Under U.S. GAAP, impairment of capital assets is the write-down a company records when a long-lived asset’s carrying amount on the balance sheet no longer reflects its economic value. The rules live in two separate places: ASC 360 covers property, plant, and equipment (PP&E) along with finite-life intangibles like patents, and ASC 350 covers goodwill and indefinite-life intangibles like trademarks. Each uses different triggers, a different test, and different measurement logic, but the end result is the same. The asset’s book value drops, an expense flows through the income statement, and no cash changes hands.
Which Assets Fall Under Which Rulebook
ASC 360 applies to long-lived assets a company holds for ongoing use: buildings, machinery, equipment, and finite-life intangibles such as patents and customer lists. Testing here is triggered by adverse events, not scheduled.1Deloitte Accounting Research Tool. 2.2 When to Test a Long-Lived Asset (Asset Group) for Recoverability
ASC 350 applies to goodwill and indefinite-life intangibles. Because neither is amortized, there is no declining book value to serve as a natural check, so both require at least an annual impairment test whether or not anything has gone wrong.2Grant Thornton. Impairment: Indefinite-lived Intangibles and Goodwill
Assets classified as held for sale are treated differently again. Depreciation stops on reclassification, and the asset is carried at the lower of book value or fair value minus estimated selling costs.3Deloitte Accounting Research Tool. Impairments and Disposals of Long-Lived Assets and Discontinued Operations Held-for-sale assets are also the one place GAAP permits limited reversals, discussed further below.
What Triggers a Test
For PP&E and finite-life intangibles held for use, testing is not calendar-driven. A company runs the test only when specific events or circumstances suggest the carrying amount may not be recoverable. ASC 360-10-35-21 lists the indicators:4PwC. 5.2 Impairment of Long-Lived Assets to Be Held and Used
- A significant decrease in the asset’s market price.
- A major change in how the asset is used, or significant physical damage.
- An adverse legal, regulatory, or business climate development, including new competing technology.
- Acquisition or construction costs running well beyond original estimates.
- A current-period operating or cash flow loss tied to the asset, combined with a history of similar losses or forecasts of more to come.
- An expectation that the asset will likely be sold or disposed of well before the end of its useful life.
A trigger does not by itself create an impairment loss. It obligates the company to run the recoverability test. Depreciation continues normally on held-for-use assets throughout that process; if a write-down results, the new lower carrying amount is depreciated over the remaining useful life going forward.4PwC. 5.2 Impairment of Long-Lived Assets to Be Held and Used
Goodwill and indefinite-life intangibles follow the annual cadence and can also be tested off-cycle when a triggering event arises.5Deloitte Accounting Research Tool. When to Test Goodwill for Impairment
Testing PP&E and Finite-Life Intangibles
Individual PP&E assets rarely generate cash flows on their own. A production line only earns revenue in combination with the building it sits in and the equipment around it. ASC 360 therefore requires testing at the asset group level, the lowest level at which identifiable cash flows are largely independent of other asset groups.6RSM. Impairment Testing of Long-Lived Assets Classified as Held and Used Get the grouping wrong and the answer changes: too narrow a group flags losses that vanish in the broader picture, too broad a group hides problems in specific underperforming assets.
Once the asset group is set, the test runs in two steps.
Step 1: The Recoverability Screen
Compare the asset group’s carrying amount to the sum of the undiscounted future net cash flows the group is expected to generate through use and eventual disposition.3Deloitte Accounting Research Tool. Impairments and Disposals of Long-Lived Assets and Discontinued Operations Undiscounted is the operative word. Nothing is reduced for the time value of money, which makes this a deliberately low bar. If undiscounted cash flows exceed carrying amount, the asset group passes and no impairment is recorded.1Deloitte Accounting Research Tool. 2.2 When to Test a Long-Lived Asset (Asset Group) for Recoverability If they fall short, the group fails and Step 2 begins.
Step 2: Measuring the Loss
Step 2 switches to fair value. The impairment loss equals the amount by which carrying value exceeds fair value.3Deloitte Accounting Research Tool. Impairments and Disposals of Long-Lived Assets and Discontinued Operations An asset group carried at $10 million with a fair value of $7.5 million produces a $2.5 million impairment. Carrying value is reduced immediately, and the loss is recognized on the income statement.
When the group contains more than one asset, the loss is allocated among the long-lived assets on a pro-rata basis using their relative carrying amounts, with one constraint: no individual asset can be written below its own determinable fair value. Anything that would push an asset below that floor is redistributed to the other assets in the group.7EY. Financial Reporting Developments: Impairment or Disposal of Long-Lived Assets
Testing Goodwill and Indefinite-Life Intangibles
Because these assets are not amortized, ASC 350 replaces the undiscounted screen with a direct fair value comparison.
