Goodwill Impairment Under FRS 102: Evidence After a PE-Backed Acquisition

The acquisition model normally tells a confident story. The first year of trading may tell a different one. Customer losses, delayed integration, margin pressure or a weaker market can make management’s original expectations less persuasive. Where a group carries goodwill, finance needs a documented assessment under the applicable accounting requirements rather than an assurance that the deal thesis still holds.

Start with the carrying amounts

Reconcile goodwill to the acquisition accounting, subsequent amortisation and any earlier impairment. Confirm which assets and business activities the assessment relates to. Under FRS 102, goodwill accounting is not the same as the IFRS approach; do not copy an IAS 36 annual-testing template without checking the UK GAAP requirements. A technically impressive model does not compensate for using the wrong framework.

Identify what has changed

Document the indicators considered at the reporting date. Useful evidence includes actual performance against the acquisition plan, approved budgets, customer retention, contract changes and relevant market developments. A missed budget is not an automatic instruction to record an impairment, but neither is it something to dismiss without analysis. Record the conclusion and its supporting facts, including evidence that challenges management’s preferred view.

Use forecasts the business can explain

Where a recoverable amount calculation is needed, connect the forecast to operational drivers. If growth depends on a new customer, what supports that assumption? If margins improve, which actions produce the improvement and when? Reconcile the forecast used for the assessment to the board-approved plan and explain differences. Treat unsupported synergies, unexplained cost savings and repeated forecast resets as matters requiring investigation.

Retain the valuation judgement

Document the basis of the calculation and the significant assumptions used. Where discount rates, growth assumptions or other valuation inputs are required, retain the source and review evidence. Sensitivity analysis should show which realistic changes would alter the conclusion; selecting only remote scenarios provides little insight. If a valuation specialist is involved, management should still understand the scope, limitations and information supplied.

Keep financing and accounting conclusions separate

Investor support or available liquidity does not by itself establish that goodwill is recoverable. Likewise, an impairment assessment is not a substitute for the going concern review. These analyses may use related information, but they answer different questions. Cross-check shared assumptions and explain why any differences are appropriate rather than forcing the conclusions to match.

Create a file that survives independent review

Keep the carrying-value reconciliation, indicator assessment, approved forecast, calculation, sensitivities and signed review together. Note unresolved questions and the person responsible for each one. If an impairment is recognised, show the accounting and disclosure assessment. If it is not, make the reasoning equally clear. Review the final conclusion before the accounts are authorised, using the applicable subsequent-event requirements where relevant.

The most useful preparation is a forecast challenge session with finance and the acquired business’s operating leadership. Ask them to defend the assumptions with evidence, not enthusiasm. This is general information, not a valuation or accounting conclusion for a particular transaction.

Source: https://www.frc.org.uk/library/standards-codes-policy/accounting-and-reporting/uk-accounting-standards/frs-102/