How to test goodwill for impairment at the CGU level

Testing goodwill for impairment at the CGU level means first confirming goodwill was allocated, at the time of each acquisition, to the cash-generating units expected to benefit from that acquisition's synergies, then independently testing the recoverable amount — the higher of fair value less costs of disposal and value in use — built for each CGU carrying goodwill, and finally checking that any resulting impairment loss is allocated first to the goodwill of that unit before being allocated to its other assets on a pro rata basis.

Why the CGU allocation is tested before the numbers are

An impairment model can be built flawlessly and still produce the wrong answer if goodwill was allocated to the wrong unit, or if the unit's boundaries have been quietly redrawn since the acquisition to absorb a struggling business into a stronger one. The allocation is tested first because a wrong allocation makes everything computed on top of it meaningless.

The testing sequence

1. 01Trace the goodwill balance for each CGU back to the original acquisition allocationThe purchase price allocation report from the acquisition should show how goodwill was split across the units expected to benefit, and this split should not have changed since, except for a documented reallocation following a reorganisation.
2. 02Confirm the CGU boundaries used this year are consistent, or that any change is justified and disclosedA CGU is the smallest identifiable group of assets generating cash inflows largely independent of other assets. A boundary redrawn to merge a weak unit into a stronger one, with no change in how the business is actually managed, is a completeness red flag.
3. 03Obtain the carrying amount of each CGU, including goodwill and any corporate assets allocated to itCorporate assets that do not generate independent cash flows, such as a head office building, have to be allocated to CGUs on a reasonable basis before the comparison to recoverable amount is meaningful.
4. 04Test the recoverable amount model built for each CGUCash flow projections against board-approved budgets, the growth rate against the long-term growth rate for the specific market, and the discount rate against an independently derived weighted average cost of capital for a market participant, not the entity's own specific financing structure.
5. 05Perform sensitivity analysis on the key assumptions independentlyFlex the discount rate and the terminal growth rate within a reasonable range and assess how much headroom the CGU actually has, rather than relying on the single point estimate the client has presented.
6. 06Where an impairment loss arises, test the allocation sequenceFirst to goodwill allocated to the unit, in full, before any allocation to the unit's other assets, and no individual asset reduced below the higher of its own fair value less costs of disposal, value in use, or zero.
7. 07Test the disclosure of key assumptions and sensitivity for CGUs with limited headroomWhere a reasonably possible change in a key assumption would eliminate the headroom, the disclosure requirements for that are specific — check the note actually says what the standard requires, not a generic statement that goodwill was tested and found not impaired.