Under IAS 36, goodwill is not amortised but must be tested for impairment every year, whether or not there is any sign of a problem. The goodwill is first allocated to the cash generating units expected to benefit from the acquisition, and each unit’s carrying amount, including its goodwill, is compared with its recoverable amount. Any shortfall writes down goodwill first, can never be reversed, and the margin by which units pass the test drives some of the most closely read disclosures in a set of IFRS accounts.

When must goodwill be tested?

Paragraph 10(b) requires goodwill acquired in a business combination to be tested annually, irrespective of whether there is any indication of impairment. Paragraph 90 adds that a unit holding goodwill must also be tested whenever there is an indication that it may be impaired, so a profit warning or loss of a major customer in the middle of the year triggers an extra test.

The annual test can be done at any time in the year, provided it is done at the same time every year, and different units can be tested at different times (paragraph 96). If goodwill was acquired during the current year, the unit must be tested before the year end. Paragraph 99 allows the previous year’s detailed calculation to be rolled forward only if the unit’s assets and liabilities have not changed significantly, the last calculation showed a substantial margin, and the chance that recoverable amount now falls below carrying amount is remote.

This differs from UK GAAP, where FRS 102 amortises goodwill and tests it only when there is an indicator; see goodwill useful life and amortisation and FRS 102 Section 27.

How is goodwill allocated to cash generating units?

From the acquisition date, paragraph 80 requires goodwill to be allocated to each unit or group of units expected to benefit from the synergies of the combination, even if none of the acquired assets sit in that unit. Each unit or group must:

  • represent the lowest level at which goodwill is monitored for internal management purposes; and
  • be no larger than an operating segment, as defined in IFRS 8, before aggregation.

The segment ceiling stops a group testing all its goodwill at a level where strong businesses hide weak ones; our guide to IFRS 8 operating segments explains how segments are identified. If the initial allocation cannot be finished in the year of the acquisition, it must be completed before the end of the first annual period beginning after the acquisition date (paragraph 84), and any unallocated amount is disclosed with the reasons (paragraph 133).

Allocation is not fixed. When an operation within a unit is sold, the goodwill disposed of is normally measured on the relative values of the part sold and the part retained (paragraph 86). The standard’s example is an operation sold for CU100 out of a unit whose retained portion has a recoverable amount of CU300, so 25% of the unit’s goodwill goes with the sale. A reorganisation that changes unit composition requires reallocation on a similar relative value basis (paragraph 87).

How is recoverable amount worked out?

Recoverable amount is the higher of fair value less costs of disposal and value in use (paragraph 18), and only one needs to be measured if it already exceeds the carrying amount (paragraph 19). Fair value follows IFRS 13. Most goodwill tests use value in use, which has specific rules:

  • Cash flows are based on reasonable and supportable assumptions and the most recent budgets approved by management, covering at most five years unless a longer period can be justified (paragraph 33).
  • Beyond the budget period, projections use a steady or declining growth rate that does not exceed the long term average for the products, industries or countries concerned, unless a higher rate can be justified.
  • Cash flows are for the assets in their current condition, so benefits from a restructuring the entity is not yet committed to, or from enhancing the assets, are excluded (paragraph 44).
  • Financing cash flows and tax are excluded (paragraph 50), and the discount rate is a pre tax rate reflecting the time value of money and risks not already reflected in the cash flows (paragraph 55).

What goes into the carrying amount being tested?

The comparison must be like for like. Corporate assets such as a head office that serve several units are allocated to them on a reasonable and consistent basis where possible, or tested at the smallest group of units to which they can be allocated (paragraph 102).

Where non controlling interests were measured at their proportionate share of net assets, the goodwill on the balance sheet is only the parent’s share, while the recoverable amount reflects the whole business. Appendix C paragraph C4 therefore requires the carrying amount of goodwill to be grossed up to include the goodwill attributable to the non controlling interest before the comparison. See our guide to non controlling interests.

Order also counts. Assets within a unit, and units within a group of units, are tested before the unit or group containing the goodwill (paragraphs 97 and 98).

How is an impairment loss allocated?

Paragraph 104 allocates a loss first to the goodwill of the unit and then to the other assets pro rata to their carrying amounts. No asset is written below the highest of its fair value less costs of disposal, its value in use and zero, with any excess spread across the other assets (paragraph 105). An impairment of goodwill is never reversed (paragraph 124), because any later increase in value is likely to be internally generated goodwill (paragraph 125). Where the unit has a non controlling interest, the loss is shared on the same basis as profit, and only the parent’s share of any loss on grossed up goodwill is recognised as a goodwill impairment (paragraphs C6 to C8).

What does a test look like in numbers?

Illustration only. A unit holds goodwill of £300,000 and other net assets of £1,200,000, a carrying amount of £1,500,000.

  • Value in use of £1,350,000. The shortfall of £150,000 reduces goodwill to £150,000. The other assets are untouched.
  • Value in use of £1,600,000. The unit passes with headroom of £100,000. If management’s analysis shows that a one percentage point rise in the discount rate would cut value in use by £120,000, and that change is reasonably possible, the headroom disclosures in paragraph 134(f) apply.
  • Partly owned unit. If the parent owns 80% and measured the non controlling interest at its share of net assets, recognised goodwill of £240,000 is grossed up to £300,000 for the test. A shortfall of £150,000 would be recognised as a goodwill impairment of only £120,000, the parent’s 80% share.

What must be disclosed about headroom and assumptions?

For each unit, or group of units, carrying goodwill that is significant compared with the entity’s total goodwill, paragraph 134 requires:

  • the goodwill and any indefinite life intangibles allocated to it, and whether recoverable amount is value in use or fair value less costs of disposal;
  • for value in use, each key assumption, how management determined its value and whether it reflects past experience or external sources, the projection period with reasons if longer than five years, the long term growth rate and the discount rate;
  • where a reasonably possible change in a key assumption would remove the headroom, the amount of headroom, the value given to that assumption and how far it must change for recoverable amount to equal carrying amount (paragraph 134(f)).

Paragraph 135 sets a parallel regime where goodwill is spread across many units that are individually insignificant but share key assumptions. If an impairment is recognised, paragraph 130 requires the events behind it, the amount and a description of the unit. If last year’s calculation was carried forward, the disclosures relate to that calculation (paragraph 136).

Subsidiaries can get relief. FRS 101 paragraph 8(l) removes paragraphs 134(d) to (f) and 135(c) to (e) if equivalent disclosures are in the group accounts, and IFRS 19 paragraph 254 keeps the key assumptions and rates but drops the sensitivity analysis.

What mistakes come up most often?

  • Allocating goodwill at a level above an operating segment, or at a higher level than management actually monitors it.
  • Including savings from restructurings not yet committed to, or using a post tax discount rate with pre tax cash flows.
  • Growth rates in the terminal period that exceed the long term average without justification.
  • Forgetting to gross up goodwill for a non controlling interest measured at its share of net assets.
  • Not testing a unit that received goodwill in the current year before the year end.
  • Leaving out the paragraph 134(f) sensitivity disclosures when headroom is slim, or reversing an earlier goodwill impairment.

For how goodwill arises in the first place, see our guide to IFRS 3 business combinations.

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Reviewed by Christine Anderson, Broker, Solar Protect. Last reviewed 19 October 2026. Part of Accountapedia, the Solar Protect guide to UK tax and accounting. This page is general information, not personalised advice.