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

An IAS 36 impairment test compares the carrying amount of an asset or CGU with its recoverable amount, the higher of fair value less costs of disposal and discounted value in use. It is mandatory every year for goodwill and indefinite-life intangibles, and it applies to IFRS consolidated accounts. Any goodwill impairment loss is permanent.

Updated 26 July 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, contract assets under IFRS 15, employee benefit assets under IAS 19, non-current assets held for sale under IFRS 5, and assets within the scope of IFRS 17 on insurance contracts. The IAS 40 and IAS 41 exclusions only cover assets measured at fair value: those still carried at cost remain within the scope of IAS 36 (paragraphs 2, 4 and 5).

An impairment test assumes the asset stays on the balance sheet: it records a loss of value, it does not take the item out. Where a fixed asset is permanently out of use and will render no further service, what has to be recorded is no longer an impairment but a final derecognition: the accounting treatment of an asset write-off sets out the entries and the expense account.

Difference with French GAAP (articles 214-5 to 214-19 of ANC Regulation 2014-03)#

A first framing point, often misunderstood: IAS 36 does not apply to the annual (statutory) accounts of a French company. Regulation (EC) No. 1606/2002 reserves IFRS for consolidated accounts, mandatory for companies whose securities are admitted to trading on a regulated market of the Union (article 4), other cases falling under an option left to Member States (article 5). Annual accounts remain prepared under French GAAP, which applies to any person required to prepare annual accounts (PCG, article 111-1). French GAAP has its own impairment mechanism, codified in articles 214-5 (definition), 214-6 (current value, market value, value in use), 214-15 and 214-16 (trigger and indicators), 214-17 (recognition) and 214-19 (reversals) 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, which is conceptually equivalent to the IAS 36 recoverable amount. Contrary to a widespread belief, French GAAP contains no 10-year amortisation cap. The PCG presumes that goodwill (fonds commercial) has an indefinite useful life, in which case it is not amortised (article 214-3). That presumption is rebutted only where the useful life is limited, and amortisation is then spread over that life or, if it cannot be reliably determined, over 10 years. Small entities within the meaning of article L. 123-16 of the Commercial Code may, in their individual accounts, amortise all their goodwill over 10 years. Where the useful life is indefinite, French GAAP also requires a test at least once per financial year, whether or not an impairment indicator exists (article 214-15), and also prohibits any reversal of goodwill impairment (article 214-19). The same regime applies to consolidation goodwill in French consolidated accounts (ANC Regulation 2020-01, article 231-11). The real divergence with IFRS is therefore neither the annual test nor irreversibility, but the very existence of amortisation where the useful life is limited: under IFRS, goodwill is never amortised. 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).

IFRS and French GAAP: what really diverges on goodwill#

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: paragraph 10(a) sets this out for intangibles, paragraph 96 for the CGU carrying the goodwill. 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 carrying amount of net assets exceeding market capitalisation (IAS 36, paragraph 12(a) to (d)). On this last indicator the standard sets no duration condition: the word "durably", widespread in practice, does not appear in paragraph 12(d). As soon as market capitalisation falls below book equity at a reporting date, the indicator is triggered and the test must be run on the relevant perimeter.

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 (IAS 36, paragraphs 12(e) to (g) and 14). Note that the standard sets no numerical threshold for the budget-to-actual gap. A significant and recurring gap between budgeted EBITDA N-1 and actual N is enough to trigger the indicator, the assessment remaining qualitative and documented, 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 6 of IAS 36, in the Definitions section, 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. Paragraph 68, very often cited in its place, is only application guidance: it opens with "As defined in paragraph 6". 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 from the acquisition date to the CGUs or groups of CGUs expected to benefit from the synergies of the business combination (IAS 36, paragraph 80). Paragraph 84 allows a window: the allocation may be completed before the end of the first annual period beginning after the acquisition date. It is then permanent, unless a reorganisation of the reporting structure changes the composition of the CGUs (paragraph 87), and it 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 (the French version adopted in the Union uses "coûts de sortie", which practitioners often render as "coûts de cession"). 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 built on market assumptions rather than management assumptions). Costs of disposal are listed in paragraph 28 of IAS 36: legal costs, stamp duty and similar transaction taxes, costs of removing the asset, and direct incremental costs incurred to bring the asset into condition for sale. The same paragraph expressly excludes termination benefits as defined in IAS 19 and costs associated with reducing or reorganising a business following the disposal of the asset: in audit, it is the exclusion rather than the list that generates adjustments.

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 those cash flows must exclude the effects of a future restructuring to which the entity is not yet committed as well as those of improving or enhancing the asset's performance (paragraph 33(b)). The growth rate framed by the standard is not the one applied "beyond the first year" but the one applied beyond the period covered by those budgets, that is five years at most: it must be steady or declining unless an increasing rate is justified, and it must not exceed the long-term average growth rate for the products, industries, or country or countries in which the entity operates (paragraph 33(c)). The standard prohibits arbitrary extrapolation: beyond the period covered by the approved budgets, the rate applied must be steady or declining and capped at the documented long-term average growth rate for the products, industry or country. A budget assuming +12% growth therefore cannot serve as the extrapolation basis where the documented long-term industry growth is +3%.

