The isolated problem approach (IPA) is a method used in the boundary element method (BEM) to overcome numerical inaccuracies caused by the high-conductivity difference in the skull and the brain tissues in the head. Hamalainen and Sarvas (1989 IEEE Trans. Biomed. Eng. 36 165-71) described how the source terms can be updated to overcome these inaccuracies for a three-layer head model. Meijs et al (1989 IEEE Trans. Biomed. Eng. 36 103849) derived the integral equations for the general case where there are an arbitrary number of layers inside the skull. However, the IPA is used in the literature only for three-layer head models. Studies that use complex boundary element head models that investigate the inhomogeneities in the brain or model the cerebrospinal fluid (CSF) do not make use of the IPA. In this study, the generalized formulation of the IPA for multi-layer models is presented in terms of integral equations. The discretized version of these equations are presented in two different forms. In a previous study (Akalm-Acar and Gencer 2004 Phys. Med. Biol. 49 5011-28), we derived formulations to calculate the electroencephalography and magnetoencephalography transfer matrices assuming a single layer in the skull. In this study, the transfer matrix formulations are updated to incorporate the generalized IPA. The effects of the IPA are investigated on the accuracy of spherical and realistic models when the CSF layer and a tumour tissue are included in the model. It is observed that, in the spherical model, for a radial dipole 1 mm close to the brain surface, the relative difference measure (RDM*) drops from 1.88 to 0.03 when IPA is used. For the realistic model, the inclusion of the CSF layer does not change the field pattern significantly. However, the inclusion of an inhomogeneity changes the field pattern by 25% for a dipole oriented towards the inhomogeneity. The effect of the IPA is also investigated when there is an inhomogeneity in the brain. In addition to a considerable change in the scale of the potentials, the field pattern also changes by 15%. The computation times are presented for the multi-layer realistic head model.