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How goodwill and intangible assets are tested for impairment under IAS 36 and ASC 350

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Goodwill and intangible assets with indefinite useful lives are not amortized but must be tested annually for impairment, or more frequently if indicators arise. IAS 36 (Impairment of Assets) and ASC 350 (Intangibles — Goodwill and Other) both require comparing the recoverable amount or fair value of the reporting unit (or cash-generating unit) to its carrying amount, but the testing structure, allocation, and reversal policies differ. The objective is to ensure goodwill and intangibles reflect continuing economic value rather than overstated acquisition balances.

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How goodwill arises and is allocated.

Goodwill represents the excess of purchase consideration over the fair value of identifiable net assets in a business combination. It captures synergies, assembled workforce, brand reputation, and other non-identifiable benefits.

Under both frameworks:

  • Goodwill is recognized only in a business combination (not internally generated).

  • It must be allocated to units expected to benefit from the acquisition.

  • The allocation unit determines the level of impairment testing.

Allocation levels:

  • IFRS: to cash-generating units (CGUs) or groups of CGUs.

  • US GAAP: to reporting units, generally one level below an operating segment.

Example allocation (IFRS):Goodwill 2,000,000 from an acquired subsidiary distributed to two CGUs based on relative value:CGU A: 60% → 1,200,000CGU B: 40% → 800,000

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Annual impairment testing under IFRS (IAS 36).

1) Recoverable amount determination.Recoverable amount = higher of:

  • Fair value less costs of disposal (FVLCD), and

  • Value in use (VIU) — present value of estimated future cash flows.

2) Testing approach. Compare carrying amount (including goodwill) to recoverable amount of the CGU:

  • If carrying > recoverable → recognize impairment loss.

  • Allocate the loss first to goodwill, then to other assets pro-rata.

Example (IAS 36):CGU carrying amount 10,000,000 (including goodwill 2,000,000).Recoverable amount 9,200,000 → impairment 800,000.

Journal entry:

  • Debit: Impairment Loss 800,000

  • Credit: Accumulated Impairment – Goodwill 800,000

If goodwill fully written down, remaining assets may be reduced proportionally.

3) Reversal.IAS 36 allows reversal for intangibles with indefinite life, but not for goodwill. If recoverable amount increases in later periods, restore other asset values up to what they would have been without impairment.

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Annual impairment testing under US GAAP (ASC 350).

1) Reporting unit level.Goodwill is tested at the reporting unit level (one level below operating segment) that represents business components with distinct financial information and management oversight.

2) One-step test (simplified model).The two-step test was replaced with a one-step test:Compare the fair value of the reporting unit to its carrying amount (including goodwill).

  • If fair value < carrying amount → record impairment = difference (limited to goodwill amount).

  • If fair value ≥ carrying → no impairment.

Example (ASC 350):Carrying amount (including goodwill) = 10,000,000Fair value = 9,200,000Goodwill = 2,000,000→ Impairment = 800,000, limited to goodwill.

Journal entry:

  • Debit: Impairment Loss 800,000

  • Credit: Goodwill 800,000

3) Optional qualitative test (“Step 0”).Entities may first assess qualitative factors (macroeconomic, industry, cost, financial performance, stock price) to determine whether it is more likely than not that goodwill is impaired. If not, skip the quantitative test.

4) No reversals.Under GAAP, goodwill and indefinite-lived intangible impairments cannot be reversed.

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Indefinite-lived intangible assets.

Examples: trademarks, perpetual licenses, brand names, broadcast rights.Test annually at the individual asset level unless part of a CGU/reporting unit.

IFRS: compare carrying amount with recoverable amount (same as goodwill).GAAP: compare carrying amount with fair value; recognize impairment if carrying exceeds fair value.

Example – trademark impairment:Carrying amount 1,000,000; fair value 850,000.

  • Debit: Impairment Loss 150,000

  • Credit: Accumulated Impairment 150,000

Reversal (IFRS only): permitted for indefinite-lived intangibles if supported by renewed recoverable amount evidence.

