Impairment of goodwill and non-financial assets

Goodwill impairment testing is one of the few areas where management's own long-term business plan directly becomes an accounting input, and because the mandatory annual test applies regardless of indicators, skipping it in a 'quiet' year is a compliance failure, not just a conservative choice; the prohibition on reversing goodwill impairment also means an overly pessimistic write-down in one year cannot be corrected later even if performance recovers, making the initial cash-generating-unit allocation and assumption-setting decisions consequential and largely irreversible.

At what level, and to which cash-generating units, has goodwill been allocated, and does that match the level at which it is actually monitored internally? Has the annual impairment test been performed regardless of whether any indicator exists, and have additional indicator-driven tests (branch closures, system replacement, sustained underperformance) also been considered? Are the discount rate and growth assumptions in the value-in-use model cross-checked against external market evidence rather than relying solely on internally generated projections? If an impairment loss arises, is it being allocated first to goodwill and never subsequently reversed in a later period?

1. Identify the cash-generating units (CGUs) to which goodwill was allocated at acquisition, at the lowest level at which goodwill is monitored internally for management purposes.
2. Perform the goodwill impairment test at least annually regardless of whether any impairment indicator exists, and additionally whenever an indicator arises (branch closures, system replacement decisions, adverse regulatory change, sustained CGU underperformance).
3. Determine the recoverable amount of each CGU as the higher of fair value less costs of disposal and value in use.
4. Compare the recoverable amount to the CGU's carrying amount, including allocated goodwill and other assets/liabilities.
5. If recoverable amount is below carrying amount, allocate the impairment loss first to goodwill, then pro rata to other assets in the CGU (not below their individual recoverable amounts where determinable).
6. Never reverse a previously recognized goodwill impairment loss in a later period, even if the CGU's performance recovers.

Determine value in use using discounted cash flow projections based on reasonable and supportable assumptions consistent with the bank's board-approved business plans (typically a maximum 5-year explicit forecast period plus a terminal value), discounted at a pre-tax rate reflecting current market assessments of the time value of money and risks specific to the CGU. Cross-check the discount rate and growth assumptions against external market evidence (peer bank valuations, analyst reports) rather than relying solely on internally generated figures, and ensure the terminal growth rate does not exceed the long-term expected growth rate of the market in which the CGU operates.

Disclose: (1) the carrying amount of goodwill allocated to each significant CGU (or group of CGUs); (2) the basis on which recoverable amount was determined (fair value less costs of disposal or value in use); (3) key assumptions used (discount rate, terminal growth rate, forecast period, margin assumptions) and management's approach to determining their values; (4) sensitivity of the recoverable amount conclusion to reasonably possible changes in key assumptions, particularly where headroom is limited; (5) the amount and CGU allocation of any impairment loss recognized during the period.

• Failing to perform the mandatory annual goodwill impairment test because '
• nothing has changed'
• , treating the annual requirement as indicator-dependent
• allocating goodwill to overly broad cash-generating units that mask impairment in an underperforming component by blending it with stronger ones
• attempting to reverse a previously recognized goodwill impairment loss, which is prohibited even when the CGU'
• s performance clearly recovers
• using unsupportably optimistic cash flow projections that diverge from the board-approved business plan actually used for other purposes
• applying a discount rate that does not reflect the specific risks of the CGU being tested.