How Goodwill and Other Intangible Assets Are Tested for Impairment under IAS 36 and ASC 350

Goodwill and intangible assets reflect the premium paid for expected future economic benefits beyond identifiable net assets. Over time, shifts in performance, market conditions, or interest rates may erode their recoverable value. Under IFRS (IAS 36 – Impairment of Assets) and US GAAP (ASC 350 – Intangibles—Goodwill and Other), entities must periodically test these assets to ensure that carrying amounts do not exceed recoverable or fair values. Both frameworks focus on cash-generating units (CGUs) or reporting units, discount-rate assumptions, and consistent application of valuation methodologies.

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How goodwill and intangible assets arise.

Goodwill arises when one entity acquires another and pays more than the fair value of identifiable net assets. It represents synergies, assembled workforce value, or brand reputation—benefits that cannot be individually recognized. Other intangible assets, such as patents, trademarks, customer relationships, and software, are separately identifiable if they are separable or arise from contractual or legal rights.

Goodwill is not amortized but tested for impairment at least annually or whenever indicators suggest it may be impaired. Other intangibles are amortized if they have finite lives, while indefinite-lived intangibles (e.g., perpetual brands) are also tested annually for impairment.

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Recognition and measurement under IFRS (IAS 36).

1) Identification of cash-generating units (CGUs).IAS 36 requires allocating goodwill to the lowest level of cash inflows that are largely independent—typically one level below a segment. This CGU structure determines the level at which impairment is tested.

2) Determining recoverable amount.Recoverable amount is the higher of:

• Fair value less costs of disposal (FVLCD); or

• Value in use (VIU), which is the present value of future cash flows expected from the asset or CGU.

If carrying amount > recoverable amount, an impairment loss is recognized.

3) Value in use calculations.Future cash flows should be based on reasonable and supportable forecasts, typically not exceeding five years, and extrapolated using a steady or declining growth rate. Discount rates reflect current market assessments of the time value of money and risks specific to the asset.

4) Recognition of impairment loss.

• First, reduce the carrying amount of goodwill allocated to the CGU.

• Then, allocate remaining loss to other assets of the CGU pro rata.

Journal entry (IFRS – goodwill impairment):

• Debit: Impairment Loss 1,200,000

• Credit: Goodwill 1,200,000

Impairment losses on goodwill cannot be reversed under IFRS, even if performance subsequently improves. For other intangibles, reversals are permitted if estimates change and recoverable amount increases.

5) Indicators triggering interim tests.Revenue declines, cost inflation, market competition, technology obsolescence, or increased discount rates can all indicate impairment.

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Recognition and measurement under US GAAP (ASC 350).

1) Reporting units.Goodwill is assigned to reporting units, which are operating segments or components thereof that constitute a business for which management reviews results separately.

2) Quantitative vs qualitative tests.Since ASU 2017-04, entities may perform a qualitative assessment (“Step 0”) to determine whether it is more likely than not that the fair value of a reporting unit is less than its carrying amount. If not, no further testing is required.

If indicators suggest possible impairment, proceed to the quantitative test, comparing:

• Fair value of the reporting unit vs carrying amount (including goodwill).

  
  

  If fair value < carrying amount, recognize an impairment charge equal to the excess (limited to goodwill balance).

Journal entry (US GAAP – goodwill impairment):

• Debit: Impairment Expense 1,200,000

• Credit: Goodwill 1,200,000

3) Intangible assets other than goodwill.

• Finite-lived intangibles: amortized over useful life; test for impairment when indicators exist (ASC 360 model).

• Indefinite-lived intangibles: tested annually or when impairment indicators arise using the same fair value comparison as goodwill.

4) Reversals of impairment.US GAAP prohibits reversal of any impairment loss for goodwill or other intangibles once recognized.

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Comparative table: IFRS vs US GAAP.

Aspect	IFRS (IAS 36)	US GAAP (ASC 350 / 360)
Testing level	Cash-generating unit (CGU)	Reporting unit
Test frequency	Annual and when indicators exist	Annual or when indicators exist
Recoverable amount	Higher of VIU and FVLCD	Fair value of reporting unit
Valuation approach	DCF (value in use) or market approach	Fair value using market or income methods
Impairment reversal	Not allowed for goodwill; allowed for other intangibles	Not allowed
Allocation of loss	First to goodwill, then proportionally to other assets	Entire loss limited to goodwill balance
Qualitative assessment	Optional indicator analysis before quantitative test	Step 0 qualitative assessment permitted
Disclosure emphasis	Key assumptions, discount rates, sensitivity	Valuation methods, assumptions, qualitative assessment results

Both frameworks aim to prevent overstated goodwill and ensure recoverable amounts reflect updated expectations.

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Presentation and disclosures.

IFRS (IAS 36) disclosures:

• Carrying amounts of goodwill and intangibles by CGU.

• Description of CGUs, valuation methods, key assumptions, discount rates, and growth rates.

• Sensitivity analysis showing impact of reasonably possible changes.

• Reconciliation of opening and closing goodwill balances.

US GAAP (ASC 350) disclosures:

• Description of reporting units and aggregation basis.

• Valuation techniques and key inputs (discount rates, multiples).

• Amount and timing of impairment losses.

• Policy on annual testing date and qualitative assessments.

Example presentation (IFRS):

Assets	Amount (USD)
Intangible Assets:
Patents and Software	3,600,000
Brands (Indefinite Life)	2,400,000
Goodwill	5,800,000

Statement of Profit or Loss	Amount (USD)
Impairment Loss – Goodwill	1,200,000
Operating Income	(4,600,000)

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Journal entries for common scenarios.

1) Goodwill impairment recognized (IFRS/GAAP):

• Debit: Impairment Loss 1,200,000

• Credit: Goodwill 1,200,000

2) Reversal of impairment (IFRS, other intangibles only):

• Debit: Intangible Asset 100,000

• Credit: Reversal of Impairment (P&L) 100,000

3) Derecognition of fully impaired goodwill:

• Debit: Accumulated Impairment 5,800,000

• Credit: Goodwill 5,800,000

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Impact on financial performance and ratios.

Goodwill impairment directly reduces operating profit and equity, often signaling declining future cash flows or overvaluation of prior acquisitions. It affects ratios such as:

• Return on Assets (ROA) and Return on Equity (ROE): lower due to impairment.

• Debt-to-equity: higher when equity declines.

• Earnings per Share (EPS): reduced in impairment years but non-recurring.

Analysts often exclude impairment charges from adjusted EBITDA but consider them indicators of acquisition integration performance and management forecasting accuracy.

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Operational considerations.

Entities must maintain robust valuation documentation, including model inputs, discount-rate derivations, and management approvals. Regular coordination between finance, strategy, and valuation teams ensures timely identification of impairment triggers.

Auditors pay close attention to sensitivity analyses, cash flow assumptions, and discount-rate consistency across CGUs. For multinational groups, foreign exchange fluctuations and hyperinflationary adjustments may materially affect recoverable amounts and goodwill allocation.

Consistent, transparent impairment testing under IAS 36 and ASC 350 ensures that goodwill remains a realistic representation of future economic benefits rather than a residual of untested optimism.

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