Financial Reporting · Impairment of assets

Impairment of Goodwill and Reversal of Impairment Losses under IAS 36

Updated 11 October 2026 · Fact-checked

Goodwill must be tested for impairment every year under IAS 36, because it has an indefinite life. Any loss hits goodwill first. A goodwill impairment loss can never be reversed. Losses on other assets can be reversed if estimates change, but only up to the carrying amount the asset would have had without the loss.

Understand Impairment of Goodwill and Reversal of Impairment Losses

Goodwill is not amortised. It is tested for impairment at least annually, and also whenever there is an indication of impairment. Goodwill produces no cash flows on its own, so it is tested as part of the cash-generating unit (CGU) it belongs to, or the group of CGUs expected to benefit from the acquisition.

The test compares the carrying amount of the CGU, including goodwill, with its recoverable amount. Recoverable amount is the higher of fair value less costs of disposal and value in use. If the carrying amount is higher, the CGU is impaired. The loss is first applied to reduce goodwill to zero. Any remainder is spread over the other assets of the unit pro rata to their carrying amounts. No asset may be reduced below the highest of its fair value less costs of disposal, its value in use (if determinable) and zero.

In consolidated statements, if the non-controlling interest (NCI) is measured at fair value, goodwill already includes the NCI share, so the full goodwill is tested. If NCI is measured at the proportionate share of net assets, goodwill recognised is only the parent's part. You must gross it up to include notional NCI goodwill before testing. The loss is then shared between the parent and the NCI in proportion to their shares of the goodwill, usually the profit-sharing ratio. Only the part relating to the parent's recognised goodwill is actually booked.

Reversal: at each reporting date you assess whether an impairment loss on an asset other than goodwill may no longer exist or may have decreased. If the estimates used to find recoverable amount have changed, you reverse the loss. The reversal is capped so the asset's carrying amount does not exceed what it would have been, net of depreciation, had no loss ever been recognised. Goodwill is never reversed, because any increase would be internally generated goodwill, which IAS 38 does not allow to be recognised.

A reversal goes to profit or loss. If the asset is held at a revalued amount and the earlier loss went to profit or loss, the reversal goes to profit or loss. If the earlier loss was charged against a revaluation surplus, the reversal is treated as a revaluation increase in other comprehensive income. After a reversal, the depreciation charge is adjusted to spread the new carrying amount over the remaining life.

Key rules to remember

Recoverable amount: Recoverable amount = higher of (fair value less costs of disposal, value in use); If either figure is above carrying amount, there is no impairment, so you need not find the other.
Impairment loss: Impairment loss = carrying amount − recoverable amount (if positive); For a CGU, the carrying amount includes allocated goodwill.
Order of allocating a CGU loss: 1) Goodwill to zero; 2) other assets pro rata to carrying amounts; Do not reduce any asset below its own fair value less costs of disposal, value in use (if known) or zero.
Gross-up of goodwill (proportionate NCI method): Notional goodwill = recognised goodwill ÷ parent's percentage; Used only for the impairment test. Only the parent's share of any loss is recognised.
Reversal cap: Carrying amount after reversal ≤ depreciated historical cost (or depreciated revalued amount) had no loss occurred; Applies to assets other than goodwill.
Goodwill reversal rule: Reversal of goodwill impairment = not permitted; Applies even if the unit recovers fully.

How to solve Impairment of Goodwill and Reversal of Impairment Losses questions

Use this order for any question on goodwill impairment or reversal.

1Identify the CGU and list its carrying amounts: goodwill, then each other asset.
2For the proportionate NCI method, gross up goodwill to include the NCI share. Add it to the CGU's net assets.
3Find the recoverable amount: the higher of fair value less costs of disposal and value in use.
4Compare the total carrying amount with the recoverable amount. If recoverable amount is higher, stop: no loss.
5Allocate the loss: goodwill first, then the other assets pro rata, respecting the floor for each asset.
6In a group, remove any unrecognised notional NCI goodwill from the loss. Split the booked loss between parent and NCI.
7For reversals, work out the carrying amount the asset would have had without the loss. Reverse only up to that cap, and never for goodwill.
8Post the entries: loss or reversal to profit or loss (or to the revaluation surplus where it applies), and adjust future depreciation.

Quickest way: Table method for CGU loss and reversal

When to use it: Use for any Section C question with a CGU, goodwill and several assets, and for reversal questions with a depreciation history.

Draw a small table: asset, carrying amount, loss, new carrying amount.
Total the carrying amounts and subtract recoverable amount to get the loss.
Write the whole loss against goodwill first. If goodwill covers it, you are done.
Spread any excess pro rata, then check each floor.
For reversal, write two numbers: current carrying amount and the capped amount without the loss. The reversal is the difference, if it is less than the estimated recovery.
Mark goodwill as no reversal, in words, to pick up the easy mark.

