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Goodwill Impairment Testing Guide, Examples, & Accounting Tips

Goodwill impairment is one of those accounting terms that's more bark than bite. Sure, we'll concede that maybe some of the confusion around it is valid. After all, goodwill itself isn't the type of asset that you can really sink your teeth into like a good ol' fashioned widget-making machine or stacks of cash.

But just because the fine folks at the Financial Accounting Standards Board (FASB) classify goodwill as an intangible asset doesn't mean it's any less important to your balance sheet as the other line items living in the same reporting neighborhood. That also means that goodwill impairment is, for the time being, necessary to provide clarity for stakeholders and an accurate assessment of value. The guidance winds are changing, though, so despite the updated standards on goodwill impairment – which we'll soon explain – the very concept of goodwill is currently under the FASB microscope.


Baby Steps: What Is Goodwill?

But let's walk before we break into a full sprint, shall we? Any discussion of goodwill impairment begins with a thorough understanding of the underlying concept – goodwill. Per ASC 350, the FASB defines goodwill as:

An asset representing the future economic benefits arising from other assets acquired in a business combination or an acquisition by a not-for-profit entity that are not individually identified and separately recognized.

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That's quite the mouthful, huh? And somewhat nebulous to boot. Translating that definition into ordinary language, goodwill is an intangible asset that represents the price premium one company pays when acquiring another. Put another way, it's the amount paid that's above the cumulative net value of the assets of the acquired business.

But why would a company ever pay such a premium, you ask? Well, for starters:

  • Brand reputation, recognition, and loyalty
  • A qualified, assembled workforce
  • Excellent customer service
  • A robust, satisfying corporate culture

All of these items have value, but not in the same way that tangible assets like PP&E, cash & cash equivalents, and the other "traditional" assets do. That's where intangible assets like goodwill come into play. In the case of goodwill, it provides a place for companies to report the value of items like brand reputation, employee relations, and other synergies.

For example, if company A acquires company B for $500 million, but the net value of company B's assets, including identified intangible assets, is only $400 million, then that $100 million paid over the net value is considered goodwill. Further, goodwill is tied to those synergies and the presumption that the acquired business will continue to operate, generate cash flows, and provide value to the investors, owners, and other stakeholders.


The Basics of Goodwill Impairment

That brings us to goodwill impairment. Long gone are the days when US GAAP allowed public companies to amortize goodwill like they do other intangible assets. But if you don't amortize goodwill like intellectual property, for instance, or depreciate it like plant equipment, then how do you assure that your recorded goodwill is recoverable? You guessed it – goodwill impairment.

Goodwill impairment exists when the fair value of your reporting unit drops below its carrying value. The topic du jour, goodwill impairment testing, is the mechanism that determines the amount of that accounting charge.

It's important to note that GAAP requires a company to assign all of its goodwill to its reporting units and test each reporting unit’s goodwill for impairment at least on an annual basis. Interim tests for goodwill impairment are required when events or circumstances change – triggering events – that, more likely than not, would reduce the fair value of a reporting unit below its carrying value. Example of such triggering events could include these, among others:

  • Impairment of other assets
  • Cash flow issues or operating losses at the reporting unit level
  • Negative current events or outlooks for industry impacting company holistically or specific reporting units
  • Planned or announced closures, layoffs, restructuring, or dispositions

However, under available private company alternatives, private companies have the choice to test for impairment or amortize goodwill over a period no longer than ten years. The FASB provides this accommodation to make life a bit easier and less costly for private companies since they often lack the necessary resources and knowledge to perform such tests without significant costs. In practice, it's not typical to see a private company opt for the amortization route since, amongst other reasons, they would have to unwind any private company alternatives under GAAP for all of their financials if they ever took the company public.


Changing Guidance on Goodwill Impairment

From a buyer's perspective, it's critical that you fully understand the way goodwill works, how you test for impairment, and what it means for your financial statements and stakeholders. And on that front, we have some pretty darn good news – with ASU 2017-04, the FASB has simplified the test for goodwill impairment. So let's look at some of the key differences between the current guidance and what the standard update has in store for companies.


