Goodwill impairment under Ind-AS 36: the annual ritual most companies fumble

Goodwill on acquired businesses sits on Indian balance sheets at amounts that can run to thousands of crores. The HUL-GSK Consumer merger, the Adani Cement consolidation, the Tata Consumer brand portfolio — each created goodwill that requires annual impairment testing under Indian Accounting Standard 36.

The standard is detailed. The execution often is not. We are brought in mid-year by audit committees who have realized that their goodwill impairment workpapers will not survive the year-end audit. The gaps follow a pattern.

What Ind-AS 36 actually requires

Goodwill is not amortized. It is tested for impairment at least annually, and more often if there are indicators of impairment (Section 12 of Ind-AS 36 lists indicators: market decline, technological change, restructuring, loss of key customers).

The testing unit is the Cash-Generating Unit (CGU). Goodwill is allocated to the CGUs that benefit from the acquisition's synergies, regardless of whether the acquired company's assets are wholly inside one CGU.

For each CGU, the recoverable amount is calculated as the higher of (a) value in use (VIU), and (b) fair value less costs to sell (FVLCTS). If the recoverable amount is below the carrying amount of the CGU (including allocated goodwill), an impairment loss is recognized. The impairment is first applied to goodwill; remaining impairment, if any, is allocated to other assets of the CGU pro-rata.

The four fumbles we see annually

Fumble one: stale CGU definition

A company acquires a target in 2021. At the time, the target was a standalone business with three product lines. By 2025, the business has been integrated into the acquirer's operations. Two of the three product lines are now run together with the acquirer's own legacy products. One has been wound down. A new product line has been added.

The 2025 impairment workpapers still test the CGU as if it were the standalone 2021 acquired entity. The cash flows being projected do not match the actual operations. The carrying amount of the CGU includes only the historical acquired assets, ignoring the new product line.

The CGU definition has to be reassessed annually. When operations are reorganized, the CGUs have to be redrawn and goodwill reallocated. The reallocation is done on a relative-value basis at the date of reorganization. Skipping this step produces an impairment test that does not test anything meaningful.

Fumble two: management projections versus board-approved budget mismatch

Ind-AS 36 requires that the value-in-use cash flow projections be based on the most recent financial budgets or forecasts approved by management. The projections cover a maximum of five years (longer periods require justification), with a terminal-period assumption beyond that.

The fumble: the impairment workpapers use an aggressive growth projection that does not match the budget the board approved three months earlier. The board-approved budget for FY 2026 has revenue of Rs. 1,400 crore. The impairment workpaper uses Rs. 1,650 crore. The gap is not explained.

When the auditor pulls the board minutes and the approved budget package, the mismatch surfaces immediately. The auditor's adjustment is to recalibrate the impairment test using the board-approved numbers, which usually produces a different conclusion — sometimes a different conclusion in the impairment direction.

The fix is alignment: use the board-approved budget as the year-one base, and project forward from there using documented growth assumptions. If management wishes to use different numbers in the impairment workpaper, the rationale has to be explicit and reviewed by the audit committee.

Fumble three: WACC unchanged for three or more years

The discount rate used in value-in-use calculations is the pre-tax rate that reflects current market assessments of the time value of money and risks specific to the asset. Indian risk-free rates (10-year G-Sec yields) have moved meaningfully over the last few years — from sub-6 percent in 2020 to above 7 percent in 2024-25. Equity risk premiums for India have also drifted.

A WACC of 13.5 percent that was computed in 2021 and rolled forward unchanged through 2025 is almost certainly wrong. The risk-free component has moved. The equity beta of comparable companies has moved. The capital structure assumption may have moved with the company's actual debt levels.

Recompute the WACC every year as part of the impairment test. Document the components: the risk-free rate as of the testing date, the equity risk premium reference, the beta sourcing, the cost of debt, the target capital structure. A WACC that has moved 100-200 basis points from the prior year should not surprise anyone. A WACC that has not moved at all in three years will surprise the auditor.

