Goodwill Impairment Testing: Annual Review Checklist

Why Goodwill Impairment Testing Matters

Goodwill is the single largest intangible asset on most corporate balance sheets. It represents the premium paid in acquisitions above the fair value of identifiable net assets — synergies, growth potential, assembled workforce value, and other factors that cannot be separately recognised. Unlike other intangible assets, goodwill is not amortised under IFRS or current US GAAP. Instead, it must be tested for impairment at least annually.

Getting the impairment test right matters for three reasons. It affects reported earnings (a goodwill write-down flows directly to the income statement), it signals to investors whether acquisitions are delivering the expected value, and it is an area of intense audit scrutiny where errors can trigger restatements.

IAS 36 vs ASC 350: Key Differences

Before diving into the checklist, it is important to understand the framework differences:

The Annual Review Checklist

Phase 1: Preparation (Weeks 1-2)

1. Confirm the testing date. The impairment test must be performed at least annually, at the same time each year. Most companies align this with their financial year-end close process. Document the chosen date and ensure consistency with prior years.

2. Identify all CGUs or reporting units carrying goodwill. List every cash-generating unit (IAS 36) or reporting unit (ASC 350) to which goodwill has been allocated. Verify that the allocation remains appropriate — organizational restructurings, disposals, or changes in management reporting structure may require reallocation.

3. Review for triggering events. Even before the annual test, companies must assess at each reporting date whether there are indicators that goodwill may be impaired. Common indicators include:

Phase 2: Valuation (Weeks 3-6)

4. Determine the recoverable amount. Under IAS 36, calculate both the value in use (present value of expected future cash flows) and the fair value less costs of disposal. The recoverable amount is the higher of the two. Under ASC 350, determine the fair value of the reporting unit.

5. Prepare cash flow projections. Develop detailed projections for the CGU or reporting unit. These should cover a period of no more than five years (IAS 36 limits projections to five years unless a longer period can be justified), with a terminal value thereafter.

6. Perform sensitivity analysis. Test the impact of key assumption changes on the recoverable amount. At minimum, vary the discount rate (±1-2%), terminal growth rate (±0.5-1%), and revenue growth assumptions. Document the breakeven points — the assumption levels at which impairment would be triggered.

Phase 3: Comparison and Recognition (Weeks 5-7)

7. Compare carrying amount to recoverable amount. For each CGU or reporting unit, compare the carrying amount (including allocated goodwill) to the recoverable amount determined in Phase 2.

8. Recognise impairment loss if required. If the carrying amount exceeds the recoverable amount:

• Under IAS 36: the impairment loss is allocated first to goodwill, then pro-rata to other assets in the CGU (but never below each asset's own recoverable amount or zero)
• Under ASC 350: the impairment loss equals the excess of carrying amount over fair value, limited to the total goodwill balance

9. Document the assessment. Whether or not impairment is recognised, prepare comprehensive documentation including:

• CGU/reporting unit identification and goodwill allocation
• Key assumptions and their justification
• Valuation methodology and calculations
• Sensitivity analysis results
• Conclusion and rationale

Phase 4: Disclosure and Governance (Weeks 7-8)

10. Prepare financial statement disclosures. Required disclosures include:

• Carrying amount of goodwill allocated to each CGU/reporting unit
• Basis for determining recoverable amount (value in use or fair value)
• Key assumptions and the approach to determining their values
• Sensitivity to assumption changes (especially if headroom is narrow)
• Any impairment losses recognised and the events that led to them

11. Obtain audit committee sign-off. Present the impairment testing methodology, results, and conclusions to the audit committee before finalisation. Ensure they understand any areas of significant judgement.

12. Coordinate with external auditors. Provide the impairment testing file to auditors early to allow adequate review time. Be prepared to respond to challenges on key assumptions, particularly discount rates, growth rates, and terminal value calculations.

Common Pitfalls

Overly optimistic cash flow projections. Management naturally wants to justify past acquisition decisions. Independent review of projections — or use of consensus analyst estimates where available — provides a necessary counterbalance.

Using the wrong discount rate. The discount rate must reflect the risk of the specific CGU, not the company-wide WACC (unless the CGU risk profile is identical to the company's overall risk). A high-risk CGU requires a higher discount rate.

Failing to update CGU allocations. Organizational changes may render historic goodwill allocations obsolete. If two divisions that previously operated independently are merged, their goodwill must be reallocated to the new combined CGU.

Ignoring market capitalisation as a cross-check. If a company's market capitalisation is below its book value (including goodwill), that is a strong indicator that goodwill may be impaired at the entity level, even if individual CGU tests show no impairment.

Tony Hillier is an Advisor at Opagio with 30 years of experience in structured finance, M&A advisory, and asset valuation. He has advised on goodwill impairment reviews across multiple industries and deal sizes. Meet the team.