Impairment Test under IAS 36 in 2026: Methodology and Best Practices

Updated 12 May 2026. The impairment test required by IAS 36 is one of the technical areas most heavily scrutinised by the statutory auditor: mandatory annual test for goodwill and indefinite-life intangibles, five-step methodology, recoverable amount built on a DCF discounted at WACC, and impairment loss that cannot be reversed for goodwill. For a group CFO, a controller, a director of a listed or unlisted mid-cap, or a founder post-acquisition in Paris, the 2026 challenge goes beyond an Excel exercise: it means arbitrating the granularity of cash-generating units (CGUs), defending DCF assumptions against interest rates that have durably re-anchored above 3%, and producing an auditable sensitivity analysis. At Cabinet Hayot Expertise in Paris, we regularly see acquisition goodwill in cyber-security or SaaS deals tip into impairment as early as the second year post-deal, when the business plan has not been properly revised.

Scope — assets covered and exclusions#

IAS 36 Impairment of Assets applies to all assets not covered by a specific standard. In scope: property, plant and equipment under IAS 16; intangible assets under IAS 38, including goodwill; investment properties measured at cost under IAS 40; biological assets at cost under IAS 41; and investments in associates and joint ventures under IAS 28. Out of scope: inventories (IAS 2 has its own net realisable value mechanism), financial assets (IFRS 9 expected-credit-loss model), deferred tax assets (IAS 12), hedging instruments, and assets within the scope of IFRS 17 on insurance contracts.

Difference with French GAAP (ANC Regulation 2014-03 article 214)#

French GAAP also includes an impairment mechanism, codified in article 214 of ANC Regulation No. 2014-03. The logic is similar: when the current value of an asset falls below its net book value, an impairment is recognised. The French "current value" is defined as the higher of market value and value in use — conceptually equivalent to IAS 36 recoverable amount. Two structural divergences remain: under French GAAP, goodwill is amortised over a period generally capped at 10 years (in addition to an indicator-based test), whereas under IFRS goodwill is never amortised but tested annually. Disclosure requirements in French annexes also remain less detailed on DCF methodology and sensitivity analysis, where IAS 36 imposes a much higher level of transparency. To place these treatments within the broader IFRS framework, you can revisit our analysis of IFRS consolidated accounts.

Why IFRS goodwill is treated separately#

Goodwill arises from IFRS 3 Business Combinations: it represents the excess of consideration paid over the fair value of identifiable assets and liabilities acquired. By construction, it does not generate cash flows on its own and is inseparable from the CGUs to which it is allocated. IAS 36 therefore imposes a specific regime: mandatory annual test at a fixed date (regardless of any indicator), allocation to CGUs or groups of CGUs at the lowest level of management monitoring, and — most importantly — a strict prohibition on reversal once impairment is recognised (paragraph 124 of IAS 36).

Mandatory annual test — goodwill and indefinite-life intangibles#

Paragraphs 9 and 10 of IAS 36 set out two regimes. The mandatory annual test, independent of any indicator, applies to goodwill, intangible assets with an indefinite useful life (such as brands), and intangible assets not yet available for use (capitalised R&D not yet in service). The annual test can be performed at any time during the year, provided the same date is used from one year to the next. Most Paris-based groups align it with the financial year-end to synchronise with the CGU values carried on the balance sheet.

External indicators — market, rates, market capitalisation#

For other assets in scope, the test is only triggered by an impairment indicator. External indicators listed by IAS 36 include: a significant decline in market value, adverse changes in technological or regulatory environment, an increase in interest rates that mechanically raises WACC and lowers value in use, and — for listed companies — a market capitalisation durably below the carrying amount of equity. The 2026 environment places this last indicator under particular pressure: several mid-caps listed on Euronext Growth show structural discounts, which forces an impairment test at the listed group level itself.

Internal indicators — performance, restructuring, obsolescence#

Internal indicators include obsolescence or physical damage to an asset, intent to dispose or restructure affecting the asset, and — the most frequent in practice — economic performance below the business plan used in the previous year's test. A gap of more than 15% between budgeted EBITDA N-1 and actual N is a red flag that auditors will systematically identify, in line with the budget-based steering we describe in our article on accounting, audit and steering.

Independent cash inflow criterion#

The test can be conducted at the level of the individual asset or, failing that, at the level of the CGU (Cash Generating Unit). A CGU is defined in paragraph 68 of IAS 36 as the smallest identifiable group of assets that generates cash inflows largely independent of the cash inflows generated by other assets or groups of assets. A single-activity industrial site is an obvious CGU. A brand distributed through a network shared with other brands requires a finer analysis of cash-flow independence.

Allocation of goodwill to CGUs#

Goodwill, which cannot be tested on its own, must be allocated at the acquisition date to the CGUs or groups of CGUs expected to benefit from the synergies of the business combination. This allocation is permanent unless an internal restructuring occurs and must be traceable. A common error consists of allocating goodwill to a group of CGUs that is too broad, which dilutes the test and masks the effective impairment of a single activity. Conversely, an overly narrow CGU may lead to successive impairment losses that a group-of-CGUs approach would have absorbed through internal synergies.