Current Guidance Prior to ASU 2017-04

According to the current standard, companies have the option to begin looking at goodwill impairment from a pretty simple and straightforward qualitative assessment – commonly referred to as step zero – that encompasses different high-level economic factors discussed in ASU 2011-08. If a company fails that test, they have to proceed to the quantitative level of testing, which entails an additional two-step process. Of course, companies can also opt just to skip the qualitative step altogether, as many currently do.

The two steps involved in the quantitative assessment for goodwill impairment testing are as follows:

  1. The company looks at each of its reporting units individually, gathering information to find both the fair value and carrying value of the reporting unit. If the carrying value is greater than the fair value, an impairment is potentially triggered and you move on to step two to measure the impairment charge.
  2. You then find the implied fair value of the reporting unit’s goodwill and compare it to its recorded carrying value. As before, if the carryinging amount is more than the fair value of the recorded goodwill, you have to record impairment for the excess.

During that first step, keep in mind that just because the carrying value of the reporting unit is greater than the fair value, it doesn't necessarily mean that you're going to charge an impairment. The only thing that can trigger impairment is when the implied fair value of goodwill is greater than the recorded carrying value of the goodwill. Is that assessment process a little bit on the intense side? Yes, it is. And remember, for companies with multiple reporting units, they must apply those two steps to each reporting unit separately. But that's why the FASB is simplifying the process in the standards update.


The New Guidance: ASU 2017-04

The simplified guidance basically just eliminates a step from the current assessment process. Companies can still begin with the qualitative assessment if they so choose but, just as before, can also head straight for step one in the quantitative assessment. However, you no longer have to go through the two-step exercise that, before, essentially meant creating a hypothetical purchase price allocation of the reporting unit to determine the implied fair value of goodwill.

Instead, when the carrying value of the reporting unit exceeds its fair value, you simply measure the impairment charge as the difference between those two amounts. Therefore, the biggest difference in the new guidance is that failing step one will now always result in recognition of an impairment charge rather than leading to a more complex and often time-consuming second step to determine if an impairment charge exists and for how much.

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Take note that your impairment charge is capped at the carrying value of goodwill. In other words, even when there's a significant difference between the carrying value of the reporting unit and the fair value versus the total goodwill recorded, you can only write your goodwill down to zero.


Effective Dates

The updated standard will be applied on a prospective basis and becomes effective for public SEC filers in 2020. For all other entities, including those private companies not electing the private company goodwill alternative, the updated standard must be adopted in fiscal years beginning after December 15, 2022.

Also, since the FASB has allowed early adoption since 2017, it's our experience that most companies failing step one of the assessment are choosing early adoption just because it's less time-consuming and costly to measure the impairment charge.


Private Company Goodwill Alternatives

As we already mentioned, most private companies prefer to adhere to the public company standards on goodwill impairment. We imagine this dynamic will only intensify with the simplified guidance, where a private company will no longer face such a trade-off between simplicity and being prepared for an exit strategy that might include going public or being acquired by a public entity. Trust us when we say that unwinding those private company goodwill elections in financial statements to comply with the public company standard isn't exactly a walk in the park. It takes quite a bit of time, effort, and resources.

Still, for the sake of being thorough and unbiased, we want to present at least the most common private company goodwill alternatives. The following are already in the accounting standards codification by way of ASU 2014-02:

  • As discussed, the simplest alternative gives private companies the option to amortize goodwill up to a maximum of 10 years and avoid any annual goodwill impairment tests altogether.
  • Nonpublic companies can also elect other alternatives to simplify, including performing their goodwill impairment at an entity-wide level rather than at each reporting unit. This election also permits nonpublic companies to assess for goodwill impairment only when there is a triggering event, as discussed above, rather than conducting a required annual test. Measurement of impairment follows the updated impairment guidance by measuring the excess of the carrying value of the entity (or reporting unit) over its fair value.


Looking Down the Goodwill Road

Interestingly, the FASB is currently reassessing the need for goodwill and goodwill impairment altogether. With ASU 2017-04 essentially being the first phase of a two-phase project, the FASB is trying to determine if some of the private company goodwill alternatives might suit the public company guidance as well.

