Corporate finance IFRS Valuations Impairment
Impairment
Because goodwill is not amortized annually, companies have to test the balance in order to estimate that the value is not higher than the direct or indirect market value. If that were the case, this item is to be written down to net realizable value (the highest of the direct and indirect realizable value). These so-called "impairment test" applies to all assets whose useful life is not quantifiable. In many cases, this applies also to other intangible assets.
The impairment test is governed by IAS 36 (IFRS). In the allocation of the purchase price to the various assets and liabilities (PPA), the goodwill has to be attributed to the Cash Generating Units (CGU) that benefit from the acquisition. It is possible that some of the goodwill of the acquired company A should be attributed to a subsidiary D that achieves great benefits of the acquisition. How the allocation of the goodwill of the different CGU's has to take place is not clearly regulated. The regulator here has a lot of room for creativity. The definition of CGU's is in itself a subjective matter.
Testing goodwill for impairment is made by comparing the carrying amount of CGU, including all the associated goodwill allocated to the "value in use " of the CGU. The value in use is usually determined by a DCF valuation of the unit.
If the value in use is lower than the carrying amount of CGU this constitutes an impairment. This impairment loss shall be charged against the assets of the CGU. First, the goodwill has to be written off, thereafter, pro rata parte the remaining assets have to be written off.
Talanton advises on the Purchase Price Allocation and carries out impairment tests for listed companies and companies that voluntarily apply IFRS.