Goodwill Impairment Testing: IFRS vs. US GAAP#
When a company overpays for an acquisition, the premium is parked on the balance sheet as Goodwill. Because Goodwill cannot be depreciated, both IFRS and US GAAP mandate that it must be tested for impairment at least annually. If the acquired business is failing, the Goodwill must be written off (impaired), resulting in a massive hit to the P&L.
However, the methodology used to calculate that impairment differs significantly between the two frameworks.
The Level of Testing#
Goodwill does not generate cash on its own, so it is allocated to groups of assets for testing.
- IFRS (Ind AS 36): Allocated to a Cash-Generating Unit (CGU), which is the smallest identifiable group of assets that generates independent cash inflows.
- US GAAP (ASC 350): Allocated to a Reporting Unit, which is generally an operating segment or one level below an operating segment. A Reporting Unit is often larger than a CGU, meaning under US GAAP, poor performance in one small product line might be shielded by strong performance in the rest of the segment, delaying impairment.
The Testing Methodology#
The IFRS One-Step Test#
IFRS compares the Carrying Amount of the CGU against its Recoverable Amount.
- Recoverable Amount is the higher of:
- Fair Value less costs of disposal.
- Value in Use (VIU): The discounted present value of future cash flows.
- Advantage: Because management can often model a higher "Value in Use" (optimistic future cash flows) than the current market "Fair Value," IFRS can sometimes result in lower or delayed impairment charges compared to US GAAP.
The US GAAP One-Step Test#
US GAAP recently simplified its previously complex two-step model into a single step.
- US GAAP strictly compares the Carrying Amount of the Reporting Unit directly against its Fair Value.
- There is no concept of "Value in Use." If the market determines the Fair Value of the unit is less than its book value, an impairment is immediately recorded for the difference (capped at the total amount of goodwill).
Reversal of Impairment#
- IFRS: Strictly prohibits the reversal of Goodwill impairment. Once written off, it's gone forever.
- US GAAP: Also strictly prohibits the reversal of Goodwill impairment. (This is one of the few areas where both boards are in complete, punitive agreement).