Even so, there is a fair amount of dissent in the FASB ranks over goodwill. One faction wants to continue simplifying the process during phase two of the accounting standards overhaul. However, other board members fear the repercussions of oversimplifying, that a single-step assessment will cause the rampant understatement and overstatement of impairment, depending on the circumstances. What does that mean for the future of goodwill impairment testing? Guidance could very well take additional dramatic turns down the road.


Goodwill Impairment Testing Example

Now we're going to look at an example that shows the difference between the guidance prior to and after applying ASU 2017-04 for goodwill impairment assessment.


Impairment Testing Prior to ASU 2017-04

Awesome Tots is a dominant force in the competitive tater tot market. And, yes, we made this company up, so feel free to pilfer. Its accounting team sits down to conduct their annual goodwill impairment testing, beginning with the qualitative assessment. For clarity's sake, we're assuming that Awesome Tots has just a single reporting unit as defined by ASC 280-50-10. Remember, this is an optional step for private companies who elect the alternative to assess goodwill impairment at an entity-wide level.


Qualitative Assessment

Is it more likely than not that Awesome Tots' fair value is less than its carrying value? Put another way, is there at least a 50% chance that the fair value is less than its carrying value according to high-level economic factors? For reference, ASC 350-20-35-3C details those economic factors to consider.

  • No – There's no indication of impairment so your work is done
  • Yes – Proceed to step one of the quantitative assessment


Quantitative Assessment, Step One

We begin by determining the carrying amount of the reporting unit for Awesome Tots:

Other Assets




Other Intangible Assets




Total Assets



Less: Total Liabilities (excluding debt)


Less: Deferred Tax Liabilities


Less: Total Non-debt Liabilities



Carrying Value



Next, you compare the carrying value we just computed with Awesome Tots' fair value. For this example, let's assume that the reporting unit fair value is $90,000 as determined under ASC 820.

Is the fair value ≥ $100,000 (the carrying value)

  • Yes – There's no indication of impairment so your work is done
  • No – Proceed to step two of the quantitative assessment

Since our assumed fair value of $90,000 is less than the carrying value we calculated at $100,000, we must proceed to step two of the quantitative assessment.


Quantitative Assessment, Step Two

We start at our assumed fair value of the reporting unit of $90,000. Also, just to keep things interesting, note that the fair values and carrying values for PP&E and Other Intangible Assets differ from one another.

Reporting Unit Fair Value from Step One



Less: Fair Value of Other Assets


Less: Fair Value of Other Intangible Assets


Less: Fair Value of PP&E


Add: Fair Value of Total Liabilities


Add: Fair Value of Deferred Tax Liabilities



Implied Fair Value of Goodwill



We can now calculate the goodwill impairment by subtracting the carrying value from the fair value of goodwill:

Implied Fair Value of Goodwill


Less: Carrying Value of Goodwill


Goodwill Impairment



Using the existing guidance, Awesome Tots has a goodwill impairment charge of $5,000. Now let's look at the same scenario using the updated guidance.


Impairment Testing Applying ASU 2017-04

Once again, companies have the choice to skip the qualitative assessment. Therefore, we're going to head straight into the quantitative impairment test. Since the reporting data is the same between our two scenarios, the Awesome Tots' carrying value will still be $100,000. Likewise, we again assume that the fair value is $90,000.

Thanks to the updated guidance, Awesome Tots no longer has to measure the fair value of each asset and liability to calculate the impairment charge. This eliminates Step Two from the current quantitative assessment, meaning we can directly compare the fair value of a reporting unit with its carrying value to arrive at the impairment charge:

Fair Value of the Reporting Unit


Less: Carrying Value of the Reporting Unit


Goodwill Impairment



When all is said and done, the updated guidance results in a greater impairment charge for Awesome Tots than the guidance prior to ASU 2017-04. However, keep in mind that we used a basic example that only included a single reporting unit.

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In reality, even the simplified accounting standards update mandates testing goodwill for each of your reporting units, assuming you're not electing one of the private company goodwill alternatives. In the meantime, you still have a business to run and everyday accounting responsibilities to meet. If it all seems too much for you and you'd prefer to have a squad of experts come in and help with some of the heavy lifting, Embark is always ready to roll up its sleeves and get to work.