US GAAP Impairment Test: Triggers, Goodwill, and Write-Down

The US GAAP impairment test is really two different procedures depending on the asset. ASC 360 governs property, plant, equipment, and finite-lived intangibles, and it uses a two-step model triggered by specific events. ASC 350 governs goodwill and indefinite-lived intangibles like perpetual trademarks, and it requires annual testing plus interim testing when circumstances suggest a problem. Getting the standard, the sequence, and the asset grouping right is what separates a defensible write-down from a restated balance sheet.

Which Standard Governs the Asset

Start by classifying the asset. Buildings, machinery, leasehold improvements, patents, and customer-relationship intangibles being amortized over a set life all sit under ASC 360. These assets get tested only when something triggers the analysis.

Goodwill and intangibles with indefinite useful lives sit under ASC 350, and they must be tested at least annually whether or not anything looks wrong.¹ A trademark with no foreseeable expiration is the classic example. If that trademark is later assigned a finite life, it migrates to ASC 360 and follows the triggered-event model from that point forward.

Events That Trigger an ASC 360 Test

Impairment testing for tangible and finite-lived intangible assets is not routine. A company runs the test whenever events or changes in circumstances suggest the carrying amount may not be recoverable. The codification lists examples, though the list is not exhaustive:²

A significant decrease in the asset’s market value.
A major change in how the asset is used or its physical condition.
An adverse business or legal climate, including regulatory action, loss of a key customer, or unfavorable legislation.
Acquisition or construction costs running well beyond original expectations.
Current-period operating or cash-flow losses combined with a history or forecast of continued losses.
A current expectation that the asset will be sold or abandoned significantly earlier than planned.

Other watch items include technology shifts that render an asset obsolete, significant declines in the entity’s stock price, substantial doubt about going-concern status, and an impairment of goodwill in a related reporting unit.² There are no bright-line thresholds. The controller and audit team have to evaluate indicators each reporting period.

Grouping Assets Before You Test

ASC 360 requires grouping assets at the lowest level for which identifiable cash flows are largely independent of cash flows from other assets. A single machine on a factory floor almost never qualifies as its own group. The production line, or the whole facility, is usually the right unit.

The grouping decision matters. A retail chain typically groups by store, since each location produces separately identifiable revenue. A fully integrated factory feeding one product line is generally a single group. Group too broadly and a healthy asset can mask an impaired one; group too narrowly and you get false positives.

Step 1: The Recoverability Screen

Once you have the group, compare its carrying amount to the sum of its undiscounted expected future cash flows. This is a screen, not a valuation. If undiscounted cash flows exceed carrying amount, the group passes and testing stops.

Say a manufacturing facility carries at $5 million across its group. If management projects $6.2 million in undiscounted net cash flows over the remaining useful life (including eventual sale proceeds), the group passes. No further work.

The use of undiscounted flows is deliberate. It sets a lower bar than a fair-value comparison, because it ignores the time value of money. An asset can pass this screen even when its fair value sits below book value, as long as the raw dollars over its life exceed carrying amount.

The cash flow estimates should reflect the most likely economic conditions over the remaining useful life. Include inflows from continued operations, net proceeds from eventual disposition, and outflows needed to maintain the asset’s existing service potential, such as routine maintenance and periodic overhauls.³ Exclude capital expenditures that would expand the asset’s service potential beyond current capacity, interest expense, and cash flows tied to a recognized asset retirement obligation.

Step 2: Measuring the Loss

If undiscounted cash flows fall short of carrying amount, the group has failed the screen and you move to measurement. Step 2 compares carrying amount to fair value under ASC 820.⁴

The impairment loss equals the excess of carrying amount over fair value. Take that same $5 million facility. Suppose it produced only $4.3 million in undiscounted cash flows, failing Step 1, and a discounted cash flow analysis then set fair value at $3.8 million. The impairment loss is $1.2 million, hits the income statement immediately, and the group’s carrying value drops to $3.8 million.

Determining Fair Value

Fair value under ASC 820 is the price to sell in an orderly transaction between market participants. Three approaches apply:

Income approach: discounting projected cash flows at a risk-adjusted rate. This is the most common method for operating assets, since active markets for used industrial equipment or specialized facilities are often thin.
Market approach: observable prices for comparable assets, or multiples from comparable public companies or transactions.
Cost approach: the cost to replace the asset’s service potential, adjusted for depreciation and obsolescence.

ASC 820 ranks inputs on a hierarchy. Level 1 is quoted prices in active markets for identical assets, Level 2 is observable data for similar assets, and Level 3 is unobservable inputs based on management projections.⁴ Most long-lived asset impairment valuations lean heavily on Level 3, and those assumptions draw the most scrutiny in audits and SEC reviews.

Indefinite-Lived Intangibles Are Simpler

Intangibles with indefinite useful lives, like perpetual trademarks or FCC broadcast licenses, follow ASC 350-30. They get tested annually and on any triggering event.¹

There is no undiscounted-cash-flow screen. Compare carrying amount directly to fair value; if carrying exceeds fair value, the difference is the loss. A qualitative assessment is available first: if it is more likely than not that fair value exceeds carrying amount, you can stop without running the quantitative calculation.

Sequence matters. Indefinite-lived intangibles should be tested before the related ASC 360 asset group and before goodwill, because a write-down at this level changes the carrying amounts that feed both subsequent tests.

Goodwill Impairment Testing

Goodwill does not generate cash flows on its own and cannot be sold separately. It represents the premium paid in an acquisition above the fair value of identifiable net assets, so it is tested at the reporting unit level.

Identifying the Reporting Unit

A reporting unit is an operating segment, or one level below (a component), provided the component is a business with discrete financial information that segment management regularly reviews.⁵ A company with three operating segments may end up with five or six reporting units. Goodwill from each historical acquisition gets allocated to the reporting unit expected to benefit from the combination.

