Impairment testing

Goodwill, indefinite-lived intangibles and intangibles not yet available for use are tested annually, at the same time each year, and whenever there is an indication of impairment.

Other long-lived assets, such as property, plant and equipment, amortised intangibles and equity-accounted investments, are tested when there is an indication, such as declining results, regulatory change, loss of a major contract or a market capitalisation below net assets.

CPC 01 (R1) · IAS 36

The recoverable amount is the higher of value in use and fair value less costs of disposal. Value in use considers the asset in its current condition, excluding future restructurings to which the entity is not yet committed and investments that improve or enhance its performance, and is discounted at a pre-tax rate, as the current wording of the standard requires.

In practice, the rate is usually built post-tax and the pre-tax rate is derived by iteration, so that the present value of pre-tax cash flows equals the one obtained with post-tax cash flows and rate. CBG documents the conversion and the iteration result in the working papers. The IASB's ED/2024/1 proposes removing the pre-tax requirement and the restriction on restructurings and enhancements, and the current wording applies until an amendment is issued and adopted by the CPC.

IAS 36, paragraphs 18 to 57 · IFRS 13

Goodwill is allocated to the units or groups of units that benefit from the combination, at the level at which management monitors it and never above an operating segment.

The definition of units must reflect how cash inflows are generated and how management tracks the business. Changes from one year to the next require justification.

IAS 36, paragraphs 65 to 108 · IFRS 8

In the same closing cycle, the recoverability of deferred tax assets depends on future taxable profit, assessed under CPC 32 and IAS 12 with projections consistent with those used in the impairment test.

For each unit with significant goodwill or indefinite-lived intangibles, the notes disclose the key assumptions, the projection period, the terminal growth rate and the discount rate. When a reasonably possible change in a key assumption would cause the carrying amount to exceed the recoverable amount, the notes also disclose the headroom and the change that would eliminate it.

IAS 12 · CPC 32 · IAS 36, paragraphs 126 to 137

The work starts from management's approved budget and actual history, reconciling past projections with realised results. The discount rate is built from market data at the test date, and the source of every parameter is documented in the working papers.

The deliverable brings together the report, the model and tables in the format of the financial statement notes, within the closing timetable.

For goodwill and indefinite-lived intangibles, the test may be performed at any time during the year, provided it is the same time every year. An indication of impairment arising after that date requires a new test.

An impairment loss on goodwill cannot be reversed in a later period. For other assets, the loss must be reversed when the estimates used to determine the recoverable amount change, up to the carrying amount, net of depreciation or amortisation, the asset would have had if no loss had been recognised.

Value in use is calculated with pre-tax cash flows, and the rate must be consistent with them. The calculation may use post-tax cash flows and rate, provided the result equals the pre-tax result. The implied pre-tax rate is derived by iteration and disclosed, and it rarely equals the post-tax rate divided by one minus the tax rate.

The standard does not require an external valuer. Companies engage independent work when goodwill is material, when headroom between recoverable amount and carrying amount is narrow, or when they need technical support for assumptions before the auditor.