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How goodwill impairment is tested under IAS 36 and ASC 350

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Goodwill arises when the purchase price in a business combination exceeds the fair value of identifiable net assets acquired. It represents synergies, expected future benefits, and the assembled workforce that cannot be recognized separately. However, goodwill is not amortized under either IAS 36 (Impairment of Assets) or ASC 350 (Intangibles – Goodwill and Other). Instead, it must be tested for impairment annually or when indicators suggest that its carrying amount may not be recoverable.

Both standards aim to prevent overstatement of goodwill by aligning its carrying value with the actual economic benefits that remain after acquisition.

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How goodwill is allocated for impairment testing.

Goodwill is allocated to the smallest identifiable unit expected to benefit from the business combination.

Under IFRS (IAS 36):

  • Allocate goodwill to one or more cash-generating units (CGUs) or groups of CGUs.

  • CGUs are the smallest groups of assets generating independent cash inflows.

Under US GAAP (ASC 350):

  • Allocate goodwill to reporting units, which are one level below operating segments (as defined under ASC 280).

Both frameworks require the allocation to be consistent with internal reporting and management structure.

Example:If a company acquires a subsidiary that integrates into two operating divisions, goodwill is apportioned based on relative fair values of the divisions benefiting from the acquisition.

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The impairment testing process under IFRS (IAS 36).

IFRS applies a one-step approach comparing the recoverable amount to the carrying amount of the CGU.

Recoverable amount = higher of:

  1. Value in use (VIU): present value of future cash flows expected from the CGU.

  2. Fair value less costs of disposal (FVLCD): market-based measure.

If carrying amount > recoverable amount → impairment loss recognized.

Example:Carrying amount of CGU = 9,000,000 (including goodwill 2,000,000)Recoverable amount = 8,200,000 → impairment = 800,000

Entry:

  • Debit: Impairment Loss 800,000

  • Credit: Goodwill 800,000

Goodwill impairment losses cannot be reversed under IFRS.

Value in use calculation:

  • Estimate cash flows for 5–10 years.

  • Discount using pre-tax rate reflecting time value and risk.

  • Include terminal value beyond projection period.

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The impairment testing process under US GAAP (ASC 350).

ASC 350 originally used a two-step test, but since the 2017 amendments (ASU 2017-04), entities may apply a simplified one-step approach similar to IFRS.

Step 1 – Quantitative test:Compare the fair value of the reporting unit to its carrying amount (including goodwill).If fair value < carrying amount → recognize impairment equal to the difference, limited to the amount of goodwill.

Optional qualitative test ("Step 0"):Before performing quantitative analysis, assess qualitative factors to determine whether it’s more likely than not (>50%) that goodwill is impaired.Factors include:

  • Macroeconomic deterioration.

  • Decline in stock price.

  • Loss of key customers.

  • Negative changes in legal or regulatory environment.

Example:Carrying amount = 12,000,000 (goodwill 3,000,000).Fair value = 10,500,000 → impairment = 1,500,000.

Entry:

  • Debit: Impairment Loss 1,500,000

  • Credit: Goodwill 1,500,000

Like IFRS, impairment losses cannot be reversed.

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Comparative table: IAS 36 vs ASC 350.

Aspect

IFRS (IAS 36)

US GAAP (ASC 350)

Testing level

Cash-generating unit (CGU)

Reporting unit

Test frequency

Annual or when indicators exist

Annual or when indicators exist

Approach

One-step (recoverable vs carrying)

One-step (fair value vs carrying)

Recoverable amount basis

Higher of VIU and FVLCD

Fair value only

Discount rate

Pre-tax rate reflecting risk

Post-tax or market participant-based

Reversal of impairment

Prohibited

Prohibited

Qualitative screen

Not permitted

Optional “Step 0” allowed

Tax effects

Excluded from recoverable amount

Reflected implicitly in fair value

Disclosure emphasis

Key assumptions, sensitivity analysis

Segment-level disclosures

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Example — calculation of value in use.

Assume the following projected cash flows for a CGU:

Year

Cash Flow (USD)

1

2,000,000

2

2,200,000

3

2,400,000

4

2,500,000

5

2,600,000

Discount rate = 8%.Terminal growth = 2%.

Value in use (VIU):PV of years 1–5 + PV of terminal value = 8,150,000.Carrying amount = 9,000,000 → impairment = 850,000.

Entry:

  • Debit: Impairment Loss 850,000

  • Credit: Goodwill 850,000

The impairment is allocated first to goodwill, then pro rata to other assets if necessary.

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Disclosures required.

IFRS 36 disclosures:

  • CGUs tested for impairment and carrying amount of goodwill.

  • Method used (VIU or FVLCD).

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

  • Period of cash flow projections.

  • Reconciliation of goodwill changes.

ASC 350 disclosures:

  • Reporting units tested.

  • Goodwill balance by segment.

  • Impairment losses recognized.

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

  • Qualitative assessment used or not.

Example disclosure:

Segment

Goodwill (USD)

Impairment Loss (USD)

Recoverable Amount (USD)

Consumer Division

5,200,000

800,000

8,200,000

Industrial Division

3,400,000

—

9,600,000

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Journal entries summary.

1) Recognize goodwill on acquisition:

  • Debit: Goodwill xx

  • Credit: Cash/Equity xx

2) Impairment identified:

  • Debit: Impairment Loss xx

  • Credit: Goodwill xx

3) Subsequent monitoring:No reversal permitted; goodwill remains reduced.

4) Disposal of CGU/reporting unit:Include goodwill associated with the unit in the carrying amount on disposal to calculate gain/loss.

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Impact on financial performance and ratios.

Goodwill impairment affects:

  • Net income: immediate charge to P&L.

  • Return on assets (ROA): decreases due to reduced total assets and lower profit.

  • Equity: declines through retained earnings.

  • Earnings volatility: may increase if impairment testing assumptions fluctuate.

Analysts often adjust for one-off impairment charges to assess underlying performance, especially in acquisition-heavy industries.

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Operational considerations.

To ensure compliance:

  • Update cash flow forecasts and discount rates annually.

  • Align impairment testing with strategic budgeting.

  • Maintain valuation models supporting VIU and fair value.

  • Document all key assumptions and sensitivity analyses.

  • Coordinate between finance, valuation, and audit teams before year-end.

Consistent application of IAS 36 and ASC 350 provides investors with a realistic picture of post-acquisition performance and protects financial statements from overstated intangible values.

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