CALCULATING GOODWILL IMPAIRMENT

Financial Accounting Standards requires that goodwill emerging from acquisitions be tested to determine whether it has been impaired. In general, the possibility that an asset has been impaired will be examined if the asset has in some way become less useful since it was acquired.

WHAT IS IMPAIRMENT?
If the value of an asset, as shown in the balance sheet, exceeds its actual value to a company, then the amount shown in the balance sheet needs to be reduced. This reduction is shown as a cost in the P&L. This is impairment. 

HOW DOES AN ENTITY IDENTIFY IMPAIRMENT INDICATORS?
There are external and internal indicators of impairment.

• External indicators include changes in the technological, market, economic or legal environment, and increases in interest rates.
• Internal indicators include obsolescence of or damage to an asset, changes in use (may increase or decrease future cash flows). If cost of assets is more than originally budgeted or if cash flows from the use of the asset are less than originally budgeted, the present value may be lower.

HOW IS THE ASSET DETERMINED AS IMPAIRED?
The recoverable amount of an asset is compared to the carrying amount to determine if an asset is impaired. An asset's recoverable amount is the higher of its value in use (VIU) and its fair value less costs to sell (IAS 36). If the asset's carrying amount exceeds its recoverable amount, the asset is impaired.

HOW OFTEN SHOULD AN ASSET BE TESTED FOR IMPAIRMENT?
The frequency depends on the nature of the asset being tested. IAS 36 requires all assets to be tested when there is an indicator of impairment. 
In addition, the following assets are required to be tested annually regardless of external or internal indicators: goodwill, indefinite-lived intangible assets and intangible assets not yet ready for use.

HOW IS GOODWILL TESTED FOR IMPAIRMENT?
Under IFRS the testing of goodwill is performed at the cash generating unit (CGU) level as a single step test. An impairment loss is recognized directly if the carrying value exceeds the higher of the net selling price derived from market’s assessment of fair value or value in use based on a discounted cash-flow approach.
Under U.S. GAAP the impairment test is to be performed in two stages. If the first stage does not indicate that the carrying values of the reporting units exceed the fair values, the second stage is not required. When the first stage indicates potential impairment, the company has to complete the second stage of the impairment test and compare the implied fair value of the reporting units’ goodwill to the corresponding carrying value of goodwill.

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