Goodwill Impairment

Goodwill impairment is the write-down required when the carrying value of goodwill is no longer economically supported. Under IFRS, this is assessed by comparing the recoverable amount of the relevant cash-generating unit with its carrying amount. This burdens earnings without real cash leaving the company.

Under IFRS goodwill is not amortised but tested under IAS 36 at least annually and whenever there is an indication of impairment. For that purpose it is allocated to cash-generating units whose recoverable amount is compared with carrying value. The recoverable amount is the higher of value in use and fair value less costs of disposal. Where it is lower, goodwill is written down first, and a later reversal is not permitted. Triggers are typically persistently missed forecasts, a deteriorating market environment, higher cost of capital or the loss of major customers. Economically the write-down may indicate missed acquisition expectations, but it can also result from a higher cost of capital. It therefore does not automatically prove that the original purchase price was excessive. Although non-cash, it can matter to capital market participants. Its treatment in credit covenants depends on their definitions.

Under German GAAP the question arises differently, because goodwill is amortised there in any case and an additional write-down is made only for permanent impairment. For buyers the link is practically relevant, because an ambitious purchase price allocation makes the later testing harder. Allocating goodwill to cash-generating units matters considerably in practice, because a coarse allocation to a few large units means surpluses in successful areas offset shortfalls in weak ones and impairment becomes visible only late. The assumptions applied also deserve scrutiny, in particular growth rate and cost of capital, since they drive the test's outcome more than the operating performance of any single year. For buyers the item is therefore a reason to review the original purchase price allocation and the current earnings and valuation assumptions.