Goodwill acquired in a business combination is tested for impairment rather than amortised under Ind AS. The test compares the carrying amount of the cash-generating unit (CGU) or group of units to which goodwill is allocated with its recoverable amount. A decline in goodwill’s apparent market value is an indicator to investigate; it does not by itself measure the loss. The examples below are illustrative.
When and how to test goodwill
Ind AS 36 requires a test at least annually and when there is an impairment indicator. The annual test can be performed at different times for different units, consistently from year to year. A unit containing goodwill acquired during the year must be tested before year-end. If an asset or smaller unit is tested at the same time as the goodwill unit, test the smaller asset or unit first as applicable. Paragraph 99 permits a prior detailed calculation to be carried forward only if all its conditions are met.
| Measure | What it means | Practical check | Key boundary |
|---|---|---|---|
| Carrying amount | Book amount of the assets attributable, or reasonably and consistently allocable, to the CGU. | Use the same perimeter for the carrying amount and recoverable amount. | Normally exclude recognised liabilities unless recoverable amount cannot be determined without considering them; treat both sides consistently. |
| Recoverable amount | Higher of value in use (VIU) and fair value less costs of disposal (FVLCD). | If either measure exceeds carrying amount, there is no need to calculate the other. | A lower VIU alone does not prove impairment if FVLCD could support a higher recovery. |
| Value in use | Present value of cash flows from continued use and ultimate disposal. | Use supportable budgets, a suitable pre-tax discount rate and consistent cash flow assumptions. | Use the asset’s current condition and exclude financing and income-tax cash flows. |
| FVLCD | Fair value under Ind AS 113 less incremental costs directly attributable to disposal. | Use appropriate market participant assumptions and a supportable valuation technique. | Do not include financing costs or income tax in costs of disposal. Observable prices can help but are not required in all cases. |
Identify the CGU and allocate goodwill
A CGU is the smallest identifiable group of assets with cash inflows largely independent of other inflows. Allocate acquisition goodwill to units expected to benefit from the combination. Under paragraph 80, the test level is the lowest level at which goodwill is monitored internally and may not exceed an Ind AS 108 operating segment before aggregation. If an active market exists for a unit’s output, the unit is identified separately even if the output is used internally; estimate arm’s-length prices where internal prices affect projections.
Build a value in use model
Discount projected cash flows for periods 1 to n using each period’s discount factor. If a terminal value is supportable, discount it from the end of period n. A perpetual model is one possible illustration; a finite-lived operation may require a different projection.
- Use management-approved budgets and give greater weight to external evidence. The explicit forecast normally covers up to five years; a longer period requires support, including the ability to forecast reliably over that period.
- Project the asset in its current condition. Exclude an uncommitted future restructuring and improvements or enhancements. Include expenditure necessary to maintain current benefits where appropriate. When a restructuring is committed, apply the relevant criteria before including its effects.
- Use a steady or declining extrapolation rate unless an increase is justified. Do not exceed the relevant long-term growth rate without support. There is no fixed India-wide terminal growth rate.
- Use a pre-tax rate reflecting current market assessments of the time value of money and asset-specific risks not already in cash flows. WACC can be a starting point; avoid double counting risks. A simple division by one minus a tax rate does not generally convert a post-tax valuation into the equivalent pre-tax rate.
Allocate the impairment loss
Under paragraphs 104–105, reduce allocated goodwill first, by the lesser of the loss and the carrying amount of goodwill. Allocate any remainder to other assets in proportion to their carrying amounts. Do not reduce any asset below the highest of its measurable FVLCD, determinable VIU and zero. Redistribute amounts limited by the floor to other eligible assets. Recognise the loss in profit or loss unless a revaluation treatment applies to an affected asset. Goodwill impairment is not reversed; reversals for other assets have separate conditions and limits.
Seven worked examples
1. Logistics software: five-year cash flow forecast
At 31 March 2024, a software provider tests its logistics CGU after recurring revenue fell 30% and operating margin fell from 28% to 14%. Those are assumed facts. Goodwill is ₹25 crore, software ₹12 crore, equipment ₹3 crore and net operating working capital ₹4 crore. The ₹44 crore carrying perimeter assumes the working capital is reflected consistently in the valuation and recognised liabilities are included only as needed for a consistent recovery comparison.
