Goodwill impairment is the accounting loss recognised when the recoverable amount of a cash generating unit falls below its carrying amount, including the goodwill allocated to it. In plain terms, the group acknowledges that an acquisition is worth less than what remains on its balance sheet.
Goodwill cannot be tested on its own, because it generates no cash flow independently. It is allocated to a cash generating unit, the smallest group of assets producing largely independent cash inflows, and the test is performed at that level. Under IAS 36 the test is annual and mandatory, whether or not any warning sign exists.
The mechanics compare two figures. The carrying amount of the unit, including allocated goodwill, against its recoverable amount, defined as the higher of fair value less costs of disposal and value in use. Value in use is a discounted cash flow calculation resting on management's projections and a discount rate, which places the test squarely in the level 3 territory of fair value measurement.
One asymmetry defines the exercise: a goodwill impairment can never be reversed. Where an inventory or fixed asset write-down may be reversed if conditions improve, IAS 36 prohibits reversal for goodwill. The loss is permanent, which is why it is scrutinised and why management is rarely eager to recognise it.
The credibility of the test depends on the reliability of the cash flows fed into it, unit by unit. Where an acquired entity still runs on its own systems, producing that view means reconciling data across tools first: consolidating data from multiple ERPs and closing data reliability are the practical prerequisites of a defensible impairment test.
