To record an asset impairment journal entry, debit an impairment loss expense account and credit either accumulated depreciation or the asset account directly for the amount by which the asset’s carrying value exceeds its fair value. The debit lands on the income statement as a non-cash operating expense in the current period, and the credit permanently lowers the asset’s net book value on the balance sheet. Under U.S. GAAP, ASC 360-10 governs the entry for long-lived tangible assets and finite-lived intangibles, while ASC 350 covers goodwill and other indefinite-lived intangibles.
The Basic Entry
Once you have the impairment amount, the mechanics are simple. Assume an asset with a $5,000,000 carrying value has been determined to have a fair value of $3,800,000. The loss is $1,200,000, and the entry is:
- Debit — Impairment Loss: $1,200,000
- Credit — Accumulated Depreciation (or the asset account): $1,200,000
Most companies credit accumulated depreciation. That preserves the historical cost in the asset account and pushes the write-down into the contra account alongside prior depreciation. Crediting the asset account directly is also acceptable and produces the same net carrying value. Pick one approach and use it consistently.
The debit flows to operating expenses. It reduces operating income and net income in the period recognized. Companies generally show it on a separate line so readers can distinguish it from recurring charges. If the impaired asset sits inside a discontinued operation, the loss instead appears below the line in the discontinued operations section, net of tax.
Figuring Out the Amount to Record
For property, plant, and equipment and finite-lived intangibles, you cannot go straight to fair value. ASC 360-10 requires a two-step process, and the first step can save the asset from any write-down at all.
Step 1: The Recoverability Test
Compare the asset’s carrying value (original cost minus accumulated depreciation) to the total undiscounted future cash flows expected from using the asset over its remaining life, including any proceeds from an eventual sale. Undiscounted means no present-value adjustment. You add the raw projected cash flows.
If undiscounted cash flows meet or exceed carrying value, the asset passes. No entry is recorded, even if fair value happens to be lower than book value. That gap between undiscounted cash flows and fair value is the buffer built into the standard.
If undiscounted cash flows fall short of carrying value, the asset fails, and you move to measurement.
Step 2: Measure Against Fair Value
The impairment loss equals carrying value minus fair value. Fair value is the price that would be received in an orderly sale between knowledgeable, willing parties, not a liquidation price. Three approaches are used to determine it:
- Market approach — prices from recent sales of comparable assets or quoted prices in active markets. ASC 820 classifies these as Level 1 or Level 2 inputs.
- Income approach — a discounted cash flow model converting expected future cash flows to present value. This relies on Level 3 inputs and is the most common approach for specialized assets with no active resale market.
- Cost approach — the cost to replace the asset’s remaining service capacity, adjusted for physical deterioration and obsolescence.
Test at the Asset Group Level
A single piece of equipment rarely generates cash on its own. ASC 360-10 requires testing at the asset group level, meaning the lowest level at which identifiable cash flows are largely independent of other asset groups. A factory, a retail location, or a product line often qualifies. The recoverability test and any resulting loss apply to the group as a whole, and the loss is allocated among the long-lived assets in that group.
When Testing Is Required
You don’t run this test every quarter on every asset. For long-lived tangible and finite-lived intangible assets, testing kicks in only when a triggering event suggests carrying value may no longer be supportable.
External triggers include a steep drop in the asset’s market price, unfavorable legal or regulatory changes, a broader economic downturn, or rising input costs that erode the asset’s profitability. A market capitalization that has fallen below the book value of net assets is another strong signal.
Internal triggers include physical damage, technological obsolescence, a major shift in how management plans to use the asset, or a decision to dispose of it well ahead of schedule. Operating losses or negative cash flows tied to the asset also qualify. When any of these surface, you test then, not at year-end.
Goodwill and other indefinite-lived intangibles are on a different schedule: they must be tested at least annually, plus whenever a triggering event occurs.
After the Entry Is Posted
The reduced carrying value becomes the asset’s new cost basis for every purpose going forward. Nothing gets restated in prior periods.
Recalculate Depreciation Prospectively
Depreciate the new carrying value over the asset’s remaining useful life on a prospective basis. If the $3,800,000 post-impairment asset has 8 years of remaining life and no salvage value, straight-line depreciation becomes $475,000 per year ($3,800,000 ÷ 8). If the impairment also prompts a reassessment of useful life or salvage value, apply the revised estimates in the new calculation.
The Write-Down Is Permanent
ASC 360-10-35-20 prohibits reversal of a recognized impairment loss on a long-lived asset held for use. If fair value rebounds next year, you cannot write the asset back up. This is one of the sharpest differences between U.S. GAAP and IFRS, where IAS 36 permits reversal for assets other than goodwill.
