When is goodwill written off or impaired?

Under IFRS, goodwill is recognised when one business acquires another in a business combination. This page uses the IFRS standards, and your statements may follow a different framework. Ask your accountant which one applies to you and how it treats goodwill. The tax treatment is separate again.

Where goodwill comes from

The IFRS Foundation says the core principles in IFRS 3 are that an acquirer in a business combination measures the cost of the acquisition at the fair value of the consideration paid, allocates that cost to the acquired identifiable assets and liabilities on the basis of their fair values, and allocates the rest of the cost to goodwill. Goodwill is what remains of the cost after that allocation.

What impaired means

The IFRS Foundation’s summary of IAS 36 says that if the carrying amount of an asset exceeds its recoverable amount, the asset is described as impaired. The entity must reduce the carrying amount to the recoverable amount and recognise an impairment loss, immediately in profit or loss. Recoverable amount is the higher of fair value less costs to sell and value in use.

How goodwill is tested

The same summary says the recoverable amount of goodwill acquired in a business combination must be assessed each year. Whether goodwill is impaired is judged by looking at the recoverable amount of the cash-generating units to which it is allocated, each being the smallest group of assets that generates independent cash flows. If a unit is impaired, goodwill is reduced first. It also says an impairment loss for goodwill is never reversed, while for other assets the loss is reversed when the circumstances that caused it are favourably resolved.

How tax treats goodwill

The CRA says that starting January 1, 2017, Class 14.1 includes property that is goodwill, and that the existing capital cost allowance rules will normally apply to Class 14.1 property acquired after 2016. That is a depreciable-property regime, which is separate from an accounting impairment. Ask your accountant how the two interact for your business. The seller’s side is covered in how goodwill is taxed when you sell.