How does IAS 36 impairment testing work for intangible assets?

Full Explanation

IAS 36 governs impairment testing for all assets, but has particular significance for intangible assets and goodwill. The standard requires annual impairment testing for: goodwill acquired in a business combination, intangible assets with indefinite useful lives, and intangible assets not yet available for use (IPR&D). For finite-life intangible assets, impairment testing is required only when triggering events indicate potential impairment — such as significant revenue decline, loss of a major customer, technological obsolescence, or adverse regulatory changes. The impairment test compares the carrying amount to the recoverable amount. Recoverable amount is the higher of fair value less costs of disposal (what the asset could be sold for, net of selling costs) and value-in-use (the present value of future cash flows expected from continuing to use the asset). If recoverable amount is less than carrying amount, an impairment loss is recognised equal to the difference. For goodwill impairment testing, the test is performed at the cash-generating unit (CGU) level — the smallest group of assets that generates independent cash flows. Goodwill must be allocated to CGUs and tested within those units. Key challenges in IAS 36 implementation include: determining the appropriate CGU level (too broad can mask impairment, too narrow can trigger premature write-downs), selecting discount rates for value-in-use calculations, justifying management's cash flow projections, and ensuring consistency between assumptions used in impairment testing and those used elsewhere in financial reporting.

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