What is Impairment Testing of Goodwill & Assets, and How Does Valuation Help?

 Impairment tests are important for companies to conduct every year or whenever an event leads to a decline in the fair market value of a goodwill asset.

Before we dive into impairment testing of goodwill and the role of business valuation in this, let us look at what a goodwill asset is in a company and how valuing goodwill impacts the overall worth of a company.

What Are Goodwill Assets?

Goodwill in business is an asset that cannot be quantified physically. It cannot be monetized or priced individually. Goodwill can be understood from customer loyalty, brand reputation, research and development of an organization, public trust, the experience of its management team, etc.

What Is Impairment Of Goodwill And Assets?

Goodwill impairment is an accounting charge recorded by the company when the carrying value of the goodwill on financial statements exceeds its fair value. Goodwill is recorded when a company acquires certain assets and liabilities but pays the price in excess of their identifiable net value.

What Is The Legal Scope For Impairment Of Goodwill Assets?

In India, according to the Indian Accounting Standards, the Impairment of Assets is covered under Ind-AS 36. Unlike the Indian GAAP, under which companies seldom perform impairment testing, Ind-AS 36 is more relevant and widespread.

Let us look at the applicability of the impairment of assets, the requirements and methodologies required to apply Ind AS 36, and how a professional service can help you with business valuation and impairment assessment of goodwill assets.

What is The Applicability Of Impairment Of Assets?

The Ind-AS 36 has to be applied while accounting for the impairment of all assets. This is done in all cases except when it is specifically excluded. The assets that come under the purview of Ind AS 36 are:

• Joint ventures, associates, and investments in subsidiaries.
• Plant, property, and all the equipment within
• Goodwill assets as well as intangible assets.

A cash-generating unit approach or CGU is applied to assess the impairment of tangible or intangible assets. In this approach, the recoverable amount is assessed for each CGU and compared with the carrying amount of the CGU. It is then drilled down to asset level.

Also Read, Goodwill and its role as a intangible assets driving Business value

Indicators of Impairment as Per Ind AS 36

One can look for certain indicators to assess whether an asset is impaired. These may include:

• Physical damage of an asset or obsolescence.
• An asset under-performing compared to its expectations
• If the asset is reassessed as having a finite life rather than an infinite life.
• Changes in regulation concerning the asset
• The technological, legal, or economic environment being affected adversely
• Increase in market interest rates

To determine the asset's condition, the following must be conducted annually. This is necessary even if there is no indication of impairment.

• Intangible assets with indefinite useful lives and intangible assets not yet available for use must be tested for impairment
• When a business acquisition or merger occurs, there must be an impairment testing of the goodwill and/or intangible assets.

What is the Methodology to Test Impairment?

There are several techniques employed to test the impairment of an asset. They are

• Estimating Recoverable Amount (RA)
• Comparing Recoverable Amount (RA) and Carrying Amount (CA)
• Recognizing Impairment Loss

How Can RNC Help with Business Valuation in Impairment Testing?

Businesses undergoing a merger or acquisition must consider goodwill and asset impairment testing. Business valuation experts can help accurately derive the value of goodwill and other intangible assets. This is key to determining the correct market worth of a business, which helps to negotiate a fair price when selling or purchasing an asset.

To get unbiased, reliable, and accurate business valuation and impairment testing, reach out to RNC, India's best business valuation firm.

Also Read, Top 8 Situations where business valuation is needed