Goodwill Amortization Under IFRS: Impairment Testing and GAAP Differences

Goodwill cannot be amortized under IFRS. The International Accounting Standards Board eliminated amortization of goodwill when IFRS 3 took effect in 2004, replacing it with an annual impairment test under IAS 36.¹ Every entity reporting under IFRS, regardless of size, follows the same rule: goodwill sits on the balance sheet at its original amount until evidence shows its recoverable value has fallen below its carrying amount, at which point the entity writes it down. The IASB reconsidered reintroducing amortization and voted in November 2022 to keep the impairment-only approach.²

Why IFRS Dropped Amortization

The predecessor standard, IAS 22, did require amortization over goodwill’s estimated useful life. IFRS 3 scrapped that approach. On transition, entities stopped amortizing existing goodwill and began testing it for impairment under IAS 36.³

The reasoning: goodwill doesn’t wear out the way a machine or a patent does. Brand recognition and customer relationships can strengthen, stay flat, or collapse, but they rarely decline at a predictable rate. A fixed amortization schedule writes down the asset regardless of what’s actually happening to its value. An impairment test, at least in principle, only reduces the balance sheet figure when the value has genuinely fallen.

The approach has drawn criticism. The IASB’s own analysis found that many stakeholders believe impairment losses are recognized “too late, long after the events that caused those losses,” and that internally generated goodwill from ongoing operations shields acquired goodwill from write-downs.⁴ The board nevertheless concluded in 2022 that the costs of switching back to amortization outweighed the benefits, and it is now focusing on better disclosures around business combinations rather than changing the measurement model.²

How the Annual Impairment Test Works

Because goodwill doesn’t produce cash flows on its own, it can’t be tested in isolation. IAS 36 requires companies to allocate goodwill, starting from the acquisition date, to one or more cash-generating units expected to benefit from the synergies of the acquisition. A cash-generating unit (CGU) is the smallest group of assets that produces cash inflows largely independent of other parts of the business.¹

The allocation goes to the lowest level at which management actually monitors the goodwill, but it can never be larger than an operating segment under IFRS 8.⁵ The size of the chosen CGU matters: a large unit with significant headroom from unrecognized internally generated value can mask declines in acquired goodwill, which is one of the main criticisms of the impairment-only model.⁴

Each CGU containing goodwill must be tested at least once a year. The test can be performed at any point during the annual period, but it must happen at the same time each year. Goodwill acquired during the current period must be tested before year-end.⁶

The test itself is a comparison. The CGU’s carrying amount (everything on the balance sheet for that unit, including allocated goodwill) is measured against its recoverable amount, defined as the higher of two figures:

Fair value less costs of disposal, which is what the company would receive in an orderly sale minus the incremental costs of completing it. This works best when observable market data exists, such as comparable transaction prices.
Value in use, the present value of future cash flows expected from the CGU.

If the carrying amount exceeds the recoverable amount, the CGU is impaired.¹

Building the Value-in-Use Calculation

Management builds cash flow projections based on the most recent approved budgets or forecasts, covering a maximum of five years unless a longer period can be justified.⁷ Beyond the forecast period, cash flows are extrapolated using a steady or declining growth rate to derive a terminal value.

Two categories of cash flows must be excluded: financing activities and income tax payments, and any spending on future restructurings or enhancements that would improve the CGU’s current performance. Projections reflect the CGU as it stands today, not as management hopes it will look after a planned upgrade.¹ The projected cash flows are then discounted using a pre-tax rate that captures the time value of money and risks specific to the CGU. Many companies start with a weighted average cost of capital and adjust it to a pre-tax basis, though the standard doesn’t mandate a particular method.

Events That Trigger Testing Between Annual Dates

The annual test is a floor. Between tests, companies must watch for indicators that a CGU may be impaired, and any indicator triggers an immediate test regardless of when the last one occurred.

External indicators include a significant, unexpected decline in the market value of the CGU’s assets; adverse changes in technology, competition, regulation, or the broader economy; rising market interest rates that push the discount rate higher and reduce the present value of future cash flows; and the company’s market capitalization falling below the carrying amount of its net assets.

