What is Goodwill Impairment?
Goodwill impairment is the reduction in the carrying amount of goodwill on a company’s balance sheet when its recoverable amount falls below its carrying value. Under IAS 36, goodwill is not amortised but tested for impairment at least annually and whenever indicators of impairment exist.
How It Works
- Allocate goodwill to cash-generating units (CGUs) that are expected to benefit from the acquisition.
- Calculate the recoverable amount of each CGU as the higher of fair value less costs of disposal and value in use.
- Compare it to the carrying amount of the CGU including allocated goodwill.
- If carrying amount exceeds recoverable amount, write down goodwill first, then other assets pro rata, and recognise the loss in profit or loss.
Saudi Context
Saudi groups reporting under IFRS, including Tadawul-listed companies that grew through acquisitions, must test goodwill annually. Independent valuation experts certified by SOCPA usually support the impairment exercise, especially for cross-border deals reviewed by ZATCA for transfer pricing.
Example
A Saudi holding bought a subsidiary for SAR 30 million, recognising SAR 10 million of goodwill. Three years later, the CGU’s recoverable amount drops to SAR 22 million while carrying amount is SAR 27 million. A SAR 5 million goodwill impairment is recognised.