Goodwill Impairment Test Explained | CPA FAR Guide With Examples

by Vicky Sarin

Goodwill Impairment Test Explained (ASC 350 Guide)

A goodwill impairment test determines whether the goodwill recorded from a business acquisition has lost value. Under US GAAP (ASC 350), companies must test goodwill for impairment at least annually or whenever a triggering event suggests the carrying amount of a reporting unit may exceed its fair value. If impairment exists, the company writes down goodwill and recognises an impairment loss on the income statement.

Key Takeaways

Goodwill is tested for impairment at the reporting unit level under ASC 350
The 2017 ASU 2017-04 simplified the test to a single quantitative step
Impairment loss = carrying amount of reporting unit minus its fair value (capped at goodwill balance)
A qualitative assessment (Step 0) can be performed first to determine whether quantitative testing is necessary
Goodwill impairment losses are not reversible under US GAAP

What Is Goodwill?
Why Test Goodwill for Impairment?
Qualitative Assessment (Step 0)
Quantitative Impairment Test
Worked Example With Journal Entries
Triggering Events
IFRS vs US GAAP Comparison
Common Mistakes to Avoid
Quick Glossary
FAQ
CPA FAR Exam Tips

What Is Goodwill?

Goodwill is an intangible asset recorded when one company acquires another for more than the fair value of its identifiable net assets. It represents the premium paid for factors such as brand reputation, customer relationships, skilled workforce, and expected synergies. Under ASC 805 (Business Combinations), goodwill is calculated as:

Goodwill = Purchase Price − Fair Value of Identifiable Net Assets

Plain-English Example: Company A buys Company B for $10 million. Company B's identifiable net assets (assets minus liabilities at fair value) total $7 million. The $3 million difference is recorded as goodwill.

Unlike other intangible assets, goodwill is not amortised under US GAAP. Instead, it is tested for impairment at least annually.

Why Test Goodwill for Impairment?

Goodwill sits on the balance sheet indefinitely because it is not amortised. Without impairment testing, companies could carry inflated goodwill balances that no longer reflect economic reality. The impairment test ensures that:

The balance sheet accurately reflects the recoverable value of goodwill
Investors receive reliable information about asset values
Management is held accountable for acquisition decisions
Overvalued assets are written down to their fair value in a timely manner

Exam Tip: Under ASC 350, public companies must test goodwill annually. Private companies may elect the alternative of amortising goodwill over 10 years and testing only when a triggering event occurs.

Qualitative Assessment (Step 0)

Before performing the quantitative test, ASC 350 allows a qualitative assessment to determine whether it is "more likely than not" (greater than 50%) that the fair value of a reporting unit is less than its carrying amount. If the qualitative factors indicate no impairment is likely, the quantitative test can be skipped.

Qualitative factors to consider include:

Factor	Examples
Macroeconomic conditions	Recession, interest rate changes, credit tightening
Industry and market conditions	New competitors, regulatory changes, declining demand
Cost factors	Rising raw materials, labour costs, supply chain disruptions
Financial performance	Declining revenues, negative cash flows, missed forecasts
Entity-specific events	Loss of key personnel, litigation, restructuring plans
Share price decline	Sustained decrease in share price below book value

Quantitative Impairment Test (Post ASU 2017-04)

If the qualitative assessment indicates possible impairment, or if the company elects to skip Step 0, a quantitative test is performed. Since ASU 2017-04 (effective 2020 for public companies), the test has been simplified to a single step:

Compare the fair value of the reporting unit to its carrying amount (including goodwill)
If carrying amount exceeds fair value, recognise an impairment loss equal to the difference
The impairment loss is capped at the total goodwill allocated to that reporting unit

Formula: Impairment Loss = Carrying Amount of Reporting Unit − Fair Value of Reporting Unit (but not exceeding goodwill balance)

Worked Example: Goodwill Impairment Test

Scenario: MegaCorp acquired SmallTech in 2023 for $50 million. At acquisition, SmallTech's identifiable net assets had a fair value of $35 million, resulting in $15 million of goodwill. In 2025, MegaCorp performs its annual impairment test.

Step 1: Determine Carrying Amount of Reporting Unit

Item	Amount
Identifiable net assets (current fair value)	$32,000,000
Goodwill	$15,000,000
Total carrying amount	$47,000,000

Step 2: Determine Fair Value of Reporting Unit

Using a discounted cash flow analysis, MegaCorp determines the fair value of the SmallTech reporting unit is $40,000,000.

Step 3: Calculate Impairment Loss

Calculation	Amount
Carrying amount of reporting unit	$47,000,000
Less: Fair value of reporting unit	($40,000,000)
Excess (impairment loss)	$7,000,000
Goodwill balance (cap)	$15,000,000
Impairment loss recorded	$7,000,000

Since the $7 million excess is less than the $15 million goodwill balance, the full $7 million is recognised as impairment.

Journal Entry:

Dr Impairment Loss — Goodwill $7,000,000
Cr Goodwill $7,000,000

After the entry, the reporting unit's goodwill balance is reduced to $8,000,000. The impairment loss appears on the income statement, typically as a separate line item before operating income.