Optional Qualitative Screen

Before running the numbers, a company can perform a qualitative assessment. The question: is it more likely than not (greater than 50 percent) that the reporting unit’s fair value exceeds its carrying amount? Consider macroeconomic conditions, industry trends, cost pressure, financial performance, and entity-specific events like management changes or litigation.

Favorable answer, you can stop. Inconclusive or unfavorable, run the quantitative test. A company can also skip the qualitative step entirely in any period.

The Quantitative Test

Compare the reporting unit’s fair value to its carrying amount, including allocated goodwill. If carrying exceeds fair value, the shortfall is the impairment loss, capped at the total goodwill allocated to that unit.⁶

Example: a reporting unit carries at $100 million, including $20 million of goodwill. Fair value comes in at $85 million. The $15 million shortfall is less than the $20 million of goodwill, so the full $15 million is recognized as the impairment loss and goodwill drops to $5 million. If the shortfall had been $25 million, only $20 million would be recognized, because the write-down cannot exceed the goodwill balance.

This one-step approach came in with ASU 2017-04, replacing the older two-step method that required a hypothetical purchase price allocation to derive an “implied fair value” of goodwill.

Private Company Alternative

Private companies and not-for-profits can elect two accounting alternatives. First, amortize goodwill straight-line over ten years or a shorter demonstrably appropriate life.⁷ Second, evaluate triggering events only at the end of each reporting period rather than continuously. Either alternative can be elected independently.

Amortization steadily lowers the goodwill balance, which cuts the dollar exposure to any eventual write-down. Five years after an acquisition, half the original goodwill may already be gone, so the maximum impairment is much smaller than under the standard model. The tradeoff is ongoing amortization expense.

Assets Held for Sale Follow Different Rules

When a company commits to selling a long-lived asset or disposal group, the measurement model changes. ASC 360 requires held-for-sale classification when all of the following are true:⁸

Management with proper authority commits to a plan to sell.
The asset is available for immediate sale in its present condition.
An active program to locate a buyer has begun.
The sale is probable and expected to close within one year.
The asset is being actively marketed at a price reasonable relative to fair value.
Significant change or withdrawal of the plan is unlikely.

Once classified as held for sale, the asset is measured at the lower of carrying amount or fair value less costs to sell.⁹ The undiscounted cash flow screen does not apply. If fair value less selling costs is below carrying amount, the loss is recognized immediately. Depreciation stops the moment the asset is classified as held for sale.

The Write-Down Is Permanent

An impairment loss is not just an income statement entry. The reduced carrying amount becomes the asset’s new cost basis. If the asset is depreciable, that new basis is depreciated over the remaining useful life, and the company should reassess whether the remaining life and salvage value assumptions still hold given whatever triggered the loss.

The part that catches companies off guard: US GAAP prohibits reversal of an impairment loss on an asset held and used, even if fair value later recovers above the new carrying amount.⁹ Once recorded, the write-down is permanent. IFRS allows reversal for non-goodwill assets; US GAAP does not. The no-reversal rule prevents companies from using impairments to create a low base for inflated future earnings.

Recording and Disclosing the Loss

The loss is recognized in the period it is identified and reported within income from continuing operations. If the impaired asset relates to a discontinued operation, the loss appears in that section, net of tax.

ASC 360-10-50-2 requires the following disclosures in the notes for the period of recognition:¹⁰

A description of the impaired asset or group and the facts and circumstances leading to the impairment.
The amount of the loss and where it sits on the income statement, if not separately presented on its face.
The method used to determine fair value, whether a quoted price, comparable pricing, or another technique.
The reporting segment holding the impaired asset, if the entity reports segment information under ASC 280.

When Level 3 inputs drive the valuation, describe the key assumptions. Those assumptions are unobservable by definition and carry the greatest estimation risk, which is why auditors and regulators focus on them. Public business entities will also need to disaggregate impairment losses on long-lived assets held and used as a separate line in the required tabular disclosure for annual periods after December 15, 2026, under ASU 2024-03 as amended by ASU 2025-01.¹⁰

Tax Consequences of the Write-Down

A GAAP impairment does not automatically produce a tax deduction. Tax rules generally require an actual sale or disposition before allowing a deduction for lost value. That mismatch creates a temporary difference between the reduced book carrying amount and the unchanged tax basis.

When tax basis exceeds book value after the write-down, ASC 740 treats it as a deductible temporary difference, and the company recognizes a deferred tax asset equal to the difference multiplied by the applicable rate. A $400,000 write-down that leaves book value at $1.6 million against a $2 million tax basis generates a $400,000 deductible temporary difference and an $84,000 deferred tax asset at a 21 percent federal rate.

The valuation allowance question is worth pausing on. If the same conditions that triggered the impairment also cast doubt on future taxable income, a valuation allowance may be needed and could erase some or all of the tax benefit. The worse the operating outlook, the less likely the deferred tax asset delivers real relief.

1
Deloitte. Intangible Assets Not Subject to Amortization
2
Deloitte. When to Test a Long-Lived Asset (Asset Group) for Recoverability
3
Ernst & Young. Financial Reporting Developments: Impairment or Disposal of Long-Lived Assets
4
SEC.gov. Note 10 – Fair Value Measurements
5
Deloitte. Identification of Reporting Units
6
Deloitte. Quantitative Assessment (Step 1)
7
FASB. Accounting Standards Update 2021-03: Accounting Alternative for Evaluating Triggering Events
8
SEC.gov. Assets Held for Sale and Discontinued Operations
9
FASB. Summary of Statement No. 144
10
Deloitte. Disclosures Related to Recognition of an Impairment Loss