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Comparative table: IAS 36 vs ASC 350.

Aspect

IFRS (IAS 36)

US GAAP (ASC 350)

Test level

CGU or group of CGUs

Reporting unit

Test frequency

Annual or when indicator exists

Annual or when indicator exists

Recoverable amount basis

Higher of VIU and FVLCD

Fair value of reporting unit

Discounting

Required for VIU

Usually fair value based on market or DCF

Goodwill impairment model

One-step carrying vs recoverable

One-step fair value vs carrying

Reversals

Prohibited for goodwill; allowed for other assets

Prohibited

Allocation

Goodwill allocated to benefiting CGUs

Goodwill allocated to reporting units

Qualitative test option

Not specified

“Step 0” qualitative assessment

Disclosures

CGU details, discount rates, assumptions

Reporting unit details, valuation methods

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Example of goodwill impairment testing with value in use.

Inputs:CGU goodwill 2,000,000; other net assets 8,000,000; carrying = 10,000,000.Forecast cash flows:Years 1–5 = 2,000,000 per year; terminal growth 2%; discount rate 10%.

Computation:PV of CFs = 2,000,000 × (1 – (1 + 0.10)^-5) / 0.10 = 7,580,000Terminal value = (2,000,000 × 1.02) / (0.10 – 0.02) = 25,500,000PV of terminal value = 25,500,000 / (1.10)^5 = 15,840,000Total recoverable amount ≈ 23,420,000 → no impairment (carrying only 10,000,000).If recoverable amount dropped to 9,000,000, impairment = 1,000,000 allocated to goodwill.

Entry:

  • Debit: Impairment Loss 1,000,000

  • Credit: Goodwill 1,000,000

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Disclosures and presentation.

IFRS requires:

  • Carrying amount of goodwill and indefinite-lived intangibles by CGU.

  • Key assumptions: growth rate, discount rate, forecast period, sensitivity analysis.

  • Description of impairment losses or reversals.

US GAAP requires:

  • Description of qualitative factors used.

  • Method of determining fair value (market or income).

  • Amount of impairment losses recognized.

  • Segment disclosure alignment with ASC 280.

Example disclosure extract:

CGU / Reporting Unit

Goodwill (USD)

Recoverable/Fair Value (USD)

Loss (USD)

Discount Rate

Consumer Brands

3,200,000

2,700,000

500,000

9.0%

Logistics Services

4,800,000

5,100,000

—

8.5%

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Journal entries summary.

1) Goodwill impairment (both frameworks):

  • Debit: Impairment Loss xx

  • Credit: Goodwill xx

2) Intangible impairment (IFRS or GAAP):

  • Debit: Impairment Loss xx

  • Credit: Accumulated Impairment xx

3) Reversal (IFRS only):

  • Debit: Accumulated Impairment xx

  • Credit: Reversal of Impairment Gain xx

4) Disposal of impaired unit:

  • Debit: Cash/Receivables xx

  • Debit: Accumulated Impairment xx

  • Credit: Net Assets xx

  • Credit: Gain/Loss on Disposal xx

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Impact on financial performance and ratios.

Goodwill impairments can significantly reduce operating profit, ROA, and book value of equity. They often occur in cyclical downturns or after acquisitions that underperform expectations. Because they are non-cash charges, analysts adjust EBITDA and normalized earnings to exclude them, but consistent impairments can indicate overvaluation of past acquisitions or deteriorating business fundamentals. IFRS entities may show smoother recovery profiles due to possible reversals on other intangibles.

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Operational considerations.

Companies must maintain a robust valuation process, updating cash flow models annually and aligning assumptions with strategic plans.Key actions include:

  • Verifying CGU/reporting unit structure after reorganizations.

  • Validating discount rates, terminal growth, and synergies.

  • Documenting Step 0 qualitative assessment (GAAP) or sensitivity analysis (IFRS).

  • Coordinating finance, M&A, and external valuation experts for transparent testing.

Disciplined impairment testing enhances credibility of reported asset values and supports investor confidence in acquisition performance monitoring.

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