IAS 36 CGU impairment testing: from indicator to disclosure

IAS 36 is one of those standards that sounds straightforward in summary and proves treacherous in practice. Compare carrying amount to recoverable amount; if carrying is higher, write down the difference as an impairment loss. Easy. The trouble starts at every word in the previous sentence: 'carrying amount' is more nuanced than it sounds (allocated goodwill? cash-generating unit? corporate-asset allocation?), 'recoverable amount' invites a rabbit hole of methodology choices (VIU? FVLCD? which discount rate?), and 'impairment loss' has its own allocation cascade (goodwill first, then proportional to carrying values of other assets). And then there's the disclosure cascade — ¶130, ¶134, ¶126, each with its own table requirements.

IAS 36 quick refresher: when to test, what to compare

The standard has a tiered testing requirement. Goodwill and indefinite-life intangibles must be tested for impairment at least annually, regardless of whether any indicator of impairment exists (¶10). Other non-current assets are tested only when there's an indicator (¶12 — internal indicators like physical damage, plans to dispose, deteriorating performance; external indicators like declining market value, adverse changes in technology, market, or legal environment). The asymmetry exists because goodwill is non-amortising and a CGU's recoverable amount can drift below carrying without showing in single-asset metrics.

Once a test is triggered, the comparison is mechanical: carrying amount of the asset (or CGU) versus its recoverable amount, defined as the higher of fair value less costs of disposal (FVLCD) and value in use (VIU). The 'higher of' formulation matters: an entity isn't compelled to dispose just because FVLCD is low if continuing to use the asset (VIU) recovers more, and vice versa. If carrying > recoverable, the impairment loss is the difference, allocated first to any goodwill in the CGU, then pro rata to the other assets in the CGU based on their carrying values.

Defining CGUs (¶6, ¶80) — and why granularity matters

The cash-generating unit is the smallest identifiable group of assets that generates cash inflows largely independent of the cash inflows from other assets. ¶6 puts it that way; ¶80 then adds that for goodwill testing, the CGU (or group of CGUs) to which goodwill is allocated must represent the lowest level within the entity at which goodwill is monitored for internal management purposes, but must not be larger than an operating segment determined under IFRS 8. So the CGU floor is the level of management monitoring, the CGU ceiling is the operating segment.

Granularity matters enormously here. A coarse CGU definition (one CGU per operating segment) can hide impairment because individual CGUs with shrinking recoverable amounts get cushioned by other CGUs in the same segment. A fine CGU definition (one CGU per product line or per geographic region) can flush out impairments that the coarse definition would have masked. Auditors look hard at how CGUs were defined; engagement teams sometimes face pushback if the CGU definition appears to have been chosen to minimise the visibility of impairment risk.

VynFi's YAML CGU schema lets you define CGUs explicitly:

cgus:
  - id: "europe-distribution"
    entities: ["acme-europe", "acme-uk", "acme-italy", "acme-spain"]
    operating_segment: "consumer_distribution"
    discount_rate: 0.085   # 8.5% pre-tax, derived from group WACC + market premium
    growth_rate_terminal: 0.020   # 2% long-run growth
    forecast_horizon_years: 5
  - id: "americas-distribution"
    entities: ["acme-us", "acme-mexico", "acme-brasil"]
    operating_segment: "consumer_distribution"
    discount_rate: 0.105   # higher rate reflects higher market risk
    growth_rate_terminal: 0.025
    forecast_horizon_years: 5
  - id: "asia-distribution"
    entities: ["acme-japan", "acme-singapore"]
    operating_segment: "consumer_distribution"
    discount_rate: 0.075
    growth_rate_terminal: 0.020
    forecast_horizon_years: 5

Each entity in the group can be a member of exactly one CGU. The engine validates that every entity with goodwill from an IFRS 3 acquisition is allocated to a CGU. The validation runs synchronously at config-load: if you've configured a 12-entity group with goodwill from one step-acquisition but only defined two CGUs that don't cover the acquired entity, the validator surfaces a clear error.

