Impairment of capitalized software and CGU testing

Loss-making products or declining anchor customers are classic impairment indicators for capitalized development costs, and because SaaS revenue is concentrated in relatively few large customers per product, losing even one or two can flip a module from healthy to impaired; skipping the required test or using unsupportable forecasts delays recognizing a real economic loss.

Are there indicators of impairment for capitalized development already available for use, such as loss of a major customer, declining usage, or falling short of the original business case? For intangibles not yet available for use, has the required annual impairment test been performed regardless of whether specific indicators exist? Is the value-in-use forecast supportable by board-approved cash flow projections and a discount rate reflecting current market assessments, rather than optimistic unapproved figures?

1. At each reporting date, assess whether indicators of impairment exist for capitalized development costs already available for use (e.g., loss of a major customer, declining usage, a competitor launch, or the product falling short of its business case).
2. For any intangible not yet available for use (still in development), test for impairment at least annually regardless of whether indicators exist.
3. Determine the appropriate cash-generating unit (CGU): if the capitalized module does not generate cash inflows independently of other assets or products, test at the level of the smallest group of assets that does generate largely independent cash inflows.
4. Compare the CGU's carrying amount to its recoverable amount (the higher of fair value less costs of disposal and value in use).
5. Recognize an impairment loss immediately in profit or loss for any excess of carrying amount over recoverable amount, allocated first to any goodwill in the CGU, then pro rata to other assets.
6. Reassess at each subsequent reporting date for any indication that a previously recognized impairment loss should be reversed (for assets other than goodwill).

Measure value in use as the present value of future cash flows expected from the CGU's continued use, based on supportable, board-approved forecasts (generally not exceeding five years absent strong justification for longer), discounted at a pre-tax rate reflecting current market assessments of the time value of money and the asset-specific risks. Measure fair value less costs of disposal by reference to observable market data where available (e.g., recent comparable SaaS product sale multiples) net of estimated disposal costs. Use the higher of the two as the recoverable amount, and ensure discount rates are internally consistent with the entity's actual cost of capital rather than an arbitrarily low rate that avoids triggering impairment.

Disclose: (1) the CGU identification and allocation basis for capitalized development costs; (2) key assumptions used in value-in-use calculations (growth rates, discount rates, forecast period) for material CGUs; (3) impairment losses recognized (and reversed, if applicable) and the line item where they are presented; (4) sensitivity analysis showing how reasonably possible changes in key assumptions would affect recoverable amount, particularly where headroom is thin.

• Never performing an impairment test despite a product generating losses for multiple consecutive periods
• using hockey-stick revenue forecasts that are contradicted by the product'
• s actual historical trajectory
• applying a discount rate below the entity'
• s actual cost of capital to artificially inflate value in use
• testing at too aggregated a CGU level (e.g., the whole company) to dilute a specific underperforming module'
• s impairment signal
• failing to test intangibles not yet available for use annually simply because no obvious indicator was noticed.