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Goodwill Impairment Review

Goodwill Impairment Review

IAS36, ASC 350: Value in Use and Fair Value less Costs to Sell

Goodwill impairment reviews entail the annual determination of the value in use or fair value less costs sell of cash generating units.

In accordance with IAS 36, “Impairment of Assets”, goodwill and indefinite-lived intangible assets are not amortised but are tested annually for impairment (impairment reviews may also be initiated by triggering events or changes in circumstances which indicate that the carrying amount of goodwill may not be recoverable).

IAS 36 states that an impairment loss shall be recognised for a CGU if, and only if, the recoverable amount (defined as the higher of fair value less costs to sell and value in use) of the unit is less than the carrying amount of the unit. A CGU is defined in IAS 36 as, “the smallest identifiable group of assets that generates cash inflows that are largely independent of the cash inflows from other assets or groups of assets.”

Value in use is defined in IAS 36 as, “the present value of the future cash flows expected to be derived from an asset or cash-generating unit.”

Fair value less costs to sell is defined in IAS 36 as, “the amount obtainable from the sale of an asset or CGU in an arm’s length transaction between knowledgeable, willing parties, less the costs of disposal.”

IAS 36 specifies use of a pre-tax discount rate (the WACC).  However, in practice the cost of equity component of the WACC cannot be calculated on a pre-tax basis as a pre-tax ‘market risk premium’ (specifically a pre-tax ‘return on the market’), cannot be observed.  Grossing up the cost of equity at the effective tax rate only gives the correct result if there is no cash flow growth and no deferred tax.

An approximation of “value in use” therefore involves discounting the post-tax cash flows at the post-tax WACC.  The correct “value in use” can be achieved by adjusting this approximation for the cash flows related to deferred tax.  However, as this involves a complex iterative calculation, a practical first step is to determine the approximation via the post-tax methodology and make a judgement as to whether the result gives sufficient headroom over the carrying value to infer there is only a remote likelihood of impairment on a pre-tax basis.

If sufficient headroom exists to infer there is no impairment and there are disclosure requirements for a pre-tax discount rate, it seems reasonable to use the pre-tax cash flows and iterate on the pre-tax discount rate required to provide the same result as the approximation of value in use determined via the post-tax methodology.

Why American Appraisal?

American Appraisal provides assistance to many companies during their annual goodwill (and indefinite lived intangible asset) impairment reviews.  American Appraisal consultants, both in the UK and across our network of global offices, have access to extensive databases which keep us in constant touch with market evidence related to discount rates and discount rate inputs, comparable transactions and selling costs for use in:

  • Value-in-use analysis
  • Fair value less costs to sell calculations
  • Sensitivity analysis

We have played a key role in both complex and more straightforward IAS 36 financial reporting engagements in recent years, including:

  • An assessment for a healthcare group
  • A number of assessments for a FTSE quoted housing group

American Appraisal consultants are active in:

  • the ICAEWs Valuation Special Interest Group
  • the International Valuation Standards Council
  • the Appraisal Issues Task Force
  • the FASB’s Valuation Resources Group
  • the Appraisal Foundation
  • the American Society of Appraisers
  • the American Institute of CPAs

This involvement ensures our knowledge of current financial reporting standards, practices and procedures.

Goodwill impairment review calculations performed by American Appraisal result in:

  • Independent, objective and supportable fair value opinions
  • Clear, comprehensive valuation reports

Get in touch with us for your goodwill impairment review needs