Impairment of intangibles under Ind AS 36 is one of the most judgment-heavy areas in financial reporting — and one of the most commonly challenged in audit and NFRA review. Intangible assets and goodwill now form a material share of balance sheets, both in India and globally. This article sets out the technical requirements and the points that most often go wrong in practice.
When does an intangible asset or goodwill need to be tested for impairment under Ind AS 36, and how is the loss measured?
Goodwill and indefinite-life intangibles (Intangible asset – Omnifin) must be tested annually, regardless of any trigger. Finite-life intangibles are tested only when an impairment indicator exists. Recoverable amount is then the higher of Fair Value Less Costs of Disposal and Value in Use, and the CGU structure used to test goodwill — along with the discount rate, terminal growth assumption, and sensitivity disclosures — is where most audit and regulatory challenges arise. The detail below covers each of these in turn.
Two Testing Regimes, Not One
- Finite-life intangibles (technology, customer contracts, most software) are tested only on a trigger — an indicator of impairment under Ind AS 36, para 12. External indicators include market value decline, adverse changes in technology, markets, economy or law, rising discount rates. Internal indicators include obsolescence, physical damage, restructuring, underperformance versus budget.
- Goodwill and indefinite-life intangibles are tested annually, irrespective of any trigger, at the same time each year. This is mandatory, not discretionary. Getting a registered valuer to test the assets for impairment is the gold standard in governance. Companies that acquired goodwill via a scheme of arrangement frequently miss this — the testing clock starts at acquisition, not at the next convenient year-end. Separately, Ind AS 38 requires the indefinite-life classification itself to be reassessed every period. An asset carried as indefinite-life for several years without a fresh look at whether that classification still holds is a control gap, independent of the impairment number.
CGU Identification — Where Most Disputes Originate
Goodwill has no standalone cash flows and must be allocated to cash-generating units (or groups of CGUs) expected to benefit from the synergies of the acquisition, completed by the end of the acquisition year.
Key requirements:
- CGU boundaries should reflect the lowest level at which goodwill is monitored internally — typically aligned to operating segments, not drawn arbitrarily wide to dilute an underperforming unit’s losses into a healthier one. This is an active area of NFRA inspection focus.
- Business reorganisations require goodwill reallocation across the new CGU structure using a relative value approach — frequently missed in group restructurings executed mid-year.
- CGU structure should be revisited each testing cycle, not mechanically rolled forward from the prior year’s model.
Recoverable Amount: FVLCD vs Value in Use
Recoverable amount is the higher of Fair Value Less Costs of Disposal (FVLCD) and Value in Use (VIU). Practical issues:
Discount rate. VIU requires a pre-tax rate reflecting current market assessment of time value of money and risks specific to the CGU — not the entity’s blended WACC applied without adjustment. A CGU concentrated around a single customer-relationship intangible does not carry the same risk profile as the consolidated group, and the rate should say so, with documented justification.
Terminal cash flows. Projections beyond five years should use a steady-state or declining growth rate not exceeding the long-term average growth rate for the product, industry or country, unless a longer explicit period is justified (Ind AS 36, para 35). A terminal growth assumption above long-run nominal GDP, applied without justification, is one of the first things flagged on review.
Source of cash flows. VIU must be built on the most recent board-approved budget. Impairment models that don’t reconcile to the actual board-approved numbers create an avoidable audit finding.
Methodology by Intangible Category
Category | Common methodology | Key risk |
Brands / trademarks | Relief-from-royalty | Royalty rate benchmarking against truly comparable licences |
Customer relationships / contracts | Multi-Period Excess Earnings Method (MEEM) | Contributory asset charges — avoid double-counting returns on working capital, fixed assets, workforce |
Technology / software / IP | Relief-from-royalty or cost approach | Choice of method should match whether an active licensing market exists |
In-process R&D | Probability-weighted scenario analysis | Risk should be reflected in cash flow probabilities, not buried in the discount rate |
PPA methodology at acquisition should inform, not mechanically dictate, the impairment methodology used in subsequent years. Royalty benchmarks and comparable transactions move; a model rolled forward unchanged is a model whose inputs are aging out of relevance.
Disclosure: Para 134 Is Not Optional
For each CGU containing goodwill or indefinite-life intangibles that is material to the entity, Ind AS 36 para 134 requires disclosure of key assumptions (growth rate, discount rate, margin). Para 134(f) requires disclosure of headroom and sensitivity where a reasonably possible change in a key assumption would push carrying value past recoverable amount.
A model with a single point estimate and no documented break-even discount rate or break-even growth rate is not audit-ready — regardless of whether the underlying conclusion is correct.
Four Questions Before Year-End Close
- Has the CGU structure been revisited this year, or carried forward unchanged?
- Does the discount rate documentation tie to the specific risk of the CGU, not the entity’s blended WACC?
- Is there a documented sensitivity/headroom analysis for every CGU where recoverable amount is close to carrying value?
- For indefinite-life intangibles, has the classification itself been reassessed this year — separately from the impairment test?
These four questions cover the bulk of what tends to surface in audit committee review and regulatory inspection.
Frequently Asked Questions
When must goodwill be tested for impairment under Ind AS 36? Annually, at the same time each year, regardless of whether any impairment indicator exists. Finite-life intangibles, by contrast, are tested only when a trigger event occurs.
What is the difference between FVLCD and Value in Use? FVLCD (Fair Value Less Costs of Disposal) estimates what the asset would fetch in a sale, net of disposal costs. VIU is the present value of future cash flows from continued use, discounted at a rate specific to the asset’s risk. Recoverable amount is the higher of the two.
How is goodwill allocated to cash-generating units? Goodwill has no independent cash flows, so it is allocated to the CGU or group of CGUs expected to benefit from the acquisition’s synergies — completed by the end of the acquisition year, and aligned to how goodwill is monitored internally, typically the operating segment level.
What discount rate should be used for impairment testing of intangibles? A pre-tax rate reflecting risks specific to the CGU being tested — not the entity’s blended WACC applied without adjustment.
What sensitivity disclosures does Ind AS 36 require? Para 134 requires disclosure of key assumptions (growth rate, discount rate, margin) for each material CGU with goodwill or indefinite-life intangibles. Para 134(f) requires disclosure of headroom where a reasonably possible change in an assumption would breach recoverable amount.
At Omnifin, impairment testing and PPA work for goodwill and intangibles is a core part of our valuation practice — building models built to withstand scrutiny on first review, not just produce a number.
Dr. Vikash Goel 
FCA, PhD, MBA, MS Finance, is Managing Partner at Omnifin.