How does the quantitative goodwill impairment test work under IFRS versus US GAAP, and what happens to the impairment loss?

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AcadiFi · Accepted Answer

Goodwill impairment testing differs significantly between IFRS and US GAAP, and the quantitative mechanics produce different loss figures even when economic reality is identical.

**IFRS Approach — IAS 36 (CGU-Level Test)**

Under IFRS, goodwill is allocated to the **cash-generating unit (CGU)** or group of CGUs expected to benefit from the combination. The impairment test compares the **carrying amount of the entire CGU** (including allocated goodwill) against the CGU's **recoverable amount** (higher of fair value less disposal costs and value in use).

**US GAAP Approach — ASC 350 (Reporting Unit Test)**

Since the 2017 simplification, GAAP compares the **fair value of the reporting unit** against its **carrying amount** (including goodwill). If carrying amount exceeds fair value, the difference is the impairment loss, capped at the goodwill balance.

**Worked Example — Briarwood Corp Acquires Ridgepoint Inc:**

Briarwood paid $90 million for Ridgepoint. At acquisition, identifiable net assets were $62 million, producing goodwill of $28 million. Two years later, the unit's carrying amount is $85 million and its fair value is $71 million.

| | IFRS (CGU Test) | US GAAP (Reporting Unit) |
|---|---|---|
| Carrying amount | $85M | $85M |
| Recoverable / Fair value | $71M | $71M |
| Total shortfall | $14M | $14M |
| Goodwill allocated | $28M | $28M |
| **Impairment loss** | **$14M** (first reduces goodwill) | **$14M** (capped at goodwill) |

In this case the numbers coincide, but under IFRS, if the CGU's recoverable amount dropped further (say to $50M), the $35M shortfall would first eliminate the $28M of goodwill, then the remaining $7M would be allocated pro rata to the CGU's other assets.

**Key Differences:**

1. IFRS tests goodwill **only at the CGU level** — never in isolation. GAAP tests at the **reporting unit** level.
2. Under IFRS, excess impairment beyond goodwill flows to other CGU assets. Under GAAP, impairment is **capped at the goodwill balance**.
3. Neither framework allows goodwill impairment reversal.
4. IFRS requires annual testing **plus** whenever indicators exist. GAAP allows an optional qualitative screen first.

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How does the quantitative goodwill impairment test work under IFRS versus US GAAP, and what happens to the impairment loss?

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