Goodwill Impairment Testing: Do the Forecasts Reflect Business Reality?
1 September 2026 · MILES Valuation Advisory — Insights
What the AFRC’s Findings Mean for This Assessment
In the AFRC’s 2025 Inspections, 53% of PIE engagements inspected for impairment of non-current assets had at least one significant finding. This category extends beyond goodwill. The figure describes audit findings in the inspected engagements; it does not mean that 53% of companies should have recognised impairment.
The findings included insufficient evaluation of terminal value assumptions, untested CGU carrying amounts and inappropriate inclusion of financing cash flows. These concern different parts of the assessment: the assumptions used to estimate recoverable amount, the carrying amount against which it is compared, and the cash flows included in the model. [1]
This article focuses on the forecast assumptions underlying value in use: how finance teams can assess whether those assumptions reflect current business conditions, and when new evidence calls for them to change.
Consider a business whose revenue and margins have fallen below budget. Its updated impairment forecast starts from the weaker actual results but still assumes the same recovery date and long-term profitability as before. The spreadsheet has changed. Has the underlying view of the business changed with it?
A forecast should reflect the information available at the assessment date, including evidence that calls earlier expectations into question. Where that evidence changes the outlook, the assumptions and the impairment conclusion need to be reassessed.
The discussion below assumes that the appropriate cash-generating unit (CGU), or group of CGUs for goodwill testing, has been established and the relevant carrying amount reconciled. These remain essential foundations. The focus here is on evaluating the business assumptions within the test under IAS 36 / HKAS 36.
1. Start with the Difference Between Forecast and Actual Performance
The previous forecast provides a record of what management expected. Comparing it with actual performance helps identify which expectations remain reasonable and which need revisiting.
A useful comparison goes beyond the total profit shortfall. Detailed cost and expense schedules provide a practical starting point: did one-off items temporarily reduce margins, or have recurring operating costs increased? For example, a settlement payment for a particular lawsuit has different implications for future margins from annual professional fees. Valuers can compare the schedules with prior periods and consider supporting documents and management explanations to assess the nature and persistence of the differences.
The AFRC’s 2024–25 Annual Inspection Report identifies a lack of review of prior-period estimate outcomes or subsequent re-estimation for the current period among its findings on impairment of non-current assets. The practical lesson is relevant to goodwill testing: the updated assessment should respond to what has happened since the previous estimate. [2]
A finance team might organise its review as follows:
| Observation | Question to investigate | Possible implication for the forecast |
|---|---|---|
| Revenue is below the previous budget | Were orders delayed, cancelled or lost to competitors? | Reconsider delivery timing, the revenue base or future growth. |
| Gross margin has continued to decline | Has pricing power, product mix or cost recovery changed? | Reconsider the extent and timing of margin improvement. |
| New capacity remains underused | Does current demand justify the expected utilisation? | Reassess volumes, operating costs and the pace of utilisation growth. |
| Operating margin is below the previous budget | Do the cost and expense schedules contain unexpected one-off charges? How much of the variance do they explain? | Separate the effects of one-off items and recurring costs to assess the basis for a margin recovery. |
| Management classifies an expense as one-off | Has the underlying matter concluded? Have similar expenses arisen before, and will further payments be needed? | Only the non-recurring portion supported by evidence can justify lower future expenses. |
| Margin remains below budget after allowing for one-off items | Have staff costs, rent or other recurring operating costs increased on a continuing basis? | Reassess recurring expense levels and the extent and timing of margin improvement. |
These are illustrative questions, not automatic adjustments. Missing a budget does not by itself establish impairment. It does require an explanation of what the variance means for the current estimate.
2. Evaluate Evidence Both for and Against the Assumptions
Each significant forecast assumption should be connected to evidence. The assessment should also address information that points in a different direction.
If management expects margins to recover because the current period includes one-off costs or expenses, the relevant items should be identified in the detailed schedules and assessed against invoices, contracts, settlement documents and historical records. These sources help establish the nature and amount of the expenditure and whether it will recur. A description in the schedule or management’s classification of an item as “one-off” does not, by itself, support excluding the entire expense from the forecast.
Consider the following hypothetical example. A business reports an operating margin below budget for the current year. Management attributes this mainly to one-off legal and professional expenses and therefore forecasts a return to the originally expected margin in the following year. A review of the expense schedules and supporting documents shows that some expenditure relates to a settlement payment for a concluded lawsuit, but the total also includes annual legal advisory fees and professional fees for matters still in progress.