Triggering Events for Interim Testing

Besides the required annual test, goodwill must be tested for impairment whenever a triggering event occurs between annual tests. Common triggering events include:

Significant adverse change in business climate or legal factors
Adverse action or assessment by a regulator
Loss of key customers, contracts, or personnel
Expectation that a reporting unit or significant portion will be sold or disposed of
Testing for recoverability of a significant asset group within a reporting unit
Recognition of a goodwill impairment loss in the financial statements of a subsidiary

IFRS vs US GAAP: Goodwill Impairment

Feature	US GAAP (ASC 350)	IFRS (IAS 36)
Testing level	Reporting unit	Cash-generating unit (CGU) or group of CGUs
Testing frequency	Annual + triggering events	Annual + triggering events
Qualitative option	Yes (Step 0)	No
Impairment measure	Carrying amount minus fair value (capped at goodwill)	Carrying amount minus recoverable amount (allocated to goodwill first, then other assets)
Recoverable amount	Fair value only	Higher of fair value less costs of disposal and value in use
Reversal of impairment	Not permitted	Not permitted for goodwill
Amortisation option	Private companies only (10 years)	Not permitted

For deeper IFRS guidance on impairment testing under IAS 36, explore our DipIFR coaching programme.

Common Mistakes to Avoid

Testing at the wrong level: Goodwill is tested at the reporting unit level, not the entity level or individual asset level
Forgetting the goodwill cap: Impairment loss cannot exceed the goodwill balance of the reporting unit
Attempting to reverse impairment: Under US GAAP, goodwill impairment losses are permanent and cannot be reversed in later periods
Confusing old and new standards: The legacy two-step test (comparing implied fair value of goodwill) was eliminated by ASU 2017-04
Ignoring triggering events: Annual testing is the minimum; interim tests are required when triggering events occur
Mixing up reporting unit and CGU: US GAAP uses reporting units (operating segment or one level below); IFRS uses cash-generating units

Quick Glossary

Term	Plain-English Definition
Goodwill	Premium paid in an acquisition above the fair value of identifiable net assets
Reporting Unit	An operating segment or component one level below that has discrete financial information
Fair Value	Price that would be received to sell an asset in an orderly transaction between market participants
Carrying Amount	Book value of an asset or reporting unit as recorded on the balance sheet
Impairment Loss	Write-down recognised when an asset's carrying amount exceeds its recoverable value
CGU	Cash-Generating Unit — the IFRS equivalent of a reporting unit for impairment testing
ASU 2017-04	The accounting standards update that simplified the goodwill impairment test to one step

Frequently Asked Questions

What is a goodwill impairment test?

A goodwill impairment test is a procedure required under ASC 350 to determine whether goodwill recorded from a business acquisition has lost value. The test compares the fair value of a reporting unit to its carrying amount. If the carrying amount exceeds fair value, the difference (up to the goodwill balance) is recognised as an impairment loss.

How often must goodwill be tested for impairment?

Under US GAAP, public companies must test goodwill for impairment at least annually. Additionally, interim testing is required whenever a triggering event occurs, such as a significant decline in market conditions, loss of a major customer, or adverse regulatory action. Private companies that elect the amortisation alternative test only upon triggering events.

Can goodwill impairment be reversed under US GAAP?

No. Under US GAAP (ASC 350), once a goodwill impairment loss is recognised, it cannot be reversed in subsequent periods, even if the fair value of the reporting unit recovers. This differs from some other assets where impairment reversals may be permitted under IFRS (though goodwill impairment reversal is also prohibited under IAS 36).

What is the difference between the old two-step test and the current one-step test?

Before ASU 2017-04, the goodwill impairment test had two steps: Step 1 compared the reporting unit's fair value to its carrying amount, and Step 2 required calculating the implied fair value of goodwill (similar to a hypothetical purchase price allocation). ASU 2017-04 eliminated Step 2, simplifying the test so that impairment equals the excess of carrying amount over fair value, capped at the goodwill balance.

How does goodwill impairment testing differ under IFRS?

Under IFRS (IAS 36), goodwill is tested at the cash-generating unit (CGU) level rather than the reporting unit level. IFRS uses the recoverable amount (higher of fair value less costs of disposal and value in use), while US GAAP uses only fair value. IFRS does not offer a qualitative assessment option, and impairment losses are allocated first to goodwill, then proportionally to other assets in the CGU.

Where does a goodwill impairment loss appear on the financial statements?

A goodwill impairment loss is reported on the income statement as a separate line item within operating expenses, typically before income from continuing operations. On the balance sheet, the goodwill account is reduced by the impairment amount. The loss also reduces net income and retained earnings.

CPA FAR Exam: How Goodwill Impairment Is Tested

Exam Focus Area	What to Know
Goodwill calculation	Purchase price minus fair value of identifiable net assets under ASC 805
Impairment test mechanics	One-step test post ASU 2017-04: carrying amount vs fair value, capped at goodwill
Qualitative assessment	When Step 0 can be used and what factors to evaluate
Journal entries	Dr Impairment Loss, Cr Goodwill; income statement and balance sheet impact
IFRS differences	CGU vs reporting unit, recoverable amount vs fair value, no qualitative option under IFRS
Private company alternative	Amortise goodwill over 10 years, test only upon triggering events

Also see our related CPA FAR guides on Deferred Tax Assets (ASC 740), ASC 842 Lease Accounting, and Revenue Recognition (ASC 606).

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About the Author

Vicky Sarin is the founder of Eduyush, a professional certification coaching platform. With years of experience in accounting education, Vicky helps CPA, ACCA, and DipIFR candidates master complex topics through clear, exam-focused content. Connect with Eduyush for CPA review courses and DipIFR coaching.