GOODWILL IMPAIRMENT (IAS 36/FRS 102 Section 27)

When Should You Get Goodwill Tested for Impairment?

Under IAS 36, impairment testing for goodwill and indefinite life intangible assets needs to be carried out annually or when there is an indication of impairment.  Under FRS 102 Section 27, impairment of goodwill and other assets is done only when there is an indication that the asset may be impaired.

An asset is considered impaired when its carrying value exceeds the recoverable amount (the amount that the company can generate by selling the asset).

IAS 36 or FRS 102 Section 27 requires companies to ensure that assets are not carried in the financial statements at more than their recoverable amount.

What is an Impairment Loss?

By definition, an impairment loss equals the excess of the carrying amount of an asset over its recoverable amount. If an asset is found to be impaired, it should be written down to its recoverable amount, which, as discussed above, refers to the higher of the amount that could be obtained by selling the asset or the asset’s value in use, as defined below.

Mechanics of Goodwill Impairment Testing

Since goodwill does not generate independent cash flows, each cash-generating unit (CGU, usually a business unit or subsidiary) is tested for impairment.  Goodwill that cannot be allocated to a CGU is allocated to the group of CGUs to which it relates.

The recoverable amount is the higher of (a) fair value less costs of disposal, and (b) value in use.

1. Fair value less costs of disposal is the price that would be receivable if the assets are sold in an orderly transaction between market participants at the measurement date, less the direct cost attributable to the disposal of the asset.
2. The value in use of an asset is measured as the present value of the expected future cash flows generated by the asset, including its estimated net disposal value at the end of its expected useful life. If the value in use of an individual asset cannot be determined, then the recoverable amount is determined for the CGU.

What Happens if an Impairment is Identified?

Once an impairment is identified, the loss is allocated to reduce the carrying value of the assets in the following order:

1. First, to reduce the carrying amount of any goodwill allocated to the CGU; and
2. Then, to the other assets on a pro-rata basis of the carrying amount of each asset.

If the value in use is negative, the entity cannot reduce the carrying value of the asset to less than zero. As such, the carrying amount of any asset in the CGU is always the highest of fair value less cost to sell, value in use, or zero.

Can Impairment Losses be Reversed?

While an impairment loss for goodwill can never be reversed, impairment losses for other assets can be reversed if the circumstances that had caused that impairment loss originally, do not apply any longer.