Allocating goodwill to CGUs (¶80) — the audit-firm sticking point

Goodwill, once recognised in an IFRS 3 acquisition, must be allocated to the CGUs that benefit from the synergies of the combination. This is where ¶80 and the audit-firm questioning starts. 'Benefit' is judgmental. The entity often says 'all of our European distribution CGUs benefit from the synergies of acquiring Newco', and the audit firm pushes back: 'Why not just the CGU where Newco's customers are?'. The answer drives the goodwill-allocation table.

VynFi handles this with an explicit allocation:

goodwill_allocations:
  - acquisition_id: "newco_step_up_2025_07_01"
    total_goodwill: 47_000_000
    allocations:
      - cgu_id: "europe-distribution"
        amount: 35_000_000
        rationale: "Primary synergy realm — Newco serves the European distribution channel"
      - cgu_id: "americas-distribution"
        amount: 8_000_000
        rationale: "Secondary synergy via cross-selling to US/Mexico customer base"
      - cgu_id: "asia-distribution"
        amount: 4_000_000
        rationale: "Limited synergy via shared procurement spend leveraged in Asia"

Each allocation carries a documented rationale — the kind of language an engagement team writes in the impairment workpaper to defend the allocation if audit firm or regulator challenges. The rationales become part of the audit trail. When the engine computes per-CGU impairment downstream, the goodwill allocation table is the input, and the workpaper the engine emits cross-references both the IFRS 3 acquisition and the goodwill allocation table.

Recoverable amount = max(VIU, FVLCD)

Recoverable amount is the higher of value in use and fair value less costs of disposal. In practice, most IAS 36 testing relies on VIU because FVLCD requires observable market data that's often unavailable for CGUs (whole CGUs aren't typically traded). VynFi can compute either, and surfaces both for comparison.

Value in use is the present value of the future cash flows expected to be derived from the CGU. The mechanic: project cash flows over a forecast horizon (typically 5 years per ¶33), apply a perpetuity formula at a steady-state growth rate beyond the horizon (the 'terminal value'), and discount everything back to present value at a pre-tax rate that reflects current market assessments of the time value of money and the risks specific to the CGU. The forecast cash flows are derived from the entity's most-recent budgets and forecasts (¶33b), with the proviso that they must be consistent with management's documented intent and not include future restructurings or expansions that aren't yet committed (¶33a, ¶44).

Fair value less costs of disposal is what an arms-length market participant would pay for the CGU, less direct costs of disposal. ¶BC123 makes the methodology hierarchy clear: observable market price first, valuation techniques second. The valuation techniques fall back on standard market multiples (EBITDA × industry multiple) or DCF on market-participant assumptions.

The 'higher of' resolution is automatic in the engine: both are computed where data is available, recoverable amount is the maximum, and the disclosure tables flag which methodology drove the figure for each CGU.

Discount rate selection — VynFi's default + per-CGU override

Discount rate is the most-debated input in any VIU calculation. The standard requires a pre-tax rate that reflects current market assessments of the time value of money and the risks specific to the asset, before the effects of tax (¶55). In practice, this is often derived from the group's WACC, adjusted for CGU-specific risk premia. Higher-risk CGUs get higher rates; lower-risk CGUs get lower rates. Audit firms scrutinise this because a small change in the discount rate has a large impact on VIU.

VynFi's default discount rate is the group WACC, derived from the YAML's group_wacc field. Per-CGU overrides apply on top: in the example above, europe-distribution gets 8.5% (slightly above the group WACC, reflecting modestly higher market risk), americas-distribution gets 10.5% (notably higher, reflecting Brazil/Mexico market risk premium), asia-distribution gets 7.5% (notably lower, reflecting Japan's lower base rates and stable market). Each override is recorded in the audit trail with a rationale.

The impairment loss calculation and reversal mechanics

Once recoverable amount is computed and compared to carrying, the impairment loss is straightforward: carrying − recoverable, if positive. Allocation cascades per ¶104: first to any goodwill in the CGU (write down to zero before touching anything else), then pro rata to the carrying values of the other assets in the CGU. Goodwill impairment is irreversible (¶124); other-asset impairments can be reversed in subsequent periods if the conditions reverse (¶117) — though never above the carrying value the asset would have had if no impairment had ever been recognised.