Assume a 14.5% pre-tax discount rate, a supported 4.5% perpetual growth rate and end-of-year cash flows. Values are in ₹ crore.
| Year | Cash flow | Discount factor | Present value |
|---|---|---|---|
| 1 (year ending March 2025) | 3.80 | 0.8734 | 3.32 |
| 2 (year ending March 2026) | 4.60 | 0.7628 | 3.51 |
| 3 (year ending March 2027) | 5.50 | 0.6662 | 3.66 |
| 4 (year ending March 2028) | 6.40 | 0.5818 | 3.72 |
| 5 (year ending March 2029) | 7.20 | 0.5081 | 3.66 |
| Explicit period total | — | — | 17.87 |
| Terminal value | 7.20 × 1.045 ÷ (0.145 − 0.045) = 75.24 | 0.5081 | 38.23 |
| Value in use | — | — | 56.10 |
VIU exceeds carrying amount by ₹12.10 crore, approximately 27.51% of carrying amount, so there is no impairment on these assumptions. FVLCD need not be calculated to reach that conclusion. The table uses unrounded discount factors in the calculation.
2. Automotive components: goodwill and asset write-down
An acquired unit has ₹62 crore of carrying amount: ₹18 crore of goodwill, ₹32 crore of plant and ₹12 crore of land and buildings. Assume customer orders fell 65% and utilisation is 22%. The valuation inputs are VIU of ₹38 crore at an assumed 15% pre-tax rate and independently assessed FVLCD of ₹41 crore. Recoverable amount is ₹41 crore, giving a ₹21 crore loss. Assume no asset floor binds and none of the other assets is carried at a revalued amount.
| Asset | Pre-impairment carrying value | Allocation of loss | Post-impairment carrying value |
|---|---|---|---|
| Goodwill | ₹18,00,00,000 | ₹18,00,00,000 | Nil |
| Plant and machinery | ₹32,00,00,000 | ₹3 crore × 32/44 = ₹2,18,18,182 | ₹29,81,81,818 |
| Land and buildings | ₹12,00,00,000 | ₹3 crore × 12/44 = ₹81,81,818 | ₹11,18,18,182 |
| Total | ₹62,00,00,000 | ₹21,00,00,000 | ₹41,00,00,000 |
Debit profit or loss by ₹21 crore. Credit goodwill by ₹18 crore and credit accumulated impairment on plant and land/buildings by the amounts shown. Check covenant implications separately under the actual lending agreement.
3. Retail chain: shared warehouse and IT assets
A retailer’s ₹40 crore warehouse and ₹15 crore ERP system support four regional CGUs. Assume a reasonable, consistent allocation of the ₹55 crore pool based on usage: North 35% (₹19.25 crore), South 30% (₹16.50 crore), West 25% (₹13.75 crore) and East 10% (₹5.50 crore). If East has ₹28.70 crore of other carrying amount and recoverable amount of ₹30 crore on the same perimeter, the loss is ₹4.20 crore.
If part of a corporate asset cannot reasonably be allocated, paragraph 102 requires testing the individual CGU excluding that asset first, then testing the smallest larger group to which the asset can be allocated reasonably and consistently. The larger group is not necessarily the whole entity.
4. Chemical plant: internally transferred output
Two units make intermediates and finished dyes. Unit A transfers all its output to B and there is no active market for A’s output. Assume A has no other independent cash inflows and A plus B are the smallest group with largely independent inflows. Test the combined unit. Separate meters and managers do not establish cash-flow independence. An active market for A’s output would change the analysis even if all output were transferred internally.
5. Medical devices: pre-tax and post-tax discount rates
Assume five equal annual cash flows of ₹11.64423 crore after tax and ₹12.41527 crore before tax, with no terminal value. The post-tax PV at 11.5% is ₹42.50 crore. Solving for the pre-tax rate that discounts the five pre-tax flows to the same PV gives approximately 14.12%. This illustrates mathematical equivalence, not a formula for deriving the statutory VIU rate from a company’s effective tax rate.
