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United Kingdom

IAS 36 impairment testing in United Kingdom: FRS 102 Section 27 (for entities not applying UK-adopted IFRS); IAS 36 as adopted by the UK for IFRS reporters

Impairment testing in the UK operates under two parallel frameworks. Listed companies and AIM-traded entities report under UK-adopted International Accounting Standards, which include IAS 36 in its full form. Private companies and groups below the public interest entity threshold typically report under FRS 102, where Section 27 covers impairment of assets. FRS 102 Section 27 follows IAS 36's core principles (recoverable amount as the higher of VIU and fair value less costs to sell) but simplifies some requirements. It doesn't require the same level of disclosure as IAS 36.134, and the guidance on discount rates is less prescriptive. For auditors working across both frameworks, the analytical approach is the same: identify indicators, calculate recoverable amount, compare to carrying amount, and document the judgment. The difference sits in the depth of disclosure and the specificity of rate derivation required by the standard. The UK's impairment testing environment has been shaped by a decade of FRC scrutiny. The FRC's Corporate Reporting Review team regularly writes to companies challenging their impairment models, and the Audit Quality Review team assesses how auditors tested those models. This dual-sided pressure means both preparers and auditors face direct regulatory consequences for weak impairment work. The UK also has specific economic factors affecting impairment: Brexit-related disruption to supply chains, sterling volatility affecting entities with foreign-currency cash flows, and the Bank of England's interest rate trajectory affecting discount rates. A UK entity that uses a GBP-denominated WACC saw its discount rate increase by 200 to 300 basis points between 2021 and 2023 as base rates rose from 0.1% to over 5.0%. That shift alone was enough to trigger impairment across sectors that had comfortable headroom under near-zero rates.

Regulatory context: Financial Reporting Council (FRC)

The FRC has published specific findings on impairment testing through its annual Audit Quality Inspection reports and its thematic reviews. The 2023 Audit Quality Inspection report found that 29% of assessed impairment testing procedures required improvement at the largest firms. Common deficiencies included insufficient challenge of management's cash flow projections, failure to independently assess discount rates, and inadequate evaluation of sensitivity analysis. The FRC's 2022 thematic review on discount rates was particularly pointed: it found that auditors were accepting management's WACC calculations without verifying the inputs (beta, equity risk premium, debt premium) against independent data sources. For FRS 102 reporters, the FRC's focus has been less intense, but the Corporate Reporting Review team has challenged several private companies on their impairment disclosures (or lack thereof). FRS 102 Section 27.21 requires disclosure of impairment losses and reversals, and Section 27.32 requires certain disclosures for CGUs with significant goodwill. The FRC has noted that many FRS 102 reporters treat these disclosure requirements as optional, which they are not. The FRC's Financial Reporting Lab has also published guidance on what investors expect from impairment disclosures, emphasising that generic sensitivity analysis ("a reasonable change in assumptions would not cause impairment") is unhelpful without quantifying what "reasonable" means.

Practical guidance for United Kingdom

UK auditors applying ISA (UK) 540 to impairment estimates should start with the entity's budgeting process. UK companies typically approve annual budgets in Q4 for the following year, with three-to-five-year strategic plans approved at board level. The VIU model should use these board-approved forecasts as the base case, per IAS 36.33(a). For the discount rate, a UK entity's WACC components include the UK risk-free rate (gilt yields), a UK equity risk premium (the Marsh/Dimson long-run average for the UK market is approximately 5.0% to 5.5% over gilts), an industry beta, and a debt premium reflecting UK credit markets. Post-Brexit, some UK entities need to consider whether their cost of capital should also reflect increased trade friction with EU markets. For FRS 102 engagements, the approach can be simpler. FRS 102 Section 27.15 requires VIU to use a pre-tax discount rate reflecting current market assessments. The FRS doesn't mandate a specific methodology for deriving the rate, so practitioners can use a CAPM-based WACC, a build-up method, or comparable transaction data. What matters is that the rate is current, documented, and specific to the asset or CGU being tested. The FRC expects audit files to contain the auditor's own assessment of the appropriate rate range, not simply a check that management's rate falls within published sector averages.

Audit expectations

FRC inspection teams look for four elements in impairment testing audit files. First, evidence that the auditor independently assessed whether impairment indicators exist rather than relying on management's assertion. Second, documented challenge of each key assumption in the VIU model (revenue growth, margins, terminal growth, discount rate) with reference to independent data. Third, the auditor's own sensitivity analysis showing the headroom or deficit and the key assumption that, if changed, would trigger impairment. Fourth, for FRS 102 engagements where goodwill is amortised, evidence that the auditor considered whether the amortisation period remains appropriate or whether indicators suggest accelerated write-down.

United Kingdom-specific considerations

UK tax law affects impairment testing in several ways. Goodwill amortisation is tax-deductible for UK corporation tax purposes for acquisitions completed on or after 1 April 2002 (and before 1 April 2019 for most cases), but impairment losses on goodwill are generally not deductible in the same way. This creates a deferred tax consideration: if IAS 36 requires a goodwill impairment but the goodwill's tax base exceeds its accounting base, IAS 12 may require recognition of a deferred tax asset on the difference. UK entities also face the substantial shareholdings exemption (SSE) regime, which can affect FVLCOD calculations for investments in subsidiaries. When testing parent company investments for impairment, the recoverable amount may be affected by whether the investment qualifies for SSE relief on disposal. The UK's Companies Act 2006, Section 841, requires that distributions can only be made from "profits available for the purpose." An impairment charge that reduces reserves below distributable profit levels restricts the entity's ability to pay dividends. For groups, this matters at individual entity level, not just consolidated level. Auditors should flag distribution implications of impairment charges to management, particularly for entities that fund group dividends up to a parent company.

Common inspection findings

Auditors accepted management's discount rate without building an independent estimate or verifying WACC inputs against observable market data (FRC AQR 2023)

Cash flow projections in VIU models were not reconciled to board-approved budgets, with unexplained differences between the two (FRC AQR 2022)

Sensitivity analysis was performed only on the discount rate and not on revenue growth or margin assumptions, giving an incomplete picture of headroom (FRC AQR 2023)

For entities with climate commitments, VIU models assumed business-as-usual cash flows inconsistent with stated net zero targets (FRC thematic review 2022)

FRS 102 reporters failed to disclose the key assumptions used in goodwill impairment assessments as required by Section 27.32 (FRC Corporate Reporting Review 2023)