IAS 36 requires goodwill to be tested for impairment at least annually and tested at the lowest level at which management monitors it. The lowest level cannot be higher than the operating segment (before aggregation) that it belongs to under IFRS 8, ‘Operating segments’.
The grouping of CGUs for the testing of impairment should reflect the lowest level at which management monitors the goodwill. If that is on an individual CGU basis, testing goodwill for impairment should be performed on that individual basis. However, where management monitors goodwill on the basis of a larger group of CGUs, the impairment testing of the goodwill should reflect this.
Goodwill is tested for impairment annually and when there are impairment indicators. Those indicators might be specific to an individual CGU or group of CGUs. When testing for impairment for annual purposes (that is, when there is no impairment indicator), the group of CGUs to which the goodwill is allocated is tested for impairment on a combined basis, including the goodwill. If the recoverable amount of the group of CGUs exceeds the carrying amount of that group of CGUs (including goodwill), there is no impairment to recognise. However, if the recoverable amount is less than the combined carrying value, the group of CGUs – and the goodwill allocated to it – is impaired. The impairment charge is allocated first to the goodwill balance to reduce it to zero, and then pro rata to the carrying amount of the other assets within the group of CGUs.
Goodwill is also tested for impairment when there is an indicator that it is impaired, or when there is an indicator that the CGU(s) to which it is allocated is impaired. When the impairment indicator relates to specific CGUs, those CGUs are tested for impairment separately before testing the group of CGUs and the goodwill together.
The diagram below illustrates the levels at which impairment testing might be required. The entity has two operating segments, A and B. Segment A comprises four CGUs, and segment B comprises two CGUs. There is goodwill allocated to each CGU. The goodwill within segment A is monitored in two parts. The goodwill allocated to CGUs 1, 2 and 3 is monitored on a collective basis; the goodwill allocated to CGU 4 is monitored separately. The goodwill within segment B is monitored at the segment B level – that is, goodwill allocated to CGUs 5 and 6 is monitored on a combined basis.
If there is an impairment indicator for CGU 2, the CGU is tested for impairment separately, excluding the goodwill allocated to it. Any impairment loss calculated in this impairment test is allocated against the assets within the CGU. This allocation of the impairment charge is made on a pro rata basis to the carrying value of the assets within the CGU. The testing of CGU 2 at this level excludes goodwill, so no impairment is allocated against goodwill in this part of the impairment test.
After recording any impairment arising from testing CGU 2 for impairment, CGUs 1, 2 and 3 and the goodwill allocated to them are tested for impairment on a combined basis. Any impairment loss calculated in this impairment test is allocated first to the goodwill. If the impairment charge in this test exceeds the value of goodwill allocated to CGUs 1, 2 and 3, the remaining impairment charge is allocated against the assets of CGUs 1, 2 and 3 pro rata to the carrying value of the assets within those CGUs.
A similar approach is taken for CGU 4. However, because no other CGU is combined with CGU 4 for goodwill impairment testing, there is no need to test CGU 4 for impairment separately from the goodwill allocated to it.