If an analyst instead divided 11.5% by (1 − 25.17%), the result would be about 15.37%. At that rate the pre-tax PV in this example is ₹41.26 crore, about ₹1.24 crore below the matched value. The assumed tax rate in that shortcut does not determine the timing of the cash tax flows.
6. Foreign CGU: sterling cash flows and goodwill
Assume a UK CGU has GBP functional currency and £4 million of goodwill included in its £16 million carrying amount. Under Ind AS 36 paragraph 54, project and discount the GBP cash flows using an appropriate GBP rate (assume 9.2% pre-tax here); translate the resulting present value at the spot rate on the calculation date. If the GBP recoverable amount is £18.5 million, the £2.5 million excess means no impairment. At an assumed ₹106/GBP, those amounts are ₹1,961 million, ₹1,696 million and ₹265 million respectively. Ind AS 21 paragraph 47 separately requires acquisition goodwill to be translated at the closing rate at each reporting date.
7. Proportionate NCI: gross up goodwill for the test
An acquirer buys 75% of a food business for ₹45 crore. Assume identifiable net assets of ₹40 crore and proportionate NCI of ₹10 crore. Recognised goodwill is ₹15 crore (45 + 10 − 40). At the test date, the recognised carrying amount is ₹50 crore, including that goodwill. For the test, gross goodwill up to ₹20 crore (15 ÷ 75%), giving a notional carrying amount of ₹55 crore.
With recoverable amount of ₹45 crore, the notional loss is ₹10 crore, fully absorbed by notional goodwill. Recognise the parent’s ₹7.50 crore goodwill loss; the ₹2.50 crore relating to unrecognised NCI goodwill is not recorded. If the loss exceeded total notional goodwill, the remaining loss allocated to other assets would be recognised and attributed under the normal rules.
Disclose assumptions and test sensitivities
Paragraph 134 applies to a unit or group with allocated goodwill or indefinite-lived intangibles significant relative to the entity’s total. When a reasonably possible change in a key assumption would eliminate the headroom, disclose the headroom, the assumption value and the change needed to reach break-even, taking consequential effects into account. A particular table layout is not required.
The following one-variable sensitivity uses the software CGU in example 1 and shows where VIU, by itself, equals the ₹44 crore carrying amount. An impairment decision still considers FVLCD where relevant. For the margin illustration only, assume all projected cash flows including the terminal cash flow scale in direct proportion to a baseline 18.20% margin; actual models need a supported cash flow bridge.
| Assumption | Base | Illustrative shock | VIU after shock and change | VIU break-even |
|---|---|---|---|---|
| Pre-tax discount rate | 14.50% | 15.50% | ₹50.68 crore (down ₹5.42 crore) | 17.05% |
| Terminal growth rate | 4.50% | 3.50% | ₹52.30 crore (down ₹3.81 crore) | 0.44% |
| Margin proxy | 18.20% | 16.20% | ₹49.94 crore (down ₹6.17 crore) | 14.27% |
Frequently asked questions
1. Can goodwill impairment be reversed?
No. Ind AS 36 paragraph 124 prohibits reversing goodwill impairment in a later period. Other assets are assessed under their own reversal requirements.
2. When is the annual test performed?
Use the same time each year for a given unit. Different units may use different dates. Test as well when an impairment indicator arises, and test a unit with goodwill acquired during the year before year-end.
3. Can future restructuring or enhancements improve VIU?
VIU reflects the asset’s current condition. Exclude uncommitted restructurings and enhancements. Evaluate market participant assumptions separately for FVLCD, where appropriate.
4. How are shared corporate assets allocated?
Allocate the asset on a reasonable and consistent basis where possible. If it cannot be allocated to the unit, test the unit first without it and then test the smallest group to which it can reasonably and consistently be allocated.
5. How does the US private-company alternative differ?
Eligible US private companies may elect the ASC Topic 350 alternative. It generally amortises goodwill over ten years, or a shorter useful life if appropriate and demonstrable, and tests upon a triggering event under the applicable rules. That election does not change the Ind AS model.
6. What can software help prepare?
A model can compute discounted cash flows, test sensitivities and reconcile loss allocation. Management still needs to support the assumptions, review the cash-flow perimeter and verify the resulting accounting and disclosures.