Internal indicators include physical damage or obsolescence, significant changes in how the CGU is used (including plans to dispose of assets earlier than expected), performance falling short of forecasts, and operating or maintenance costs substantially exceeding original estimates.

Recognizing an Impairment Loss

When the recoverable amount falls below the carrying amount, the difference is recognized as a loss in profit or loss. The allocation order is fixed: the loss reduces the goodwill allocated to that CGU first, down to zero. Any residual loss is spread proportionally across the other assets in the unit.¹

There is a floor on how far individual assets can be written down. No asset in the CGU can be reduced below the highest of its own fair value less costs of disposal, its own value in use, or zero. If the pro-rata allocation would breach that floor for any asset, the excess loss is redistributed among the remaining assets.

One rule catches many people off guard: goodwill impairment losses are permanent. Impairment losses on most other assets can be reversed if conditions improve, but a goodwill write-down cannot be restored in a later period.¹ The logic is that any later recovery in value likely reflects new, internally generated goodwill rather than a resurrection of the original acquired goodwill, and IFRS never allows internally generated goodwill on the balance sheet.

Entities carrying material goodwill also face substantial disclosure obligations around the key assumptions in each CGU’s impairment test, including a sensitivity analysis showing how much a key assumption would have to change before the CGU tips into impairment.

How This Differs From US GAAP

Readers coming from US GAAP sometimes assume amortization is at least an option under IFRS. For most entities, it isn’t. The two frameworks agree on the core principle for public companies: goodwill is not amortized but tested for impairment, and losses cannot be reversed. The mechanics and the available options diverge from there.

Under US GAAP (ASC 350), the impairment test compares a reporting unit’s fair value to its carrying amount. If the carrying amount exceeds fair value, the excess is the impairment loss, capped at the total goodwill allocated to that unit.⁸ IFRS uses recoverable amount, which gives entities a second path (value in use) that US GAAP’s goodwill test does not include. US GAAP also offers a qualitative assessment option that lets a company skip the quantitative test entirely if it concludes it is more likely than not that fair value exceeds carrying amount. IFRS has no such shortcut for goodwill.

The sharpest difference affects private companies. Under US GAAP, private companies can elect to amortize goodwill on a straight-line basis over ten years and test for impairment only when triggering events occur.⁹ IFRS offers no comparable election. A private company reporting under IFRS tests goodwill for impairment on the same model as the largest listed multinational.

What’s Changing

In March 2024, the IASB published an exposure draft proposing new disclosure requirements for business combinations. The project does not reintroduce amortization. It expands the information companies must provide about how their acquisitions are performing.¹⁰

Companies completing a “strategic” business combination would be required to disclose the key objectives and targets for the deal at the acquisition date, and then report in subsequent periods whether those targets are being met. A combination qualifies as strategic if the acquiree’s revenue, operating profit, or total acquired assets (including goodwill) reaches at least 10 percent of the acquirer’s corresponding consolidated figure.¹¹ The disclosure obligation continues for as long as key management personnel keep reviewing whether the acquisition’s objectives are being met; if management stops tracking a target within two years of the deal, the company must disclose that fact and explain why. The IASB is currently redeliberating the proposals based on feedback received.

1
IFRS Foundation. IAS 36 Impairment of Assets
2
IFRS Foundation. IASB Votes to Retain Impairment-Only Approach for Goodwill Accounting
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IFRS Foundation. IFRS 3 Business Combinations
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IFRS Foundation. Effectiveness of the Impairment Test
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IFRS Foundation. Allocating Goodwill to Cash-Generating Units
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IFRS Foundation. IAS 36 Impairment of Assets
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IFRS Foundation. Climate-Related Uncertainties and IAS 36
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FASB. Accounting Standards Update 2017-04
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FASB. Accounting Standards Update 2014-02
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IFRS Foundation. Business Combinations – Disclosures, Goodwill and Impairment
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IFRS Foundation. Exposure Draft – Business Combinations, Disclosures, Goodwill and Impairment