Impairment Testing

Goodwill impairment testing is a process used to assess whether the recorded value of goodwill on a company's balance sheet has been impaired or decreased in value. Goodwill impairment testing is usually performed annually or whenever events or circumstances indicate a potential impairment. It requires a thorough analysis of relevant factors such as market conditions, industry trends, financial performance, and specific risks associated with the reporting unit. Valuation techniques are employed to estimate fair value and determine whether an impairment exists.

US GAAP (ASC 350)

ASC 350: Intangible–Goodwill and Other, is the U.S. GAAP section outlining the accounting for goodwill and certain identifiable intangible assets. Costs of developing, maintaining, or restoring internally generated goodwill should not be capitalized. For entities that do not elect the accounting alternative for amortizing goodwill, goodwill that is recognized under the business combination framework should not be amortized. Instead, it should be tested for impairment at least annually. If the accounting alternative for a goodwill impairment triggering event evaluation is elected, a goodwill impairment triggering event shall be evaluated.

ASC 350 Framework

An entity is required to monitor and evaluate goodwill impairment triggering events throughout the reporting period.

Testing Requirement

If the entity concludes that it is more likely than not that the fair value of the reporting unit is less than its carrying value, then the entity must test goodwill for impairment.

Accounting Alternative

A private company or not-for-profit entity may make an accounting policy election to apply the accounting alternative for amortizing goodwill. The accounting alternative, once elected, shall be applied to existing
goodwill and to all additions to goodwill recognized in future transactions.

Quantitative Test

In evaluating whether a quantitative test is necessary, an entity should consider the totality of all relevant events or circumstances that could affect the significant inputs used to determine the fair value of an indefinite-lived intangible asset.

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IFRS (IAS 36)

The core principle in IAS 36 is that an asset must not be carried in the financial statements at more than the highest amount to be recovered through its use or sale. If the carrying amount exceeds the recoverable amount, the asset is described as impaired. The entity must reduce the carrying amount of the asset to its recoverable amount, and recognise an impairment loss. IAS 36 also applies to groups of assets that do not generate cash flows individually (known as cash-generating units).

IAS 36 Framework

The recoverable amount of the following assets in the scope of IAS 36 must be assessed each year: intangible assets with indefinite useful lives; intangible assets not yet available for use; and goodwill acquired in a business combination. The recoverable amount of other assets is assessed only when there is an indication that the asset may be impaired. Recoverable amount is the higher of (a) fair value less costs to sell and (b) value in use.

Value in Use

The value in use of an asset is the expected future cash flows that the asset in its current condition will produce, discounted to present value using an appropriate discount rate. A Value-in-Use model typically employs five-year cash flows and a terminal period based on stabilized-level cash flow metrics that are presented in perpetuity.

Fair Value Less Costs to Sell

Fair value less costs to sell (FVLCS) is the arm’s length sale price between knowledgeable willing parties less costs of disposal. FVLCS employs a market-participant basis and usually results in a higher value than a value-in-use basis.

Quantitative Test

An impairment loss is recognised immediately in profit or loss (or in comprehensive income if it is a revaluation decrease under IAS 16 or IAS 38). The carrying amount of the asset (or cash-generating unit) is reduced. In a cash-generating unit, goodwill is reduced first; then other assets are reduced pro rata. The depreciation (amortisation) charge is adjusted in future periods to allocate the asset’s revised carrying amount over its remaining useful life.

Tailored impairment testing models to meet your annual testing needs with 100% audit acceptance guarantee.

The Unyvers core principle is to provide solutions that are fit for purpose. Companies benefit from our value in use (VIU) and fair value less cost to sell (FVLCS) impairment models because they provide a long-term solution that is both flexible and economical.

IFRS-Based Impairment Model - Features & Capabilities

Cash Flow Forecasting

Projection Period: Customize the forecast period to reflect the business cycle and industry dynamics under both a VIU and FVLCS basis.
Revenue and Expense Inputs: Enter detailed revenue, operating expenses, net working capital and capital expenditure forecasts to model expected future cash flows.

Terminal Value Estimation:

Growth Models: Use the Gordon Growth Model (perpetuity growth) and exit multiple approaches to estimate the terminal value, reflecting long-term growth expectations and market conditions.

Discount Rate Calculation:

WACC Integration: Calculate the Weighted Average Cost of Capital (WACC) to discount future cash flows, incorporating user-defined inputs or industry-standard benchmarks.
Sensitivity Analysis: Assess the impact of variations in the discount rate on the VIU calculation through built-in sensitivity analysis tools.

Scenario & Sensitivity Analysis:

Scenario Modeling: Evaluate different business scenarios (e.g., optimistic, pessimistic) to understand how varying assumptions affect the VIU.
Variable Sensitivity: Analyze the sensitivity of key inputs (e.g., growth rates, discount rates) to assess their impact on the overall valuation.

Key Benefits

Reporting & Documentation

Comprehensive Reports: Generate detailed reports that summarize VIU calculations, key assumptions, and outcomes, with options to export in various formats (e.g., PDF, Excel).
Audit Trail: Maintain a clear audit trail of data inputs and modifications for transparency and regulatory compliance.

Technology

Accuracy: Provides a reliable and accurate assessment of goodwill's value-in-use and fair value less costs to sell, supporting compliance with accounting standards and regulations.
Flexibility: Adaptable to various industries and business models, accommodating different assumptions and scenarios.
Decision Support: Equips clients with the necessary tools to make informed decisions regarding goodwill impairment and overall investment strategy.

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