Lowest level of management monitoring#

IAS 36 caps the allocation level: goodwill must be allocated at the lowest level at which it is monitored for internal management purposes, and this level cannot be higher than an operating segment as defined by IFRS 8 before aggregation. Concretely, if management reporting is organised by business line, goodwill must be tracked by business line. If the management view is geographic (Paris / Europe / international), goodwill is split accordingly.

MAX(fair value less costs of disposal ; value in use) formula#

Paragraph 18 of IAS 36 defines the recoverable amount as the higher of fair value less costs of disposal and value in use. If one of the two values already exceeds the carrying amount, the calculation procedure can stop immediately: no impairment loss is recognised, and there is no need to calculate the second value. This rule saves audit time on clearly non-impaired assets. In 2026 practice, when market multiples are depressed, value in use more often rescues an asset than fair value.

Fair value under IFRS 13 — market, cost and income approaches#

Fair value less costs of disposal is measured under IFRS 13 Fair Value Measurement. Three approaches are admitted: the market approach (observable transactions on comparable assets or entities, sector multiples), the cost approach (replacement cost less economic depreciation), and the income approach (short-term DCF with market — not management — assumptions). Costs of disposal include broker commissions, legal fees, transfer taxes, and demolition or relocation costs directly attributable to the disposal.

Value in use through a discounted DCF#

Value in use is the present value of future cash flows expected from the continued use of the asset or CGU and from its ultimate disposal. It is obtained by discounting at a rate reflecting the time value of money and the risks specific to the asset. The dominant method in practice is the Discounted Cash Flow (DCF), split into two blocks: an explicit period with detailed projections, and a terminal value. The methodological detail is set out in the next section.

Explicit period ≤ 5 years and growth rate ≤ long-term average#

Paragraphs 30 to 57 of IAS 36 strictly frame the construction of cash flows. The explicit period is capped at 5 years, save for justification of longer visibility (concessions, long-term contracts), it relies on the most recent budgets and business plans approved by management, and the growth rate used beyond the first year must be justified by reference to historical and sector rates. The standard prohibits arbitrary extrapolation: if management budget N+1 assumes +12% growth but the long-term sector average is +3%, the DCF must use the budget for N+1 and then gradually converge towards the sector average.

Terminal value and the Gordon-Shapiro model#

The terminal value captures cash flows beyond the explicit period. Practice relies almost universally on the Gordon-Shapiro model: TV = normalised FCF / (WACC − g), where g is the perpetual growth rate. IAS 36 requires that g does not exceed the long-term average growth rate of the economy or sector, save for rigorous justification. For 2026, retaining g > 2% in the euro zone exposes the test to an immediate audit comment. Terminal value frequently represents 60 to 80% of total value in use, which makes it the most sensitive assumption in the model.

WACC and asset-specific risk premiums#

The discount rate is defined as a pre-tax rate reflecting the time value of money and the risks specific to the asset. In practice, the starting point is the post-tax weighted average cost of capital (WACC) of the company or sector, then converted to a pre-tax equivalent and adjusted for risks specific to the CGU being tested (country risk, size premium, sector risk premium, asset-specific risk premium). With a risk-free rate (French OAT 10-year) stabilised around 3.2% at the start of 2026 and an equity market risk premium in the order of 7%, the WACCs applied to Paris-based mid-caps typically range between 9% and 13% depending on leverage and sector. A 100-basis-point variation in WACC can shift a CGU from a comfortable recoverable amount to a significant impairment loss — hence the importance of the sensitivity analysis.

Priority allocation to goodwill#

When the recoverable amount of a CGU containing goodwill is below its carrying amount, the impairment loss is allocated according to a cascade set out in paragraphs 104 and 105 of IAS 36: first to the goodwill allocated to the CGU until exhausted, and only then to the other assets of the CGU on a pro-rata basis of their carrying amount.

Pro-rata allocation to other CGU assets#

The allocation to other assets respects a strict floor: no asset can be reduced below the highest of its fair value less costs of disposal, its value in use if determinable, and zero. The portion of the loss that cannot be allocated to an asset protected by this floor is reallocated to the other assets of the CGU. This mechanism preserves the value of assets that can be valued individually (real estate, generic equipment) by concentrating the loss on corporate or less identifiable intangible assets.

Recognition in profit or loss#

The impairment loss is recognised immediately as an expense in profit or loss (paragraph 60), unless the asset concerned is carried at a revalued amount under IAS 16 with a revaluation surplus in OCI: in that case, the loss first eliminates the OCI surplus before any pass-through to profit or loss. From a French tax perspective, IFRS impairments on goodwill are not deductible, which creates a deferred tax liability at the initial recognition of goodwill and a mechanical reversal at impairment.