Held-for-Sale Assets Follow Different Rules
If management commits to selling the asset instead of continuing to use it, the accounting changes. An asset is reclassified as held for sale when management with authority approves a plan to sell, the asset is available for immediate sale, an active program to find a buyer is underway, the sale is probable within one year, and the asset is being marketed at a reasonable price.
Held-for-sale assets are measured at the lower of carrying amount or fair value less costs to sell. There is no undiscounted-cash-flow screen. You compare directly to fair value less selling costs such as broker fees and closing costs. Depreciation stops on the reclassification date. If carrying amount exceeds fair value less costs to sell, record the difference as an impairment loss with the same entry structure. Unlike assets held for use, subsequent increases in fair value less costs to sell can be recognized as gains, up to the cumulative impairment previously recorded on the asset.
Goodwill and Indefinite-Lived Intangibles
The entry shape is the same, but the test path differs.
Goodwill
Goodwill is not amortized under standard GAAP and must be tested at least annually plus on triggering events. A company may first perform a qualitative assessment, sometimes called Step Zero, asking whether it is more likely than not (greater than 50% probability) that the reporting unit’s fair value has fallen below its carrying amount. If the answer is no, the quantitative test is skipped for that period.
If the quantitative test is run, compare the fair value of the entire reporting unit to its carrying amount, including goodwill. A reporting unit is typically an operating segment or one level below. If carrying amount exceeds fair value, the shortfall is the impairment loss, capped at the total goodwill allocated to that unit (goodwill cannot go negative).1Financial Accounting Standards Board (FASB). ASU 2017-04 – Simplifying the Test for Goodwill Impairment
Example: a reporting unit has a $10,000,000 carrying value including $3,000,000 of goodwill, and its fair value is $8,500,000. The $1,500,000 shortfall is under the $3,000,000 goodwill balance, so the full amount is recognized:
- Debit — Impairment Loss: $1,500,000
- Credit — Goodwill: $1,500,000
Goodwill impairment losses cannot be reversed.
Private companies can elect the ASU 2014-02 alternative, amortizing goodwill straight-line over 10 years (or a shorter demonstrated useful life). Under the alternative, goodwill is tested only when a triggering event occurs, not annually.2Financial Accounting Standards Board (FASB). ASU 2014-02 – Accounting for Goodwill
Other Indefinite-Lived Intangibles
Trademarks, broadcast licenses, distribution rights, and similar assets fall under ASC 350-30. Skip the undiscounted-cash-flow screen and compare fair value directly to carrying amount. Any excess of carrying amount over fair value is the impairment loss. Annual testing is required, a qualitative assessment is available, and reversal is prohibited.3Financial Accounting Standards Board (FASB). FASB Publishes Proposal for Impairment of Indefinite-Lived Intangible Assets
The Deferred Tax Side of the Entry
A book impairment usually does not produce a same-year tax deduction. The IRS generally allows a loss only when the asset is sold, abandoned, or becomes permanently worthless, and a GAAP write-down based on a decline in fair value doesn’t satisfy that standard.4Office of the Law Revision Counsel. 26 U.S. Code 165 – Losses For tax purposes, the company keeps depreciating from the original tax basis over the original recovery period, while book depreciation now runs off the lower post-impairment basis.
Under ASC 740, this mismatch creates a deductible temporary difference. Book carrying value is now lower than tax basis, so a deferred tax asset is recorded for the future benefit. The companion entry debits deferred tax asset and credits income tax expense for the tax effect of the impairment. The deferred tax asset unwinds over the asset’s remaining life or on disposition.
Goodwill acquired in a taxable business combination is amortized over 15 years under IRC Section 197 regardless of book treatment.5Office of the Law Revision Counsel. 26 U.S. Code 197 – Amortization of Goodwill and Certain Other Intangibles A book impairment of goodwill does not accelerate the tax deduction, so the book charge hits earnings immediately while the tax benefit lags.
Disclosures That Go With the Entry
In the period an impairment is recognized, the footnotes must describe the impaired asset and the facts and circumstances that led to the write-down, state the loss amount and where it appears on the income statement, identify the reporting segment affected, and explain the method used to determine fair value, including whether the valuation used quoted market prices, comparable transactions, or unobservable inputs from a discounted cash flow model. For goodwill impairment, disclose the specific reporting unit involved.
Documenting the triggering event, the recoverability analysis, the fair value methodology, and the supporting market data at the time you record the entry is worth the effort. Impairment estimates are judgment-heavy, and the file that supports the entry is the same file an auditor will ask to see.