VynFi 2.7 surfaces this in the Impairment Heatmap visualisation tab — a CGU × period grid where each cell shows the headroom (recoverable − carrying) as a heat value. Green cells have ample headroom; yellow cells are within 10% of impairment; red cells are impaired in that period. Click any cell for the full waterfall: which CGU, which period, which assumption (discount rate? terminal growth? forecast cash flows?) tipped recoverable below carrying. Reviewers can spot trouble before opening any workpaper.

IAS 36 ¶130 + ¶134 disclosures — what audit firms expect

Once impairment is computed, the disclosure cascade kicks in. Three paragraphs drive most of what shows up in financial statements:

• **¶126** — required for any individually material impairment loss recognised or reversed in the period: the events and circumstances that led to it, the amount, the nature of the asset, and the segment to which it belongs.
• **¶130** — for each CGU containing goodwill or indefinite-life intangibles, disclose the carrying amount of goodwill and intangibles, the basis on which the recoverable amount has been determined (VIU or FVLCD), the key assumptions on which the calculation is based, the approach to determining values for those assumptions, and any change in approach.
• **¶134** — for any CGU where a reasonably possible change in a key assumption would cause carrying amount to exceed recoverable amount, additional sensitivity disclosures: the amount by which the recoverable amount exceeds carrying, the value assigned to the key assumption, and the change required to drive recoverable below carrying.

VynFi 2.7 emits both ¶130 and ¶134 disclosure tables as first-class output. The ¶130 table lists every CGU with goodwill, the goodwill allocation, the recoverable-amount methodology, and the key assumptions (discount rate, growth rate, forecast horizon). The ¶134 sensitivity table tests reasonably-possible changes in each key assumption: ±100 bps on the discount rate, ±100 bps on the terminal growth rate, ±10% on the forecast cash flows. CGUs where any of those changes would tip recoverable below carrying are flagged with the precise change required.

A worked example: 4 CGUs, 1 impaired in Q3 2025

Walk through a concrete example. Acme has the four CGUs from the YAML above plus a fourth (Acme Industrials). At the Q2 2025 close, all four CGUs have ample headroom — recoverable amounts are 30-50% above carrying values. By the Q3 2025 close, the americas-distribution CGU has lost considerable headroom: a major customer's bankruptcy has hit Q3 cash flows and dragged forecast cash flows down through the rest of the horizon. The discount rate hasn't changed, but the cash-flow forecast has dropped substantially.

VynFi computes:

• Carrying amount of americas-distribution CGU at Q3 2025 close: €82M (including €8M of goodwill from the Newco step-up)
• Forecast cash flows over horizon (revised, post customer bankruptcy): €92M cumulative
• Terminal value (capitalised at 2.5% growth, discounted back at 10.5%): €5M present value
• VIU: PV of forecast cash flows + PV of terminal = €72M + €5M = €77M
• FVLCD: not separately computed (no market comparable identified)
• Recoverable amount: max(VIU, FVLCD) = €77M
• Impairment loss: €82M − €77M = €5M
• Allocation: write down goodwill first (€5M of the €8M goodwill is written down). Remaining goodwill: €3M.

The Q3 2025 impairment shows up on the consolidated income statement as a separate line. The ¶130 disclosure shows the methodology and key assumptions. The ¶134 sensitivity shows that a further 50bps on the discount rate, or a further 5% drop in forecast cash flows, would tip americas-distribution into a larger impairment that touches the other CGU assets, not just goodwill. The Impairment Heatmap turns the americas-distribution row red for Q3 2025; reviewers can drill in and see the full computation in seconds rather than reconstructing it from a workpaper.

Try it

VynFi 2.7's IAS 36 CGU goodwill impairment is part of the existing Group Audit feature (Enterprise tier, no new SKU). If you're an audit firm running impairment-test training, a methodology team validating an IAS 36 workpaper template, or a CFO preparing a goodwill-impairment narrative for the board, contact sales for a guided walkthrough on a 12-entity group with several CGUs and a triggered impairment.

Background reading: the Group Audit landing page covers the full v2.7 feature surface. The IFRS 3 step-acquisition post covers the upstream side — how goodwill enters the consolidated balance sheet in the first place. The IAS 29 hyperinflation post covers a related corner case: testing impairment for a CGU that includes a hyperinflationary entity introduces the question of which measuring unit to compare carrying and recoverable amounts in.