Goodwill and indefinite-lived intangible assets are tested annually for impairment, irrespective of indicators.

Intangibles that are not yet ready for use should be tested annually, because they are not being amortized. The ability of an intangible asset to generate sufficient future economic benefits to recover it carrying amount is usually more uncertain before it is brought into use.

The impairment tests on goodwill and intangibles can be performed at any time in the financial year, provided that they are performed at the same time each year. An entity might choose to perform its impairment test at less busy times of the year. Different CGUs might be tested at different times.

An intangible or goodwill that was recognized during the current financial period should be tested for impairment before the end of the current period. If any assumptions change, or if there is a further impairment trigger before the year end, the calculation should be updated accordingly.

Requirement for impairment review – general

An asset is impaired when its carrying amount exceeds its recoverable amount. At the end of each reporting period, entities are required to assess whether there is any indication that an asset may be impaired. If any such indication exists, the entity is required to estimate the recoverable amount of the asset.

Other than in these three specific circumstances, there is no requirement to make a formal estimate of an asset’s recoverable amount if no indication of an impairment loss is present.

Requirements for annual reviews

Items required to be tested for impairment at least annually

As noted, irrespective of whether there is any indication of impairment, the following items are required to be tested for impairment at least annually:

• intangible assets with an indefinite useful life;
• intangible assets that are not yet available for use; and
• goodwill acquired in a business combination.

Intangible assets required to be tested for impairment at least annually

Intangible assets with an indefinite useful life and intangible assets not yet available for use are tested for impairment by comparing their carrying amounts with their recoverable amounts both:

• annually; and
• whenever there is an indication, at the end of a reporting period, that the asset may be impaired.

IAS 36 allows that the annual impairment test may be performed at any time during the annual period, provided that it is performed at the same time every year. Different intangible assets may be tested for impairment at different times.

In the case of a newly recognized intangible asset (e.g., an intangible asset with an indefinite useful life purchased in the current period), an impairment test must be carried out before the end of the current annual period.

Although IAS 36 requires an annual review for the specified intangible assets, it does allow that the most recent detailed calculation of an asset’s recoverable amount made in a preceding period may be used in the impairment test for that asset in the current period, provided that the following criteria are met:

• the most recent recoverable amount calculation resulted in an amount that exceeded the asset’s carrying amount by a substantial margin;
• based on an analysis of events that have occurred and circumstances that have changed since the most recent recoverable amount calculation, the likelihood that a current recoverable amount determination would be less than the asset’s carrying amount is remote; and
• for intangible assets tested for impairment as part of a CGU, the assets and liabilities making up that unit have not changed significantly since the most recent recoverable amount calculation.

Goodwill

Cash-generating units to which goodwill has been allocated

Impairment testing for goodwill is always carried out in the context of a CGU or a group of CGUs because goodwill does not generate cash flows independently of other assets. The detailed rules for the allocation of goodwill to CGUs are set out.

When goodwill has been allocated to a CGU, or to a group of CGUs, that unit or group of units is tested for impairment both:

• annually; and
• whenever there is an indication that the unit, or group of units, may be impaired.

The impairment test is carried out by comparing the carrying amount of the unit (or group of units), including the goodwill, with the recoverable amount of the unit(s). If the recoverable amount of the unit(s) exceeds the carrying amount of the unit(s), the unit(s) and the goodwill allocated to the unit(s) are not regarded as impaired. If the carrying amount of the unit, or group of units, exceeds its (their) recoverable amount, the entity recognizes an impairment loss in accordance with the requirements set out at.

Timing of impairment tests for a cash-generating unit to which goodwill has been allocated

The annual impairment test for a CGU to which goodwill has been allocated may be performed at any time during the annual period, provided that it is performed at the same time every year. Different CGUs may be tested for impairment at different times.

When some or all of the goodwill allocated to a CGU was acquired in a business combination during the current annual period, that CGU must be tested for impairment before the end of the current annual period. 

Impairment testing for goodwill acquired in the period – example An entity routinely tests goodwill for impairment in the second quarter of its annual reporting period. During the third quarter of 20X0, the entity makes an acquisition in which goodwill arises. The acquired goodwill (determined on a provisional basis) is allocated to CGUs in accordance with the requirements of IAS 36. There is no indication that the acquired or existing goodwill is impaired. In 20X0, although there is no indication that the acquired goodwill is impaired, and the annual impairment test for goodwill has already been performed, a further impairment test must be conducted before the end of the 20X0 reporting period on each CGU to which the newly acquired goodwill has been allocated.

