Module I· Goodwill, Intangibles & ImpairmentIntermediate
Question
What is the goodwill impairment test under IFRS?
Answer
Mechanics (IAS 36)
Goodwill is allocated to a cash-generating unit (CGU) — the smallest identifiable group of assets that generates independent cash flows — and tested there. Test logic:
- AT LEAST annually, plus on any 'triggering event' (margin deterioration, market change).
- Recoverable amount of the CGU = max of (a) fair value − cost of disposal and (b) value in use (= the CGU's DCF).
- If the carrying amount of the CGU (including goodwill) exceeds the recoverable amount, an impairment is due.
- Impairment order: first against goodwill, then pro rata against the other assets.
- A goodwill impairment can NEVER be reversed.
Deep diveShow more details
Practice
The test is typically run at fiscal year-end — many large groups in Q4 or January.
Key assumptions (often a focus for auditors and the securities regulator): a 5-year cash-flow forecast + terminal value, WACC, and the long-term growth rate.
Example — Bayer-Monsanto FY2020
a $9.3bn goodwill impairment on the Crop Science CGU driven by glyphosate litigation and lower forecast cash flows.
Pitch tip
'Goodwill / EBITDA ratio watchlist — > 5x signals impairment risk if margins deteriorate; show a stress test in the sensitivity'.