An impairment analysis involves ‘testing’ goodwill to ensure that it is not overstated. If so, it is necessary to decrease, or impair, the goodwill on the balance sheet to reflect the decrease in value. This is called impairment.According to the International Financial Reporting Standard (IFRS), goodwill should be tested for impairment annually. The test compares the book value of the CGU, including goodwill, with the so-called fair value. Fair value is usually determined by carrying out a DCF valuation and a multiple valuation method for the CGU. If the fair value is below the book value, an impairment is carried out.
First, we determine the value of a CGU or group of CGUs, and so the market value of the goodwill. There are two ways to determine the value:
Through internal analysis (DCF, based on anticipated cash flows);
Through external analysis (recent transactions, market multiples).
The lowest of these two values, the so-called recoverable amount, is then compared to the balance sheet value of the acquired goodwill. If the carrying value recorded on the balance sheet is higher than the market value, goodwill impairment needs to be performed.
We can relieve you of the burden of conducting an annual impairment test on goodwill. Or you can call on us when you see that your goodwill value has decreased below the carrying value recorded on your balance sheet. We can also provide support in discussions with accountants about the potential need for goodwill impairment and the amount of impairment loss.
Wingman uses a financial calculation model which provides insight into the need for goodwill impairment and which calculates the amount of impairment loss. As this model is flexible and transparent, it can be reused to carry out new impairment tests, for example at the end of each year.Our model also shows which principles have led to the calculated impairment and it studies the sensitivity for changes to these principles.