Individual assets to be tested before cash-generating unit to which goodwill has been allocated

When assets within a CGU to which goodwill has been allocated (such as intangible assets with indefinite lives) are tested for impairment at the same time as the CGU containing the goodwill, the assets should be tested for impairment before the CGU containing the goodwill. Similarly, when CGUs are tested for impairment at the same time as the group of CGUs to which they belong and to which goodwill has been allocated in aggregate, the individual CGUs should be tested for impairment first.

In addition, at the time of testing a CGU to which goodwill has been allocated, there may be an indication that a specific asset within the CGU is impaired. In such circumstances, the individual asset is tested for impairment first (and any identified impairment loss relating to that asset is recognized) before the CGU is tested for impairment. This requirement is imposed so as to ensure that any losses that can be identified with a specific asset are not ‘lost’ in the testing of the CGU. Similarly, when goodwill has been allocated to a group of CGUs, and there is an indication that an individual CGU within the group is impaired, the individual CGU is tested for impairment first (and any identified impairment loss relating to the individual CGU recognized) before testing for impairment the group of units to which goodwill has been allocated.

Asset within cash-generating unit that provides no future benefit – example

An entity provides worldwide wireless communications to its customers through a network of 10 satellites. The entity has determined appropriately that its satellite business as a whole represents the ‘lowest level’ for which identifiable cash inflows are largely independent of the cash inflows of other assets and liabilities. A meteor destroys one satellite. However, the entity can continue to provide worldwide service with the remaining nine satellites.

The entity should not continue to recognize the satellite that has been destroyed as part of the CGU even if the recoverable amount of the CGU exceeds its carrying amount. IAS 36 is not intended to allow an entity to continue to recognize as an asset an item that does not meet the definition of an asset. If no future benefits are expected to be gained from holding or disposing of the satellite, it is likely that the asset should be written off in full in accordance with the derecognition requirements of IAS 16. In such circumstances, even though the entity continues to have positive cash flows from its satellite communications business, the entity must recognize the loss of a satellite.

Asset within the cash-generating unit that no longer contributes to cash flows – for example

A machine within a CGU has become redundant and is no longer contributing to cash flows. Its carrying amount exceeds its recoverable amount. However, the recoverable amount of the CGU is above its carrying amount.

The entity should recognize an impairment loss for the machine because its carrying amount is above its recoverable amount. The general principle is that impairment should be identified at the individual asset level, if possible. The recoverable amount should be calculated for the smallest CGU to which the asset belongs only when the recoverable amount for the individual asset cannot be identified. The machine is no longer in use and, therefore, no longer belongs to the CGU. The smallest CGU is now the machine itself. The entity can determine the future cash inflows arising from using this machine; they are nil. Therefore, the entity should determine the fair value less costs of disposal of the machine (because the machine may have some scrap or resale value), and it should recognize the impairment loss identified.

Rolling forward detailed calculations from a preceding period

Although IAS 36 requires an annual review for CGUs to which goodwill has been allocated, it does allow that the most recent detailed calculation of a unit’s recoverable amount made in a preceding period may be used when testing that unit for impairment in the current period, provided that the following criteria are met:

• the assets and liabilities making up the unit have not changed significantly since the most recent recoverable amount calculation;
• the most recent recoverable amount calculation resulted in an amount that exceeded the unit’s carrying amount by a substantial margin; and
• based on an analysis of events that have occurred and circumstances that have changed since the most recent recoverable amount calculation, the likelihood that a current recoverable amount determination would be less than the unit’s carrying amount is remote.

Cash-generating units to which it has not been possible to allocate goodwill

As discussed, it may not be possible to allocate goodwill to an individual CGU to which it relates. In such circumstances, the unit concerned is tested for impairment whenever there is an indication that the unit may be impaired by comparing the unit’s carrying amount, excluding any goodwill, with its recoverable amount.

If no goodwill has been allocated to a CGU but the CGU includes an intangible asset that has an indefinite life or that is not yet available for use, it will be necessary to carry out an annual impairment test for that CGU if that asset can be tested for impairment only as part of the CGU.