

Discount rate derivation lacked current market data. Firms used prior-year rates without updating for changed interest rate environment (DPR enforcement 2023)

Cash flow projections extended beyond five years without documented justification under IAS 36.33 (DPR activity report 2022)

IAS 36.134(f) sensitivity disclosures stated that "no reasonably possible change would cause impairment" without quantifying the threshold or defining "reasonably possible" (DPR enforcement 2023)

For Mittelstand entities with export exposure, terminal growth rates reflected only German GDP without weighting for international revenue mix (APAS inspection 2022)