Goodwill Impairment Testing under Ind AS 36 — CGU Allocation, Value in Use, and Discount Rate Methodology for Indian Companies

Goodwill impairment testing under Ind AS 36 is one of the most consequential and most contested areas of financial reporting valuation — and one where the gap between what the standard requires and what companies actually deliver in practice is widest. Unlike amortisation, which allocates the cost of a depreciable intangible over its useful life in a predictable, declining pattern, goodwill impairment is a cliff-edge event. A company can carry goodwill on its balance sheet at full carrying value for years, and then record a large impairment loss in a single period when the recoverable amount of the cash-generating unit to which goodwill has been allocated falls below its carrying amount. For Mumbai-based listed companies, financial holding groups, and NBFCs that have made acquisitions over the past decade, the goodwill impairment test is an annual financial reporting obligation that requires rigorous, independently supportable valuation work — not an internal financial model with optimistic assumptions that have never been stress-tested.

Under Ind AS 36, goodwill acquired in a business combination must be allocated, from the acquisition date, to each of the acquirer’s cash-generating units (CGUs) or groups of CGUs that are expected to benefit from the synergies of the combination. The CGU is the smallest identifiable group of assets that generates cash inflows that are largely independent of the cash inflows from other assets or groups of assets. The allocation of goodwill to CGUs is itself a judgment-intensive exercise — for conglomerates and financial services groups with multiple business lines, the CGU definition determines which parts of the business bear the goodwill carrying value and therefore which parts are exposed to impairment risk if business performance deteriorates.

The Technical Requirements of Goodwill Impairment Testing That Indian Companies Consistently Miss

The impairment test compares the recoverable amount of the CGU — defined as the higher of fair value less costs of disposal and value in use — against the CGU’s carrying amount (including allocated goodwill). Value in use is the present value of estimated future cash flows expected to be derived from the CGU, discounted at a pre-tax rate that reflects current market assessments of the time value of money and the risks specific to the asset. For most Indian companies, value in use is the operative measure, because fair value less costs of disposal requires evidence of what a market participant would pay — evidence that is often unavailable for non-traded CGUs.

The value in use calculation is a discounted cash flow exercise, but it is subject to specific constraints under Ind AS 36 that distinguish it from a commercial or transaction DCF. Cash flow projections must be based on reasonable and supportable assumptions that represent management’s best estimate of the range of economic conditions over the projection period, using the most recent approved budgets and forecasts. Projections beyond the detailed forecast period must use a steady-state growth rate that does not exceed the long-term average growth rate of the products, industries, or country in which the CGU operates. For Indian financial services CGUs, where growth rates have historically exceeded long-term averages, the constraint on the terminal growth rate is a critical — and frequently violated — assumption. A growth rate assumption in the terminal period that exceeds sustainable long-run GDP growth for the relevant sector requires explicit justification, and auditors at Big 4 firms routinely challenge this assumption when testing the reasonableness of management’s impairment model.

The discount rate applied in the value in use calculation must be a pre-tax rate that reflects the risks specific to the CGU. In practice, most companies derive this from a post-tax WACC and gross it up to a pre-tax equivalent — but the grossing-up methodology itself requires care, because applying a simple tax rate grossing to a post-tax WACC does not always produce the correct pre-tax equivalent when the CGU’s tax rate differs from the standard corporate tax rate, or when there are deferred tax assets or liabilities in the carrying amount. For Mumbai-based NBFCs with large deferred tax assets on their balance sheets — as is common following periods of elevated NPA provisioning — the treatment of deferred tax in the CGU carrying amount and in the discount rate is a technically significant issue that must be resolved consistently.

The sensitivity disclosures required under Ind AS 36 — which must describe how a reasonably possible change in key assumptions would eliminate the headroom between recoverable amount and carrying amount — are as important as the impairment calculation itself. Companies that report impairment headroom of only a few percent, with growth rate or discount rate assumptions at the aggressive end of the reasonable range, are in effect signalling to sophisticated financial statement readers that impairment is a near-term risk. For Mumbai-listed companies with goodwill on their balance sheets from financial services or technology acquisitions, the quality of the sensitivity analysis is often where analysts and auditors focus first. An independently prepared goodwill impairment report — with documented methodology, stress-tested assumptions, and sensitivity analysis that matches the standard’s disclosure requirements — is the foundation on which defensible financial reporting in this area must be built.

The practical application of the value in use calculation under Ind AS 36 for Indian financial services companies presents specific challenges that differ from the industrial company context for which the standard’s guidance was primarily developed. For an NBFC CGU, the cash generating unit’s free cash flows are not simply the spread between lending yields and funding costs — they include provisioning charges that themselves are a function of the credit quality of the loan book, which changes over time and is sensitive to macroeconomic conditions. Projecting the ECL provision trajectory over a five-year detailed forecast period requires the same PD/LGD/EAD framework used for Ind AS 109 ECL calculation, applied prospectively rather than at a point-in-time. This means the goodwill impairment test and the ECL provision calculation are analytically linked — and inconsistencies between the two, where the impairment model assumes better credit performance than the ECL model, will be challenged by auditors.

The terminal growth rate assumption in Ind AS 36 value in use calculations for Indian companies has been a persistent area of audit challenge. The standard states that the terminal growth rate should not exceed the long-term average growth rate for the products, industries, or country in which the CGU operates. For Indian financial services CGUs, this creates tension between the observable historical growth rates of Indian NBFCs and banks — which have significantly exceeded mature market averages — and the standard’s requirement to use a sustainable long-term rate. Big 4 auditors generally take the position that the terminal growth rate for an Indian financial services CGU should not exceed nominal GDP growth of approximately 10-12% (real GDP growth plus inflation), and that rates above this level require explicit justification in the impairment model. Management teams who have historically used higher terminal growth rates to maintain headroom may find that increasingly rigorous audit scrutiny requires either a reduction in the terminal growth rate or an offsetting adjustment to the discount rate.

For Mumbai-listed companies with significant goodwill from financial services acquisitions — private banks that have acquired smaller banks or NBFCs, insurance holding companies that have acquired distribution platforms, and asset management groups that have acquired boutique fund managers — the annual goodwill impairment test is a recurring financial reporting obligation with direct earnings consequences. The independent valuer who supports this exercise brings not just the technical capability to build and run the value in use model, but the professional independence to challenge management assumptions that are optimistic relative to market evidence. That challenge function — uncomfortable as it sometimes is for management teams — is precisely what makes the independent valuation meaningful rather than a ratification exercise.

At Harshul Mangal & Associates, goodwill impairment testing support for Ind AS 36 is provided by CA Harshul Mangal (IBBI Registered Valuer, Reg. No. IBBI/RV/16/2025/16044), whose practice combines financial modelling rigour with the professional accountability that IBBI registration requires — producing value in use reports that are analytically defensible and audit-ready.

For further reading on the regulatory framework governing this area, refer to the ICAI guidance on Ind AS 36 — Impairment of Assets, which provides the primary regulatory foundation for the analysis discussed here.

Our valuation services cover the full range of SFA assignments described in this post — from regulatory compliance to transaction support. If you need professional valuation assistance, we would be pleased to assist. You can reach out to us here or write to harshulmangal.ca@gmail.com.