Indefinite-Life Intangibles
For assets like trademarks and broadcast licenses, the quantitative test compares carrying amount to fair value directly, and any shortfall is the impairment loss. Before running numbers, ASC 350-30 allows a qualitative screening step: the company assesses whether it is more likely than not (greater than 50 percent likelihood) that the asset is impaired. If not, no further work is needed for that period.8PwC. 8.3 Impairment of Indefinite-Lived Intangible Assets
Goodwill
Goodwill arises only from business acquisitions, representing the premium paid over the fair value of identifiable net assets acquired. It is tested at the reporting unit level, defined as an operating segment or one level below.9Deloitte Accounting Research Tool. 2.6 Identification of Reporting Units
The same optional qualitative screen (often called Step 0) is available. Management evaluates macroeconomic conditions, industry trends, cost factors, and financial performance to judge whether it is more likely than not that the reporting unit’s fair value has dropped below carrying amount. If not, the quantitative test can be skipped for that year.5Deloitte Accounting Research Tool. When to Test Goodwill for Impairment
If the qualitative check raises concerns, the quantitative test compares the reporting unit’s fair value to its carrying amount, including goodwill. Where carrying amount exceeds fair value, the difference is recorded as a goodwill impairment loss, capped at the total goodwill allocated to that reporting unit.10FASB. ASU 2017-04 Simplifying the Test for Goodwill Impairment
How Fair Value Gets Measured
Both ASC 360 and ASC 350 rely on the fair value framework in ASC 820, which sorts inputs into three levels:11FASB. Fair Value Measurement (Topic 820)
- Level 1: quoted prices in active markets for identical assets, used without adjustment when available.
- Level 2: observable inputs other than Level 1 prices, such as prices for similar assets or market-corroborated data.
- Level 3: unobservable inputs based on the company’s own assumptions, such as internal cash flow projections.
Most impaired long-lived assets lack an active market. In practice companies land in Level 3, using a discounted cash flow model (income approach) or comparable transaction data (market approach) to estimate fair value. Goodwill testing commonly blends both. Because these assumptions drive the size of the loss, they attract heavy audit scrutiny.
How the Loss Hits the Financial Statements
The charge flows through all three statements. On the income statement, it appears as an operating expense, typically on its own line labeled something like “Impairment of long-lived assets,” and directly reduces net income.
On the balance sheet, the asset’s carrying value drops to its new fair value, and retained earnings decrease by the after-tax amount of the loss. A goodwill write-down cuts the intangible assets line and can meaningfully shift reported equity.
The cash flow statement is where confusion sets in. An impairment involves no cash outlay. Under the indirect method, the expense is added back to net income in the operating section as a reconciling item. Cash on hand is unchanged.
The No-Reversal Rule and Its One Exception
Once a held-for-use asset is written down under GAAP, its value cannot be restored in a later period, even if the underlying fair value recovers. ASC 360-10-35-20 is explicit that restoration of a previously recognized impairment loss is prohibited. The written-down amount is the asset’s new cost basis for depreciation going forward.
The one exception is for assets reclassified as held for sale. Under ASC 360-10-35-40, if such an asset’s fair value increases after a write-down, the company can recognize a gain, but only up to the cumulative loss previously recorded.7EY. Financial Reporting Developments: Impairment or Disposal of Long-Lived Assets The asset can climb back to its original carrying amount but no higher.
Tax Treatment Doesn’t Follow the Book Charge
A GAAP impairment does not automatically create a tax deduction in the same period. Under IRC Section 165, a business can deduct a loss sustained during the taxable year to the extent it is not compensated by insurance or other recovery, based on the asset’s adjusted tax basis.12Office of the Law Revision Counsel. 26 U.S. Code 165 – Losses The IRS generally requires a closed or completed transaction to recognize a loss, though. A decline in value without a sale, abandonment, or similar event usually does not qualify for a current deduction, so a book impairment on an asset the company keeps using creates a temporary book-tax difference.
Goodwill adds another wrinkle. For tax purposes, acquired goodwill is amortized ratably over 15 years under IRC Section 197, regardless of how the asset is actually performing.13Office of the Law Revision Counsel. 26 U.S. Code 197 – Amortization of Goodwill and Certain Other Intangibles A book write-down of goodwill does not accelerate that schedule. The company keeps taking the same straight-line deduction over the remaining 15-year period even if the entire goodwill balance has been erased on the books, typically producing a deferred tax asset that unwinds as the future amortization is claimed.
The Private Company Alternative for Goodwill
Private companies and not-for-profit entities have an option that simplifies goodwill accounting considerably. Under ASU 2014-02, extended to nonprofits by ASU 2019-06, eligible entities can elect to amortize goodwill on a straight-line basis over 10 years, or a shorter period if more appropriate. Electing entities are exempt from the annual goodwill impairment test and test only when a triggering event occurs.
When a test is required, the simplified approach compares the reporting unit’s carrying amount to its fair value in a single step. Any excess of carrying amount over fair value is the impairment, capped at the goodwill balance. Electing entities also skip the tabular reconciliation of changes in goodwill that public companies disclose. For many closely held businesses, amortizing goodwill steadily over a decade is a lot less painful than carrying it at full value and risking a sudden large charge in a down year.