These items should be assessed separately. Documents confirming that the lawsuit has concluded, together with payment records, may support treating the settlement payment as non-recurring. Historical advisory fee records and ongoing service contracts, however, do not support treating all the expenses as one-off. The forecast should retain recurring expenses and estimate further expenditure based on the progress of outstanding matters. Even where some expenditure is confirmed as one-off, its amount must still be assessed against the margin variance to judge whether the expected recovery is reasonable. Expense recognition and payment timing should also be distinguished so that cash outflows for expenses already recognised but not yet paid are not overlooked.
The same principle applies to favourable effects. If a one-off refund or provision reversal has reduced current-period costs or expenses, assess whether that benefit can continue rather than directly using the unusually high current-period margin as the basis for future forecasts.
For value in use, the accounting basis also limits which planned changes can enter the cash flows. Future enhancements and restructurings to which the entity is not yet committed require particular care. An approved business plan should therefore be reviewed for consistency with the measurement requirements before being used in the impairment model. [3]
3. Examine the Business Assumed at the End of the Forecast
An assessment can devote considerable attention to next year’s results while leaving the final forecast year largely unexamined. Yet that year often provides the starting cash flow for the terminal value.
Ask what the business is assumed to look like by then. Have margins returned to a historical peak? Has capacity reached a utilisation level not yet demonstrated? Are working capital and maintenance expenditure consistent with the scale of operations? If the business is still undergoing a material transition, the basis for treating its cash flow as sustainable needs explanation.
The terminal growth rate should be considered alongside those assumptions. A modest growth rate does not resolve an overstated starting cash flow. Equally, a lower terminal growth rate cannot substitute for revisiting an unsupported margin forecast.
Long-term inflation expectations can be one reference point when evaluating nominal growth. Their relevance depends on the business’s pricing, volumes, market conditions and investment needs. The selected rate should be consistent with both the cash flow basis and the applicable long-term growth constraints. [3]
A useful review therefore considers the final year’s cash flow, the transition to sustainable operations and the growth assumption together.
4. Assess How Uncertainty Affects the Conclusion
Sensitivity analysis should address the assumptions that could materially change the assessment. For a business dependent on retaining a major customer or improving gross margins, varying only the discount rate and terminal growth rate may leave the main commercial uncertainty unexplored.
Start with the uncertainties identified in the forecast review. Consider reasonably possible changes in those assumptions and their consequences for related inputs. Lower sales, for example, may also affect capacity utilisation, margins and working capital. Linked changes should be considered coherently and without counting the same effect twice.
Where recoverable amount exceeds carrying amount, headroom describes that excess. The next question is what changes would eliminate it, and whether those changes are reasonably possible. If this work identifies a weakness in the central forecast, revisit that forecast before relying on the sensitivity results.
Disclosure requirements must also be assessed. For a CGU or group carrying goodwill significant relative to the entity’s total goodwill, where a reasonably possible change in a key assumption would cause carrying amount to exceed recoverable amount, the standard requires disclosure of:
- The amount by which recoverable amount exceeds carrying amount.
- The value assigned to the key assumption.
- The change in that assumption needed to bring recoverable amount down to carrying amount, incorporating consequential effects on other variables.
Sensitivity disclosure in these circumstances is a requirement, not simply an optional presentation improvement. [3]
What the Assessment Should Make Clear
A useful assessment lets a reviewer follow the connection between the business evidence, the forecast and the conclusion. For each material assumption, the record should explain:
- What has changed since the previous forecast.
- What evidence was considered, including conflicting information.
- How that evidence affected the selected assumption.
- How remaining uncertainty could affect recoverable amount and the related disclosures.
Management remains responsible for the estimate when an external valuer is engaged. A clear account of these judgements gives management, the valuer and the auditor a common basis for evaluating whether the forecast reflects the business at the assessment date and whether impairment is required.
References
1. AFRC, 2025–26 Annual Inspection Report, Annex 4, p. 35.
2. AFRC, 2024–25 Annual Inspection Report, Section 4, p. 23.
3. IAS 36 / HKAS 36, Impairment of Assets: cash flow projections for value in use, long-term growth assumptions and disclosures relating to CGUs containing goodwill.
This article is prepared for general information purposes and does not constitute audit, accounting, or valuation advice. Readers should refer to the applicable accounting standards and primary regulatory publications for authoritative guidance.
About MILES Valuation Advisory
MILES Valuation Advisory is an independent valuation firm based in Hong Kong, providing valuation services across business valuation, purchase price allocation, impairment testing, share-based payment valuation and financial instrument valuation to listed companies, IPO candidates and transaction parties across Greater China.