Goodwill Impairment – Purpose of IAS 36

IAS 36 is an accounting standard that ensures assets are not carried in the financial statements at amounts greater than the economic benefits they are expected to generate.

For companies that grow through acquisitions, the value of assets recorded on the balance sheet may change over time as business performance, market conditions, and future expectations evolve.

If an asset’s carrying amount exceeds the amount that can be recovered through its continued use or sale, IAS 36 requires an impairment loss to be recognized. This helps ensure that financial statements continue to present a realistic picture of a company’s financial position and prevents assets from being overstated.

This article explains the purpose of IAS 36, the assets covered by the standard, the impairment testing process, and the valuation concepts that support annual goodwill impairment testing.

Key takeaways

• IAS 36 ensures that assets are not reported above the economic benefits they are expected to generate
• Goodwill and indefinite-lived intangible assets require annual impairment testing, while finite-lived intangible assets are tested only when impairment indicators exist
• Finite-lived intangible assets are amortized, while goodwill and indefinite-lived intangible assets are not
• Recoverable amount is the higher of Fair Value Less Costs of Disposal and Value in Use
• Goodwill is tested at the Cash-Generating Unit level because it does not generate independent cash flows
• Goodwill impairment cannot be reversed under IAS 36

What is the purpose of IAS 36?

The objective of IAS 36 is to ensure that assets are not reported at amounts higher than the economic benefits they are expected to generate.

Whenever the carrying amount of an asset or a group of assets exceeds its recoverable amount, the company must recognize an impairment loss. This adjustment reduces the carrying value to its recoverable amount and improves the reliability of financial reporting.

For startup founders, this becomes particularly relevant after acquisitions. While goodwill and other intangible assets may initially reflect the value of future opportunities, those expectations can change over time. IAS 36 provides a consistent framework for reassessing these values and recognizing impairment when necessary.

Which assets are tested under IAS 36?

For impairment purposes, IAS 36 groups assets into three broad categories. Each category follows a different impairment testing requirement.

Category	Examples	Testing Trigger
Goodwill	Acquired business premium	Annual + indicators
Indefinite-lived intangibles	Trademarks, brand names, licenses	Annual
Finite-lived intangibles	Customer relationships, patents, technology	Indicators only

Goodwill

Goodwill arises when the purchase price of an acquired business exceeds the fair value of its identifiable net assets.

For example, suppose a company acquires another business for $100 million while the fair value of its identifiable net assets is $80 million. The remaining $20 million is recognized as goodwill.

Unlike most long-term assets, goodwill is not amortized. Instead, IAS 36 requires it to be tested for impairment every year and whenever there are indicators that its value may have declined.

Indefinite-lived intangible assets

Assets such as trademarks, brand names, and certain licenses may continue generating economic benefits without a predictable expiry date. Since these assets are not amortized, IAS 36 requires them to undergo an annual impairment assessment to confirm that their carrying values remain recoverable.

Finite-lived intangible assets

Customer relationships, developed technology, and patents have finite useful lives. These assets are amortized over their expected lives and are tested for impairment only when events or circumstances indicate that their carrying amount may no longer be recoverable.

What lies at the core of IAS 36?

The central concept in IAS 36 is the recoverable amount, which represents the maximum value that can be recovered from an asset.

The standard defines it as:

• Recoverable Amount = Max (Fair Value Less Costs of Disposal, Value in Use)

Instead of relying on a single valuation method, IAS 36 compares two measures and uses whichever is higher.

Fair Value Less Costs of Disposal (FVLCD)

Fair Value Less Costs of Disposal represents the amount that could be obtained from selling the asset in an orderly transaction after deducting disposal costs. This value is commonly estimated using market multiples, discounted cash flow models, or evidence from recent comparable transactions.

Value in Use (VIU)

Value in Use measures the present value of future cash flows expected from continuing to use the asset. It is generally estimated using discounted cash flow analysis supported by management forecasts and terminal value assumptions.

What is the role of Cash-Generating Units (CGUs) in IAS 36?

Goodwill cannot generate cash flows independently. Instead, it contributes to the performance of a broader business operation. For this reason, IAS 36 requires goodwill to be allocated to a Cash-Generating Unit (CGU).

A CGU is the smallest identifiable group of assets that generates largely independent cash inflows. Depending on the business, a CGU may represent the entire company, a business segment, a product line, or a geographic region.

During impairment testing, the recoverable amount of the CGU is compared with its carrying amount to determine whether an impairment loss exists.

How do you test for impairment under IAS 36?

An impairment test determines whether the carrying amount of a CGU exceeds its recoverable amount.

Assume a CGU has the following carrying value.

Component	Amount
Tangible assets	$60 million
Customer relationships	$15 million
Trade name	$5 million
Goodwill	$20 million
Total carrying amount	$100 million

A discounted cash flow analysis estimates:

Measure	Value
Fair Value Less Costs of Disposal	$92 million
Value in Use	$95 million
Recoverable amount	$95 million

Since IAS 36 uses the higher value, the recoverable amount is $95 million.

Comparing this with the carrying amount results in a $5 million impairment loss.

Under IAS 36, the impairment loss is first allocated to goodwill before being applied proportionately to other assets if necessary. In this example, the entire loss reduces goodwill from $20 million to $15 million, while the carrying values of the remaining assets remain unchanged.

