How does goodwill impairment testing work under IFRS vs. US GAAP?

Goodwill impairment is a high-profile topic because write-downs can be massive and signal that an acquisition overpaid. Here's how both frameworks handle it.

IFRS — Impairment Testing (IAS 36):

1. Level of testing: Cash Generating Unit (CGU) — the smallest identifiable group of assets that generates independent cash flows
2. Frequency: At least annually, plus whenever there's an indication of impairment
3. One-step test: Compare the carrying amount of the CGU (including allocated goodwill) to its recoverable amount (higher of fair value less costs to sell OR value in use)
4. Impairment: If carrying amount > recoverable amount, write down goodwill first, then allocate remaining impairment to other assets pro rata
5. No reversal: Goodwill impairment cannot be reversed

US GAAP — Impairment Testing (ASC 350):

1. Level of testing: Reporting unit (similar to an operating segment or one level below)
2. Frequency: At least annually, or when triggering events occur
3. One-step test (simplified since 2017): Compare carrying amount of the reporting unit (including goodwill) to its fair value
4. Impairment: If carrying amount > fair value, impairment = the difference, capped at the carrying amount of goodwill
5. No reversal: Same as IFRS — irreversible

Key differences:

Example: Meridian Corp acquired Apex Solutions for $500M, recognizing $150M of goodwill. Three years later, Apex's CGU has a carrying value of $480M but a recoverable amount (value in use) of $400M.

• Impairment = $480M - $400M = $80M
• Write down goodwill first: $150M → $70M (impairment of $80M)
• If impairment exceeded $150M, the excess would be allocated to other CGU assets

What triggers testing?

• Significant decline in stock price or market conditions
• Loss of a major customer or contract
• Adverse regulatory changes
• Operating losses or negative cash flows
• Rising discount rates

Exam tip: The CFA exam often gives you carrying amounts and fair values and asks you to calculate the impairment charge and its income statement impact. Know the allocation order under IFRS.

Explore more FRA topics on AcadiFi's CFA Level II course.