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 for the products, industries, or country or countries in which the entity operates, save for rigorous justification (paragraph 33(c)). The standard sets no universal numerical cap: a given g is neither inherently right nor wrong, it is either defensible or not against the documented long-term growth rate of the industry and country retained. Because terminal value weighs heavily in value in use, it is the assumption whose source, and not only whose value, must be justified in writing.

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). The anchor point has shifted. According to the European Central Bank series for the French long-term interest rate (10-year maturity), the monthly average moved from 3.53% in January 2026 to 3.68% in June 2026, giving a 3.62% average over the first half of 2026. A value-in-use model still built on a 2% or 3% risk-free rate therefore under-discounts the cash flows and mechanically overstates the recoverable amount: this is now the statutory auditor's first checkpoint. A 100-basis-point variation in the discount rate can shift a CGU from a comfortable recoverable amount to a significant impairment loss: hence the importance of the sensitivity analysis.

The six DCF checkpoints, and the error that goes with each#

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. Two points are frequently reversed on the tax side. First, IAS 12 expressly prohibits recognising a deferred tax liability arising from the initial recognition of goodwill (paragraph 15(a)): there is therefore neither a deferred tax liability at inception nor any reversal of deferred tax when goodwill is impaired. Second, the French corporate income tax base is built from the individual accounts prepared under French GAAP (PCG, article 111-1), not from IFRS consolidated accounts: an impairment of consolidation goodwill has no direct effect on corporate income tax. A deferred tax liability does arise, on purchase price allocation, on identified intangible assets (technology, customer relationships) that cannot be amortised for tax purposes: that temporary difference falls under the general rule of paragraph 15, not under exception (a).

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 doctrinal status is settled and has not moved. On 24 November 2022 the IASB voted to retain the impairment-only model, that is, not to reintroduce systematic amortisation of goodwill. It then published, in March 2024, the exposure draft Business Combinations: Disclosures, Goodwill and Impairment, which proposes amendments to IFRS 3 and IAS 36 on disclosures, not a return to amortisation. The project is at the redeliberation stage, the latest session referenced on the IFRS Foundation project page being that of 20 May 2026. As at 26 July 2026, goodwill amortisation has not been reintroduced under IFRS.

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, conditionally, a sensitivity analysis. That last disclosure is not unconditional: paragraph 134(f) requires it only if a reasonably possible change in a key assumption would cause the unit's carrying amount to exceed its recoverable amount. Only in that case does the entity disclose the excess of the recoverable amount over the carrying amount, the value assigned to the key assumption, and the amount of change that would equalise the two.

Auditor role under NEP 540 and H2A#

The statutory auditor intervenes on the impairment test under French professional standard NEP 540, L'audit des estimations comptables et des informations y afférentes fournies dans l'annexe (the audit of accounting estimates and related disclosures in the notes). A point of vocabulary that matters: a NEP is not "published" by the regulator. The revised NEP 540 was approved by order of the Minister of Justice dated 24 August 2021 (Journal officiel of 31 August 2021), replacing the standard approved by the order of 10 April 2007. H2A, the Haute Autorité de l'audit, is the regulator of French statutory auditors that adopts and proposes the standards; approval itself is a ministerial order. 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 is one of the topics that recur most often in the Key Audit Matters (KAM) published by auditors of listed entities, precisely because it concentrates high-judgement estimates. Contemporary documentation (a time-stamped DCF model, piece-by-piece justification of the discount rate, validation of the CGU granularity in a dedicated memo) has become an unavoidable defence standard.

CGU identification and data gathering#

This example is a teaching illustration built for demonstration purposes: it does not describe any actual engagement. Suppose a Paris-based mid-cap had acquired a cyber-security company in April 2024 for €8M, generating goodwill of €5M after allocating the purchase price to identifiable assets (technology €2M amortised over 5 years, customer relationships €1M amortised over 8 years). The "cyber activity" CGU includes the acquired entity and the dedicated sales team, monitored in a separate analytical P&L. CGU carrying amount at 31 December 2025, after 21 months of amortisation: €7.4M (€5M goodwill + €1.3M residual technology + €0.8M residual customer relationships + €0.3M other net assets, rounded). Impairment indicator identified: the 2025 commercial pipeline delivered only 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% pre-tax over 2026-2030, terminal value computed with a perpetual growth rate of 2% justified by the documented long-term growth of the industry and country. Result: value in use €4.2M. In parallel, valuation by sector multiples (EV/sales 2.5x on 2025 revenue of €1.6M) gives an enterprise value of €4.0M, from which estimated costs of disposal of €0.2M must still be deducted, giving 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 €7.4M against recoverable amount €4.2M, giving an impairment loss of €3.2M. Allocation cascade: the €3.2M is allocated in full to goodwill, which falls from €5M to €1.8M, without reaching the other CGU assets. Impact on the 2025 result: a €3.2M charge for goodwill impairment. That charge has no direct effect on French corporate income tax, which is assessed on the individual accounts, and gives rise to no reversal of deferred tax liability on goodwill (IAS 12, paragraph 15(a)). Disclosures: CGU description, key assumptions (pre-tax discount rate 11%, g 2%), and the sensitivity disclosure if a reasonably possible change in a key assumption would push the carrying amount above the recoverable amount.

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#

The questions that come up most often#