Fumble four: no sensitivity disclosure

Ind-AS 36 paragraph 134 requires specific disclosures when goodwill allocated to a CGU is significant in relation to the total. The disclosures include the discount rate, the growth rate used for extrapolation beyond the projection period, the period over which cash flows are projected, and a sensitivity analysis showing the effect of reasonable changes in key assumptions.

The fumble: the financial statements disclose the goodwill carrying amount and a one-sentence summary saying the impairment test did not result in any impairment. The sensitivity table is absent.

When the recoverable amount and carrying amount are close, the sensitivity disclosure is the only signal to investors that a moderate change in assumptions would tip the test into impairment territory. Auditors are increasingly insisting on it. Companies that have historically skipped the sensitivity disclosure are being asked to include it.

When the impairment trigger gets pulled mid-year

Indicators of impairment listed in paragraph 12 of Ind-AS 36 require an immediate test, not waiting for year-end. The common Indian triggers we see in practice:

Loss of a major customer. A CGU whose revenue is concentrated 20-30 percent in one customer that has just terminated its contract. The impairment test has to be triggered at the date of termination, not at the next annual cycle.

Regulatory or licensing event. A telecom CGU losing a circle, an NBFC losing its license category, a pharma CGU losing exclusivity on a major drug. Each requires an interim test.

Market capitalization below book value. For listed parent entities, when the market cap drops below the carrying amount of net assets, it is an external indicator of impairment. Many Indian listed entities have been in this zone at various times — the test has to be performed, even if the conclusion is that the recoverable amount of CGUs in aggregate still supports the carrying amount.

Strategic restructuring. A decision to wind down or divest a CGU. The test should be performed before the divestiture transaction prices in any expected proceeds.

What good impairment workpapers look like

We have built impairment workpapers for clients across sectors. The ones that survive auditor review have a consistent anatomy.

A CGU definition memo. One page per CGU explaining the cash flow boundaries, the assets and liabilities allocated to each CGU, and the basis for the allocation. This memo is re-read and updated annually.

A cash flow projection schedule. Five years of projected free cash flows tied to the board-approved budget for year one and to documented growth assumptions for years two through five. Terminal value calculated using either a perpetuity growth formula or an exit multiple, with the choice justified.

A WACC derivation. Risk-free rate, equity risk premium, beta, size premium where applicable, cost of debt, capital structure. Each component referenced to its source.

A recoverable amount calculation. Value in use computed as the present value of projected cash flows. Fair value less costs to sell computed only if it is reasonably available and likely to exceed value in use; otherwise, the calculation defaults to value in use only, which is permissible.

A headroom calculation. Carrying amount of CGU including allocated goodwill, recoverable amount, headroom (or shortfall). For CGUs with significant goodwill, the headroom as a percentage of carrying amount is the disclosure metric.

A sensitivity table. Effect on headroom of plus-or-minus 100-200 basis points on discount rate, plus-or-minus 0.5-1 percent on terminal growth, and plus-or-minus 10-20 percent on terminal-period EBITDA margin. Where any reasonable sensitivity flips the conclusion, the disclosure has to be expanded.

The audit-committee-level question

The most useful question an audit committee can ask its management during the impairment workpaper review is: what assumption would have to change, and by how much, for this CGU's recoverable amount to fall below carrying amount?

If the answer is 'the discount rate would have to rise by 300 basis points and revenue growth would have to drop by 8 percentage points,' the headroom is comfortable. If the answer is 'the discount rate would have to rise by 50 basis points or terminal growth would have to drop by 0.5 percent,' the headroom is thin, and the disclosure has to reflect that.

The annual ritual is unavoidable. Getting it right takes about three weeks of work for a multi-CGU company. Most companies allocate three days. The gap between those two numbers is where the auditor's letter lands.