Common mistakes in Impairment of Goodwill and Reversal of Impairment Losses

Reversing a goodwill impairment loss when the CGU recovers.
Students apply the rule for other assets to every asset.
Fix: Remember goodwill is the one exception. A reversal would create internally generated goodwill, which is not allowed.
Reversing an impairment up to the full recoverable amount or original cost.
The cap is forgotten, and depreciation is ignored.
Fix: Compute the carrying amount the asset would have had with normal depreciation and no loss. The reversed amount cannot take the asset above that.
Spreading a CGU loss over all assets pro rata including goodwill.
Students recall pro rata allocation but not the order.
Fix: Goodwill is written down first. Only the remainder is pro rata across the other assets.
Not grossing up goodwill under the proportionate NCI method.
The recognised goodwill looks like the full amount.
Fix: Divide goodwill by the parent's share to get notional total goodwill, test, then book only the parent's share of the loss.
Reversing a loss and keeping the old depreciation charge.
The reversal is treated as a one-off entry.
Fix: Recalculate depreciation on the new carrying amount over the remaining useful life.
Reducing an asset below its own fair value less costs of disposal when allocating a loss.
Pro rata allocation is applied mechanically.
Fix: Check each asset's floor. Any loss not allocated because of a floor is spread over the other assets pro rata.

Worked examples

Example 1

Alpha acquired 80% of Beta. The NCI is measured at the proportionate share of net assets. Goodwill on acquisition in the consolidated statement of financial position is ₹40,00,000. At the year end, Beta's net assets (excluding goodwill) have a carrying amount of ₹1,60,00,000. The recoverable amount of Beta as a CGU is ₹1,85,00,000. Calculate the impairment loss and how it is shared.

Show the solution

Gross up goodwill: ₹40,00,000 ÷ 80% = ₹50,00,000 notional total goodwill.
Carrying amount of CGU: ₹1,60,00,000 + ₹50,00,000 = ₹2,10,00,000.
Impairment loss: ₹2,10,00,000 − ₹1,85,00,000 = ₹25,00,000.
Allocate to goodwill first. The loss of ₹25,00,000 is less than notional goodwill of ₹50,00,000, so all of it falls on goodwill.
Only the parent's share is recognised: 80% × ₹25,00,000 = ₹20,00,000.
Goodwill after impairment: ₹40,00,000 − ₹20,00,000 = ₹20,00,000.
The ₹5,00,000 NCI share of the loss is not booked because the NCI goodwill was never recognised.

Answer: Total impairment loss ₹25,00,000, of which ₹20,00,000 is recognised against goodwill (charged wholly to the parent's share). Goodwill is carried at ₹20,00,000. No amount is charged to the NCI.

Example 2

On 1 January 20X1, Gamma bought a machine for ₹10,00,000 with a 10-year life and no residual value. Straight-line depreciation is used. At 31 December 20X2 the machine was impaired and written down to its recoverable amount of ₹5,00,000. At 31 December 20X4, the recoverable amount is reassessed at ₹6,50,000 after a favourable change in estimates. Calculate the reversal at 31 December 20X4.

Show the solution

Annual depreciation before impairment: ₹10,00,000 ÷ 10 = ₹1,00,000.
Carrying amount at 31 December 20X2 before impairment: ₹10,00,000 − 2 × ₹1,00,000 = ₹8,00,000.
Impairment loss: ₹8,00,000 − ₹5,00,000 = ₹3,00,000.
Remaining life at 31 December 20X2 is 8 years. New depreciation: ₹5,00,000 ÷ 8 = ₹62,500 a year.
Carrying amount at 31 December 20X4: ₹5,00,000 − 2 × ₹62,500 = ₹3,75,000.
Cap: had there been no impairment, the carrying amount would be ₹10,00,000 − 4 × ₹1,00,000 = ₹6,00,000.
Recoverable amount is ₹6,50,000, which is above the cap, so the cap applies: reversal = ₹6,00,000 − ₹3,75,000 = ₹2,25,000.
Entry: Dr Machine ₹2,25,000, Cr Profit or loss ₹2,25,000. Future depreciation: ₹6,00,000 ÷ 6 = ₹1,00,000 a year.

Answer: The reversal is ₹2,25,000, taking the machine to ₹6,00,000, credited to profit or loss. Depreciation from 20X5 is ₹1,00,000 a year.

Exam tips

In Section C, state the rule in a short sentence before the figures. For example: goodwill impairment is never reversed. This often earns an easy mark.
In objective tests, look for reversal traps: goodwill, the cap based on depreciated historical cost, and revalued assets.
Always show the order of allocation: goodwill first, then pro rata. Markers follow the working, so lay it out in a clear table.
In group questions, check the NCI method before you start. Proportionate share means gross up. Fair value means test the goodwill as given.
Check whether the unit's assets include items with a known fair value less costs of disposal, since their floors limit how far they can be written down.

Practice questions from Impairment of assets

Impairment of Goodwill and Reversal of Impairment Losses in other exams

The same ground in other exams, if you are preparing for more than one or want another angle on it.

Impairment of Goodwill and Reversal of Impairment Losses: frequently asked questions

Can goodwill impairment be reversed under IAS 36?

No. Once goodwill is impaired, the loss stays, even if the CGU later recovers. A reversal would effectively recognise internally generated goodwill, which IAS 38 does not permit.

How often must goodwill be tested for impairment?

At least once a year, at the same time each year, and also whenever there is an indication of impairment. This is because goodwill is not amortised, so a loss can otherwise go unnoticed.

What is the limit on reversing an impairment loss on other assets?

The new carrying amount cannot exceed what it would have been, after depreciation, had no impairment ever been recognised. Within that cap, the reversal is the increase in recoverable amount, subject to the same limit.

Where is a reversal of impairment recognised?

Normally in profit or loss. If the asset is revalued and the earlier loss was taken against the revaluation surplus in other comprehensive income, the reversal is treated as a revaluation increase and goes to other comprehensive income.