Goodwill Accounting under IFRS 3 and IAS 36 Explained

Last reviewed: July 2026.

Goodwill in IFRS financial statements normally arises when one entity acquires control of a business and the consideration exceeds the recognised amount of identifiable net assets and relevant non-controlling interests. IFRS 3 governs business-combination accounting, while IAS 36 governs subsequent impairment testing.

Internally generated goodwill—such as reputation, assembled workforce or expected future synergies—is not recognised simply because a business is valuable. Purchased goodwill is a residual produced by acquisition accounting.

This page provides the broad IFRS 3 and IAS 36 framework. For a more detailed acquisition-focused treatment of consideration, identifiable net assets, measurement-period adjustments, full versus partial goodwill and consolidated-statement presentation, see the Purchased Goodwill Accounting under IFRS 3 guide.

When IFRS 3 applies

The acquirer first determines whether the acquired set is a business. An asset acquisition and a business combination can produce different accounting. IFRS 3’s acquisition method applies when control of a business is obtained, subject to the Standard’s scope requirements.

The acquisition date is the date control transfers. Measurement and recognition are based on facts existing at that date.

The acquisition method

1. Identify the acquirer.
2. Determine the acquisition date.
3. Recognise and measure identifiable assets acquired and liabilities assumed.
4. Measure non-controlling interests using the permitted basis for the transaction.
5. Recognise and measure goodwill or a bargain-purchase gain.

Goodwill calculation

A simplified full-goodwill example is:

Component	Amount (CU)
Consideration transferred	1,000,000
Fair value of non-controlling interest	180,000
Fair value of previously held interest	—
Less: fair value of identifiable net assets acquired	(950,000)
Goodwill	230,000

The identifiable net assets must include separately identifiable intangible assets that meet the applicable criteria, such as certain brands, customer relationships, technology or contractual rights. Failing to identify them can overstate goodwill.

Consideration transferred

Consideration can include cash, shares, other assets, liabilities to former owners and contingent consideration. Acquisition-related professional costs are generally expensed rather than included in goodwill, while costs of issuing debt or equity follow the relevant financial-instrument requirements.

Payments linked to continuing employment may represent post-combination remuneration rather than acquisition consideration.

Non-controlling interests

For qualifying present ownership interests, IFRS 3 permits measurement at fair value or at the proportionate share of the acquiree’s identifiable net assets on a transaction-by-transaction basis. The choice affects the amount of goodwill recognised.

Bargain purchase

If the recognised net assets exceed consideration and the relevant interests, the acquirer reassesses identification and measurement. After confirming the amounts, a bargain-purchase gain is recognised in profit or loss rather than recording negative goodwill.

Subsequent accounting for goodwill

Goodwill is not amortised under full IFRS. It is allocated to cash-generating units or groups of units expected to benefit from the combination and tested for impairment annually, and additionally when impairment indicators exist.

IAS 36 defines recoverable amount as the higher of value in use and fair value less costs of disposal. If a unit’s carrying amount exceeds recoverable amount, an impairment loss is recognised. Within a cash-generating unit, the loss is allocated first to goodwill and then to other assets subject to the Standard’s limits.

Goodwill impairment cannot be reversed

An impairment loss recognised for goodwill is not reversed in a later period. This differs from some impairment losses on other assets, which may be reversed when the reasons for impairment improve and the IAS 36 conditions are met.

Worked impairment example

A cash-generating unit includes goodwill of 230,000 CU and other net assets of 870,000 CU, for a carrying amount of 1,100,000 CU. Its recoverable amount is 980,000 CU. The impairment loss is 120,000 CU and is applied first against goodwill, reducing goodwill to 110,000 CU.

If the loss had exceeded the goodwill balance, the remainder would be allocated to other unit assets subject to the required floors.

Disclosures and monitoring

Entities disclose information about business combinations, recognised goodwill, impairment assumptions and cash-generating units under the applicable Standards. Management forecasts used in value-in-use calculations should be supportable and consistent with approved budgets and external evidence.

The IASB is currently redeliberating proposed improvements to business-combination disclosures and goodwill impairment. Preparers should distinguish current requirements from proposals until amendments are issued and effective.

Related Accounting Guides

• Purchased Goodwill Accounting under IFRS 3
• Goodwill Arising on Consolidation
• Goodwill Versus Identifiable Intangible Assets
• Goodwill in Partnership Accounts

Partnership goodwill adjustments are not automatically the same as IFRS 3 goodwill in consolidated financial statements.

Common mistakes

• recognising internally generated goodwill;
• treating every asset purchase as a business combination;
• failing to recognise identifiable intangible assets separately;
• capitalising acquisition-related professional costs into goodwill;
• amortising IFRS goodwill;
• delaying the annual impairment test;
• reversing a goodwill impairment;
• using unsupported growth rates or discount assumptions.

Goodwill and measurement uncertainty

Goodwill impairment testing relies on forecasts, discount rates, growth assumptions and the allocation of goodwill to cash-generating units. Small changes in assumptions can materially affect recoverable amount. Controls should include independent review, consistency with approved plans and comparison of past forecasts with actual outcomes.

Sensitivity disclosures may be important when a reasonably possible change in a key assumption would cause impairment. Management should avoid using optimistic forecasts created only to support the carrying amount.

Key takeaway

Goodwill is a residual acquisition asset, not a general valuation of business reputation. Correct accounting requires a valid business-combination analysis, complete identification of net assets, disciplined measurement of consideration and annual impairment testing at the appropriate cash-generating-unit level.

Official references: IFRS 3 Business Combinations and IAS 36 Impairment of Assets.

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