IFRS vs US GAAP Goodwill Impairment Testing

Introduction

Goodwill impairment testing is one of the most consequential — and contentious — areas of financial reporting for acquisition-active companies. Both IFRS and US GAAP require annual testing (and more frequent testing when triggering events occur), but they approach the question from different directions.

IFRS, through IAS 36, asks: "Does the recoverable amount of the cash-generating unit exceed its carrying amount?" US GAAP, through ASC 350-20, asks: "Does the fair value of the reporting unit exceed its carrying amount?" These sound similar, but the differences in testing unit, measurement approach, qualitative screening, and impairment calculation produce materially different outcomes for the same economic facts.

For cross-border groups — particularly those with UK IFRS parents and US GAAP subsidiaries, or vice versa — understanding these differences is essential for consistent reporting and investor communication.

IFRS Goodwill Impairment: IAS 36

Under IFRS, goodwill is allocated to cash-generating units (CGUs) or groups of CGUs expected to benefit from the business combination. The impairment test compares the CGU's carrying amount (including allocated goodwill) with its recoverable amount.

Testing mechanics

1. Identify CGUs to which goodwill is allocated — the lowest level at which goodwill is monitored for internal management purposes, not larger than an operating segment
2. Determine recoverable amount — the higher of Value in Use and Fair Value Less Costs of Disposal
3. Compare — if carrying amount exceeds recoverable amount, an impairment loss is recognised
4. Allocate the loss — first to goodwill, then pro rata to other assets in the CGU

Key IAS 36 requirements

US GAAP Goodwill Impairment: ASC 350-20

Under US GAAP, goodwill is assigned to reporting units — typically operating segments or one level below an operating segment. Since the simplification in ASU 2017-04, the impairment test is a one-step comparison of fair value to carrying amount.

Testing mechanics

1. Identify reporting units to which goodwill is assigned — operating segments or components with discrete financial information and regular management review
2. Optional qualitative assessment (Step 0) — assess whether it is "more likely than not" (>50%) that fair value is below carrying amount. If not, no further testing required
3. Quantitative test — if Step 0 is failed or bypassed, compare the reporting unit's fair value to its carrying amount
4. Measure impairment — if carrying amount exceeds fair value, impairment equals the difference (limited to the goodwill balance)

Key ASC 350-20 requirements

Side-by-Side Comparison

Testing framework

Impact on outcomes

The differences in testing unit and measurement approach create scenarios where impairment outcomes diverge:

Practical Example: Cross-Border Group

A UK-listed technology group (IFRS) acquires a US subsidiary (US GAAP for local reporting). The group paid £200 million; £80 million allocated to goodwill. After two years, the US subsidiary's market has weakened.

IFRS testing (group consolidated accounts)

Goodwill is allocated to two CGUs: the US business (£60 million goodwill) and the integrated UK-US platform (£20 million goodwill).

US GAAP testing (subsidiary local accounts)

The US subsidiary is a single reporting unit with all £80 million goodwill allocated to it:

The Private Company Alternative (US GAAP Only)

ASU 2014-02 allows private companies to elect an accounting alternative for goodwill:

• Amortise goodwill on a straight-line basis over 10 years (or less if a shorter useful life is appropriate)
• Test for impairment only when a triggering event occurs (not annually)
• Test at the entity level or reporting unit level

This alternative is unavailable under IFRS, where goodwill is never amortised. Interestingly, FRS 102 (UK GAAP for private companies) also requires goodwill amortisation — making this one area where US GAAP and UK GAAP converge while differing from full IFRS.

Common Pitfalls

IFRS-specific pitfalls

• Allocating goodwill at too high a level — IAS 36 requires allocation at the lowest level of internal monitoring, not the highest convenient level
• Failing to calculate both VIU and FVLCD when the outcome is close — only one needs to exceed carrying amount
• Using post-tax discount rates for VIU without proper iterative conversion (see pre-tax vs post-tax discount rates)

US GAAP-specific pitfalls

• Over-reliance on qualitative screening — documenting Step 0 requires rigorous analysis of all relevant factors; vague assertions will not withstand audit scrutiny
• Defining reporting units too broadly to avoid impairment — ASC 350 has specific guidance on reporting unit determination
• Forgetting the private company alternative — entities that qualify may benefit from the predictability of amortisation

Convergence and Divergence

The IASB has periodically considered aligning with aspects of the US GAAP approach — particularly the qualitative screening option. A 2020 discussion paper explored reintroducing goodwill amortisation under IFRS, which would align with FRS 102 and the US GAAP private company alternative. As of 2026, these proposals remain under discussion without a firm implementation date.

Conclusion

Both frameworks share the same core objective — ensuring that goodwill is written down when it is no longer recoverable. The practical differences in testing unit, measurement basis, and qualitative screening create scenarios where outcomes diverge. Companies operating across both jurisdictions must maintain parallel impairment testing processes and clearly communicate any differences to investors.

For the broader accounting framework comparison, see IFRS 3 vs ASC 805 and IAS 38 vs ASC 350. For the impairment measurement framework, see Value in Use vs Fair Value Less Costs of Disposal.

Related Glossary Terms

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