Goodwill amortization is not permitted under IFRS. Instead of writing goodwill down over a fixed useful life, companies reporting under IFRS must test it for impairment at least once a year and recognize a loss only when its recoverable amount falls below the carrying value on the balance sheet.1IFRS Foundation. IAS 36 Impairment of Assets The IASB reconsidered reintroducing amortization as recently as November 2022 and voted to keep the impairment-only model, though it is developing new disclosure rules around business combinations.2IFRS Foundation. IASB Votes to Retain Impairment-Only Approach for Goodwill Accounting
Why IFRS Replaced Amortization With Impairment
Before IFRS 3 took effect in 2004, its predecessor IAS 22 required companies to amortize goodwill over its estimated useful life. IFRS 3 removed that approach. On adoption, entities were required to stop amortizing existing goodwill and begin testing it for impairment under IAS 36.3IFRS Foundation. IFRS 3 Business Combinations
The reasoning was that goodwill doesn’t wear out the way a machine or a patent does. A brand or a customer base can strengthen, stagnate, or collapse, but it rarely declines at a neat, predictable rate. Amortization forces a steady write-down regardless of what is actually happening to the asset. Impairment testing, in principle, only reduces the reported figure when evidence shows the value has genuinely fallen.
The impairment-only model has drawn criticism. The IASB’s own analysis found that many stakeholders believe losses are recognized “too late, long after the events that caused those losses,” and that internally generated goodwill can shield acquired goodwill from write-downs.4IFRS Foundation. Effectiveness of the Impairment Test Even so, the board decided in November 2022 to keep the model in place and focus on improving disclosure around business combinations so investors can judge whether an acquisition is delivering.2IFRS Foundation. IASB Votes to Retain Impairment-Only Approach for Goodwill Accounting
Where the Goodwill Figure Comes From
Goodwill only appears on the balance sheet after a business combination accounted for under the acquisition method in IFRS 3. It is a residual: the gap between what the acquirer paid, broadly defined, and the fair value of what it received.5IFRS Foundation. IFRS 3 Business Combinations
The “cost” side of the calculation combines three items: the consideration transferred (cash, assets, liabilities assumed, and any equity instruments issued by the acquirer, all at fair value); the non-controlling interest in the acquiree at the acquisition date; and, in a step acquisition, the acquisition-date fair value of any previously held equity interest. The “received” side is the net fair value of identifiable assets acquired and liabilities assumed. Goodwill equals the cost side minus the received side.3IFRS Foundation. IFRS 3 Business Combinations
That opening figure is the number the impairment test protects. It stays on the balance sheet at that value until, and unless, an impairment test forces it down.
The Annual Impairment Test
Goodwill doesn’t generate cash flows on its own, so it can’t be tested in isolation. IAS 36 requires companies to allocate goodwill, from the acquisition date, to one or more cash-generating units expected to benefit from the synergies of the combination. A cash-generating unit, or CGU, is the smallest group of assets that produces cash inflows largely independent of other parts of the business.1IFRS Foundation. IAS 36 Impairment of Assets
The allocation goes to the lowest level within the entity at which management actually monitors the goodwill. That level cannot be larger than an operating segment as defined by IFRS 8.6IFRS Foundation. Allocating Goodwill to Cash-Generating Units The size of the CGU matters. When goodwill is allocated to a large unit with substantial headroom from unrecognized internally generated value, genuine declines in acquired goodwill can be masked.4IFRS Foundation. Effectiveness of the Impairment Test
Each CGU containing goodwill must be tested at least once every year. The test can occur at any point in the annual period, but it must happen at the same time each year. A CGU that received goodwill during the current period must be tested before year-end.7IFRS Foundation. IAS 36 Impairment of Assets
The test itself is a comparison. The CGU’s carrying amount (everything on the balance sheet for that unit, including allocated goodwill) is measured against its recoverable amount, which is the higher of two figures: fair value less costs of disposal, and value in use.1IFRS Foundation. IAS 36 Impairment of Assets If the carrying amount is higher, the CGU is impaired.
Fair Value Less Costs of Disposal
This is what the entity would receive in an orderly sale between market participants, less the incremental costs of completing the deal. It works best when observable market data exists. Many CGUs don’t have a readily determinable market price, which pushes companies toward the other measure.