Valuation Methodologies Used

IAS 36 impairment testing relies on established valuation techniques to estimate an asset’s recoverable amount. Depending on the circumstances, one or more of the following approaches may be applied.

Income approach

The income approach estimates value based on the present value of expected future cash flows. The most common method is the discounted cash flow (DCF) analysis, which incorporates assumptions relating to revenue growth, EBITDA margins, capital expenditure, working capital, the weighted average cost of capital (WACC), and terminal growth rates.

Since Value in Use as well as Fair Value Less Costs of Disposal is based on future cash flows, this is the approach most commonly used in IAS 36 impairment testing.

Market approach

The market approach estimates value by comparing the asset or business with similar companies or recent transactions. Common inputs include EBITDA multiples and revenue multiples from comparable transactions. This approach provides a market-based indication of value when sufficient comparable data is available.

Cost approach

The cost approach estimates value based on the cost of replacing or recreating an asset. Although it is less common in impairment testing, it may be appropriate for certain specific assets where replacement cost provides a reasonable measure of value.

Key Assumptions Reviewed by Auditors

The outcome of an impairment test depends heavily on the assumptions used in the valuation. Auditors therefore review these assumptions to determine whether they are reasonable and supported by available information.

Assumption	Description/How is it applied in valuation	Why do auditors pay attention to this?
Discount rate	Usually based on WACC using inputs such as the risk-free rate, beta, equity risk premium, size premium, and debt costs	Small changes can significantly affect the present value of future cash flows
Revenue growth	Based on budgets, historical performance, and the industry outlook	Auditors assess whether projected growth is realistic and internally consistent
Terminal growth rate	Represents long-term growth beyond the forecast period Mature businesses commonly assume 2% to 4%	Irrationally high assumptions can materially increase valuation results
Forecast period	Usually covers five years followed by a terminal value	Auditors review whether the forecast period is appropriate for the business
Sensitivity analysis	Tests scenarios such as a higher discount rate, lower revenue, or reduced EBITDA margins	Demonstrates how changes in assumptions affect the impairment conclusion

Reversal of Impairment

IAS 36 permits impairment losses for most assets to be reversed if circumstances improve and the recoverable amount subsequently increases.

Goodwill is treated differently. Once goodwill has been impaired, the impairment loss cannot be reversed, even if the business later recovers. This treatment is one of the distinguishing features of IAS 36.

Relationship to Purchase Price Allocation (IFRS 3)

IAS 36 builds upon the accounting established under IFRS 3 after an acquisition.

The process begins when an acquisition is completed, and a Purchase Price Allocation is performed under IFRS 3. During this exercise, identifiable tangible and intangible assets are recognized at fair value, while the remaining amount is recorded as goodwill. That goodwill is then allocated to one or more Cash-Generating Units, which become the basis for future impairment testing under IAS 36.

In other words, IFRS 3 determines how goodwill is initially recognized, while IAS 36 ensures that its carrying value continues to be supported after the acquisition.

Information Typically Requested by a Valuation Specialist

A reliable impairment assessment depends on complete financial and operational information. Valuation specialists typically request the following information to support their analysis.

Financial information

Historical financial statements, periodic financial results, current budgets, strategic plans, and management forecasts provide the foundation for estimating future cash flows.

Acquisition documents

Purchase agreements, IFRS 3 Purchase Price Allocation reports, goodwill allocation schedules, and prior impairment reports help establish how goodwill was originally recognized and allocated.

Operating information

Segment reporting, product and customer information, headcount plans, and capital expenditure forecasts provide insight into the factors expected to influence future performance.

Valuation inputs

Comparable public companies, transaction multiples, industry outlook information, country risk assumptions, and capital structure data inform key valuation assumptions made during the impairment assessment.

FAQs

What disclosures are required by IAS 36?

IAS 36 requires companies to disclose information that helps readers/auditors understand impairment losses and the assumptions supporting impairment testing. This typically includes the recoverable amount, the valuation approach used, and the key assumptions underlying the assessment.

What is the difference between IAS 16 and IAS 36?

IAS 16 governs the accounting treatment of tangible assets such as buildings, machinery, equipment, and computers. It explains how these assets are recognized, depreciated, and, where applicable, revalued. IAS 36 has a different purpose. It ensures that the carrying amount of assets does not exceed their recoverable amount by requiring impairment testing whenever appropriate.

What are the implications of IAS 36 for investors?

IAS 36 improves the reliability of financial statements by ensuring that goodwill and other assets continue to reflect expected future economic benefits. This gives investors greater confidence that reported asset values are supported by reasonable valuation assumptions.

Eqvista – Supporting Reliable Goodwill Impairment Testing!

From a valuation perspective, IAS 36 impairment testing is essentially an annual discounted cash flow valuation of a Cash-Generating Unit to determine whether previously recognized goodwill and intangible assets continue to be supported by expected future cash flows. For many businesses, the exercise closely resembles a Purchase Price Allocation valuation, except that it is performed periodically after an acquisition rather than at the transaction date.

Preparing a robust impairment assessment requires sound valuation methodologies, realistic assumptions, and well-supported financial forecasts.

Eqvista helps businesses perform independent valuation analyses that support IAS 36 compliance and financial reporting. Our valuation specialists assist companies in estimating recoverable amounts, evaluating key assumptions, and preparing defensible valuation reports.

Contact us to learn how Eqvista can support your IAS 36 goodwill impairment testing and valuation requirements!