Reversal possible for other assets#

Paragraphs 109 to 116 of IAS 36 authorise the reversal of an impairment loss previously recognised on an asset other than goodwill, when the indicators that led to the impairment disappear or reverse. The reversal is assessed asset by asset and requires a fresh estimate of the recoverable amount.

Cap of the hypothetical carrying amount#

Paragraph 117 caps the reversal: the asset's value after reversal cannot exceed the carrying amount (net of normal amortisation or depreciation) that would have been determined had no impairment loss ever been recognised. This rule prevents the reversal from turning a past impairment into a disguised revaluation.

Strict prohibition on goodwill reversal#

Paragraph 124 of IAS 36 is unambiguous: an impairment loss recognised on goodwill can never be reversed. The rationale lies in the nature of goodwill: any apparent reversal would economically correspond to internally generated goodwill, whose recognition is prohibited by IAS 38. This is one of the main asymmetries of IAS 36 and a recurring topic in doctrinal reviews. The IASB published in November 2023 its decision not to reintroduce systematic amortisation of goodwill (Goodwill and Impairment project), but the subject has been reopened in the 2025-2027 work plan: the exact doctrinal status as at 12 May 2026 should be checked against the latest IASB Update.

CGU description, key assumptions, sensitivity#

Paragraphs 126 to 137 of IAS 36 set out the disclosure requirements: total impairment losses and reversals recognised in the period, events that led to recognition, description of each CGU containing significant goodwill (activity, allocation, carrying amount), method used to determine the recoverable amount, key assumptions on which the test relies (projected growth rate, discount rate, explicit period, terminal value), and a sensitivity analysis showing the reasonably possible change in key assumptions and its impact on the recoverable amount.

Auditor role under NEP 540 and H2A#

The statutory auditor intervenes on the impairment test under the professional standard NEP 540 Audit of accounting estimates and related disclosures, published by H2A (France's High Audit Authority, formerly H3C since 2024). NEP 540 requires the auditor to identify material misstatement risks linked to the estimate, assess the reasonableness of management's assumptions, and test the consistency of the preparation process. In practice, the auditor frequently mobilises an independent expert (valuation specialist) to challenge the WACC and terminal value.

Most closely watched audit risk area#

The impairment test systematically features in the Key Audit Matters (KAM) published by auditors of listed mid-caps: according to the annual reviews published by H2A, more than 70% of audit reports on listed entities include a KAM on goodwill or intangible impairment. Contemporary documentation — a time-stamped DCF model, piece-by-piece justification of the WACC, validation of the CGU granularity in a dedicated memo — has become an unavoidable defence standard.

CGU identification and data gathering#

A Paris-based mid-cap acquires in April 2024 a cyber-security company for €8M, generating a goodwill of €5M after allocation of the purchase price to identifiable assets (technology €2M, customer relationship €1M). The "cyber activity" CGU is defined: it includes the acquired entity and the dedicated sales team, monitored in a separate analytical P&L. CGU carrying amount at 31 December 2025: €5.5M (€5M goodwill + €0.3M residual technology after amortisation + €0.2M other net assets). Impairment indicator identified: the 2025 commercial pipeline delivered 60% of the initial budget.

DCF calculation and comparable fair value#

The DCF is rebuilt over five years from a revised business plan: net operating cash flows discounted at 11% (WACC adjusted for commercial deterioration risk) over 2026-2030, terminal value computed with a perpetual growth rate of 2%. Result: value in use €4.2M. In parallel, the valuation by cyber-sector multiples (EV/sales 2.5x on 2025 revenue of €1.5M) gives a fair value less costs of disposal of €3.8M. Recoverable amount = max(€4.2M ; €3.8M) = €4.2M.

Recognition and P&L impact#

Comparison: CGU carrying amount €5.5M > recoverable amount €4.2M → impairment loss of €1.3M. Allocation cascade: the €1.3M is fully allocated to goodwill (€5M → €3.7M after impairment), the other CGU assets remain at their carrying amount. P&L impact 2025: €1.3M charge in "goodwill impairment", non-deductible for tax purposes, and mechanical reversal of the deferred tax liability. Disclosures: CGU description, key assumptions (WACC 11%, g 2%), sensitivity (+100 bp WACC → an additional €0.9M loss).

The trade-off to arbitrate — who runs the test (internal, external, mixed)#

In the engagements we handle in Paris, three patterns coexist. Fully internal model: the finance department builds the DCF, the auditor challenges downstream. This works for groups with a senior controlling team and a dedicated valuation manager. Fully external model: an independent valuer produces the test against a brief. This option provides security but sometimes disempowers management, which can lose grip on the assumptions. Mixed model: the CFO builds the model, an external valuer reviews the WACC and terminal value during pre-audit, which reduces the risk of disagreement with the auditor. Our outsourced CFO service most often operates in mixed mode for mid-caps in the €20-100M revenue range.

The underestimated risk — overly broad CGU masking real impairment#