HKAS 36 · Hong Kong
Impairment testing and CGU valuation
Independent recoverable-amount assessments for goodwill, intangible assets, subsidiaries and cash-generating units — prepared for financial reporting and audit review.
When an impairment assessment is required
- Annual testing. Goodwill acquired in a business combination, intangible assets with indefinite useful lives and intangible assets not yet available for use are tested at least annually.
- Trigger-based testing. Other in-scope assets are tested when internal or external indicators suggest that carrying amount may not be recoverable.
- Common triggers. Underperformance against budget, loss of a major customer, rising discount rates, adverse market multiples, restructuring, technological change, regulatory change and climate-related effects can all require analysis.
- Investments and subsidiaries. A decline in operating performance or net assets may indicate that an investment carried in separate financial statements requires impairment support.
What Valtech delivers
CGU and carrying-amount analysis
Map cash-generating units, allocate goodwill and corporate assets, and reconcile the carrying amount being tested to the accounting records.
Recoverable-amount valuation
Estimate value in use, fair value less costs of disposal, or both, depending on which basis is supportable and relevant.
Discount rates and sensitivities
Develop WACC or asset-specific discount rates, terminal growth assumptions and headroom sensitivities that can be traced to evidence.
Report and audit support
Provide a signed report, model support and direct responses to auditor questions on forecasts, methodology and key assumptions.
Valuation bases used in an HKAS 36 test
| Basis | How it is applied |
|---|---|
| Value in use | Present value of entity-specific cash flows from continuing use and ultimate disposal. The model is aligned to the asset or CGU being tested and avoids cash flows that the standard excludes. |
| Fair value less costs of disposal | Market-participant value less incremental disposal costs. It may be supported by a DCF, market multiples, transaction evidence or an asset approach. |
| Market-capitalisation cross-check | For listed groups, enterprise value implied by market capitalisation can be compared with the aggregate carrying amount and the valuation model, with control and liquidity differences considered. |
| Sensitivity and headroom | Shows how changes in discount rate, growth, margin or revenue affect recoverable amount and whether a reasonably possible change would eliminate headroom. |
The hard part is usually not the spreadsheet. Audit review tends to focus on whether the CGU boundary is correct, the forecast is supportable, the carrying amount is comparable with the recoverable amount, and the discount rate and terminal assumptions are internally consistent. The report is structured around those review points.
Areas that commonly attract audit challenge
- Goodwill allocated at too high a level, masking underperformance in an individual CGU.
- Forecasts that do not reconcile to approved budgets, historical results or operational capacity.
- Inconsistent treatment of right-of-use assets, lease liabilities, corporate assets or working capital.
- Mixing entity-specific value-in-use assumptions with market-participant fair-value assumptions.
- Discount rates that do not match the currency, geography, leverage, cash-flow basis or risks already reflected in the forecast.
- Insufficient sensitivity disclosure where headroom is limited.
Information normally required
- Latest audited financial statements and current management accounts.
- Approved budgets and forecasts, with prior-year forecast-versus-actual results.
- Goodwill and intangible-asset schedules, acquisition documents and the original purchase price allocation where available.
- Management's proposed CGU structure and carrying-amount calculation.
- Operational drivers, customer concentration, capacity, capital expenditure and working-capital assumptions.
- Prior-year impairment model, report and auditor comments.
Common questions
Which assets require an annual impairment test?
Goodwill acquired in a business combination, intangible assets with indefinite useful lives and intangible assets not yet available for use require an annual impairment test. Other assets within HKAS 36 are tested when an impairment indicator exists.
What is the difference between value in use and fair value less costs of disposal?
Value in use is an entity-specific present value based on the cash flows expected from continuing use and ultimate disposal. Fair value less costs of disposal is market-participant based. Recoverable amount is the higher of the two.
Can Valtech use management forecasts?
Yes, but the forecast is not accepted mechanically. We reconcile it to approved budgets, historical performance, capacity and market evidence, and document adjustments where assumptions need normalising for the selected valuation basis.
Will you respond to our auditor after the report is issued?
Yes. Auditor review is expected in a financial-reporting engagement. We respond to methodology, discount-rate, forecast, sensitivity and model questions, and provide supporting workings where appropriate within the agreed scope.
Related valuation services
- Purchase Price Allocation
- Business Valuation
- Property, Plant & Equipment Valuation
- Expected Credit Loss Assessment
This page summarises how Valtech approaches this engagement type in Hong Kong. It is general information, not valuation, accounting, tax or legal advice for any specific entity. Scope and methodology are agreed in an engagement letter before work begins.
Request a quotation
Prepare the impairment file before audit review begins.
Send the reporting date, asset or CGU, carrying amount and latest forecast. A director-level valuer in Hong Kong will come back with scope, fee and turnaround.