Value in Use
Value in use is the present value of the future cash flows the entity expects to generate from the CGU. Projections are built from the most recent approved budgets or forecasts and cover a maximum of five years unless a longer period can be justified.8IFRS Foundation. Climate-Related Uncertainties and IAS 36 Beyond the forecast period, cash flows are extrapolated using a steady or declining growth rate to produce a terminal value.
Two categories of cash flows must be excluded: financing activities and income tax payments, and any spending on future restructurings or enhancements that would improve current performance. The projections must reflect the CGU as it stands today, not as management hopes it will look after a planned upgrade.1IFRS Foundation. IAS 36 Impairment of Assets
Projected cash flows are discounted using a pre-tax rate that reflects the time value of money and risks specific to the CGU. Many companies start with a weighted average cost of capital and adjust to a pre-tax basis, though the standard doesn’t mandate any particular method.
Triggers Between Annual Tests
The annual test is a floor. If any indicator of impairment surfaces between tests, IAS 36 requires an immediate assessment. External signs include a sharp decline in the market value of the CGU’s assets, adverse shifts in technology, competition, regulation, or the economy, rising market interest rates that push up the discount rate, and a market capitalization that has fallen below the carrying amount of net assets. Internal signs include physical damage or obsolescence, plans to dispose of assets sooner than expected, cash flows or operating profits falling short of budget, and operating costs running well above original estimates.
How a Loss Is Recognized and Allocated
When the recoverable amount is below the carrying amount, the shortfall is recognized as a loss in profit or loss. IAS 36 dictates the order of allocation. The loss first reduces the goodwill allocated to that CGU, all the way to zero. Any residual is spread proportionally across the other assets in the unit.1IFRS Foundation. IAS 36 Impairment of Assets
No individual asset can be written down below the highest of its own fair value less costs of disposal, its own value in use, or zero. If the pro-rata allocation would breach that floor for any asset, the excess is redistributed among the remaining assets.
One rule catches many preparers off guard: goodwill impairment losses are permanent. Impairment losses on other assets can be reversed if conditions improve, but a goodwill write-down can never be restored in a later period.1IFRS Foundation. IAS 36 Impairment of Assets The reasoning is that any later recovery in value likely reflects new, internally generated goodwill, and IFRS never allows internally generated goodwill on the balance sheet.
Where US GAAP Differs
US GAAP shares the core principle for public companies: goodwill is not amortized but tested for impairment, and goodwill impairment losses cannot be reversed. The mechanics differ in three ways worth knowing if you work across both frameworks.
First, under ASC 350 the impairment test compares a reporting unit’s fair value to its carrying amount. If the carrying amount is higher, the excess is the impairment loss, capped at the goodwill allocated to that unit.9FASB. Accounting Standards Update 2017-04 IFRS uses recoverable amount, which gives entities a second path (value in use) to support the carrying value. US GAAP has no value-in-use equivalent in its goodwill test.
Second, US GAAP offers a qualitative assessment option that IFRS lacks. Before running the full quantitative test, a company can weigh qualitative factors to decide whether it is more likely than not that fair value has fallen below carrying amount. If not, the quantitative test can be skipped for that period. IFRS has no such shortcut.
Third, and most important for anyone searching for goodwill amortization: US GAAP does allow amortization, but only for private companies that elect it. Under that election, goodwill is amortized on a straight-line basis over ten years and tested for impairment only when triggering events arise, not annually.10FASB. Accounting Standards Update 2014-02 IFRS offers no comparable election. Every entity reporting under IFRS follows the same impairment-only model, regardless of size or ownership.
Proposed Changes to IFRS Disclosures
In March 2024 the IASB published an exposure draft proposing new disclosure requirements for business combinations. The project does not reintroduce amortization, but it would expand the information companies must provide about how their acquisitions are performing.11IFRS Foundation. Business Combinations – Disclosures, Goodwill and Impairment
Under the proposals, an entity completing a “strategic” business combination would disclose the key objectives and targets for the deal at acquisition, then report in subsequent periods on whether those targets are being met. A combination qualifies as strategic when the acquiree’s revenue, operating profit, or total acquired assets reach at least 10 percent of the acquirer’s corresponding consolidated figure.12IFRS Foundation. Exposure Draft – Business Combinations, Disclosures, Goodwill and Impairment The disclosure obligation continues as long as key management personnel keep reviewing whether objectives are being met, and if management stops tracking a target within two years, the company must disclose that and explain why. The IASB is currently redeliberating the proposals based on feedback received.