Goodwill impairment testing

Goodwill is often the largest asset on an acquirer's balance sheet, and the goodwill impairment test is where failed acquisitions show up. This guide explains how goodwill is allocated, when the test is done, how a loss is allocated when it exceeds goodwill, and how non-controlling interests change the calculation.

By Awais Jameel, Chartered Accountant. Reviewed by Muhammad Bilal, Chartered Accountant. Checked against official sources on . 3 minute read.

Short answer

Under IAS 36, goodwill impairment is tested at least annually by allocating goodwill to the cash-generating units, or groups of units, expected to benefit from the acquisition, and comparing each unit's carrying amount, including goodwill, with its recoverable amount. Any impairment loss reduces goodwill first and then the unit's other assets pro rata. Goodwill impairment losses are never reversed.

At a glance

Frequency
Annually, plus when indicators exist
Level
CGUs or groups, no larger than a segment
Compare
Carrying amount vs recoverable amount
Loss allocation
Goodwill first, then pro rata
Reversal
Never for goodwill
Excel
Impairment test model
Goodwill impairment testingFrequency: Annually, plus when indicators exist; Level: CGUs or groups, no larger than a segment; Compare: Carrying amount vs recoverable amount; Loss allocation: Goodwill first, then pro rata; Reversal: Never for goodwill; Excel: Impairment test model.KEY FACTS AT A GLANCEGoodwill impairment testingFrequencyAnnually, plus whenindicators existLevelCGUs or groups, no largerthan a segmentCompareCarrying amount vsrecoverable amountLoss allocationGoodwill first, then prorataReversalNever for goodwillExcelImpairment test modelChecked against official sourcesTax BakersGoodwill impairment testingFrequency: Annually, plus when indicators exist; Level: CGUs or groups, no larger than a segment; Compare: Carrying amount vs recoverable amount; Loss allocation: Goodwill first, then pro rata; Reversal: Never for goodwill; Excel: Impairment test model.KEY FACTS AT A GLANCEGoodwill impairment testingFrequencyAnnually, plus when indicators existLevelCGUs or groups, no larger than a segmentCompareCarrying amount vs recoverable amountLoss allocationGoodwill first, then pro rataReversalNever for goodwillExcelImpairment test modelChecked against official sourcesTax Bakers
Key facts at a glance, as set out in this guide.

How is goodwill allocated for the goodwill impairment test?

The allocation of goodwill is made from the acquisition date: goodwill is allocated to each cash-generating unit, or group of units, expected to benefit from the synergies of the combination, whether or not other assets of the acquiree are assigned to them. Each unit or group must represent the lowest level at which goodwill is monitored for internal management purposes, and must not be larger than an operating segment as defined by IFRS 8, before aggregation.

When is goodwill tested?

The annual test can be done at any time during the year, as long as it is the same time each year, and also whenever there is an indication of impairment. Different units may be tested at different times. Goodwill acquired during the current year must be tested before the year end.

A worked example: a loss larger than goodwill

Allocating an impairment loss of 180Allocating an impairment loss of 1801,000Carryingamount-100Goodwillwritten off-53Plant-27Intangibles820Recoverableamount
Goodwill absorbs the loss first; the rest is spread over the other assets.

A unit has a carrying amount of 1,000, including goodwill of 100 and other assets of 900 (plant 600, intangibles 300). Its recoverable amount is 820, so the impairment loss is 180.

BeforeLossAfter
Goodwill100(100)0
Plant (600 of 900)600(53)547
Intangibles (300 of 900)300(27)273
Total1,000(180)820

The 80 remaining after goodwill is spread in proportion to carrying amounts, but no asset is reduced below the highest of its fair value less costs of disposal, its value in use and zero; any amount that cannot be allocated to one asset is spread over the others. The Impairment test model (Excel) performs this allocation.

How do non-controlling interests affect the test?

If non-controlling interests were measured at their share of net assets, goodwill on the balance sheet is only the parent's share. For the test, the goodwill is notionally grossed up to include the non-controlling interest's share, so it can be compared with the recoverable amount of the whole unit. Any loss is then allocated between parent and non-controlling interest, and only the parent's share of a goodwill loss is recognised.

Example: a parent owns 80% of a subsidiary and recognised goodwill of 80. For the test, goodwill is grossed up to 100. If the unit's impairment loss on goodwill is 50, only 40 (80%) is recognised.

What usually causes a goodwill impairment?

Paying too much for an acquisition, synergies that do not materialise, a downturn in the acquired business's market, higher interest rates raising discount rates, or a reorganisation that moves goodwill into a weaker unit. A market capitalisation below net assets is a warning sign that auditors and regulators look at closely.

What happens to goodwill when part of a unit is sold?

Goodwill associated with the operation disposed of is included in its carrying amount when calculating the gain or loss, measured on the basis of the relative values of the operation sold and the part retained, unless another method better reflects it.

What must be disclosed?

For each unit with significant goodwill: its carrying amount, the basis of recoverable amount, the key assumptions, the discount rate, the growth rate beyond the forecast period, and, where a reasonably possible change in a key assumption would cause an impairment, the headroom and how much the assumption would need to change.

How does US GAAP differ?

US GAAP tests goodwill at the reporting unit level against fair value, with an optional qualitative screen, and private companies may amortise goodwill. See IAS 36 vs US GAAP impairment and cash-generating units.

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Questions people ask

How often is goodwill tested for impairment under IAS 36?

At least annually, at the same time each year, and whenever there is an indication of impairment.

At what level is goodwill tested?

At the cash-generating unit or group of units that benefits from the acquisition, no larger than an operating segment.

How is a goodwill impairment loss allocated?

First to goodwill, then to the unit's other assets pro rata to their carrying amounts, without reducing any asset below its recoverable amount or zero.

Can a goodwill impairment be reversed?

No. IAS 36 prohibits reversing impairment losses on goodwill.

Sources

Every fee, date and rule on this page was taken from these official and primary sources.

  1. IFRS Foundation: IAS 36 Impairment of Assets

Rules and fees change. If you are reading this long after October 4, 2026, confirm the figures with the source before you rely on them.

IAS 36Cash-generating units and corporate assetsIAS 36IAS 36 impairment of assets explainedIFRS vs US GAAPIAS 36 vs ASC 350 and 360: impairment differences

More in IAS 36

Next in this topicReversing an impairment lossTopicAll 5 guides in IAS 36

This guide is general information. It is not tax or legal advice for your situation.