Impairment Calculator
for Healthcare

IAS 36 impairment testing for Healthcare

Healthcare entities span a wide range of asset profiles. A private hospital group carries property, medical equipment, and goodwill from clinic acquisitions. A pharmaceutical company holds capitalised development costs for drug candidates, marketing authorisation intangibles, and in-process R&D acquired in business combinations. A medical device manufacturer looks more like a traditional manufacturer but with higher regulatory risk. What unites them for IAS 36 purposes is that healthcare assets tend to have long useful lives, high carrying amounts, and cash flows dependent on regulatory approvals that can be withdrawn. A single adverse regulatory decision (loss of a marketing authorisation, failure of a clinical trial, withdrawal of a reimbursement code) can eliminate an asset's recoverable amount overnight.

IAS 36.9(b) identifies changes in the regulatory environment as an external indicator of impairment. In healthcare, this isn't abstract. When a government reduces reimbursement tariffs for a specific procedure, every hospital performing that procedure must assess whether the related assets' recoverable amounts have fallen. For pharmaceutical intangibles, IAS 36.10 requires annual testing of indefinite-life intangibles (which marketing authorisations may be, if they can be renewed indefinitely at negligible cost). In-process R&D acquired in a business combination must also be tested annually until it's available for use, per IAS 36.10. The VIU model for a pharmaceutical intangible typically extends well beyond five years, matching the patent protection period. IAS 36.33 permits longer forecast periods where the entity can demonstrate the ability to forecast accurately over that horizon. For a patented drug with 12 years of remaining protection, a 12-year explicit forecast is justifiable.

Audit findings in healthcare impairment testing cluster around two themes. First, discount rates that don't reflect the probability of regulatory or clinical failure. A drug in Phase III trials carries substantially higher risk than an approved and marketed product, and the discount rate should reflect this (or the cash flows should be probability-weighted under IAS 36.30(a), with the discount rate reflecting only time-value and non-diversifiable risk). Applying the same rate to both creates a material misstatement risk. Second, hospital groups that test goodwill at too high a level, combining profitable urban clinics with struggling rural sites in one CGU. IAS 36.80 requires testing at the lowest level at which goodwill is monitored, and if the board reviews performance by region or by clinic, that's the CGU level.

For healthcare CGUs, set the carrying amount to include all allocated assets: property, medical equipment, intangible licences, and goodwill. Healthcare discount rates tend to be lower than technology (more stable cash flows) but higher than utilities (regulatory and reimbursement risk). European mid-market healthcare companies typically use pre-tax WACCs between 7.5% and 10.0%. Terminal growth should align with healthcare spending growth in the entity's market, typically 1.5% to 2.5% in Western Europe. For pharmaceutical intangibles, consider extending the forecast period beyond five years to match patent or licence expiry, and model a cliff in cash flows at expiry if generic competition is expected.