Last Updated: March 2026

A goodwill impairment journal entry records a write-down of goodwill (the intangible asset created when a company pays more than book value to acquire another business) when its carrying value exceeds its implied fair value under ASC 350. The entry debits Goodwill Impairment Loss and credits Goodwill on the balance sheet, reducing the asset and recognizing the loss in the income statement. Sofer Advisors, a nationally recognized business valuation firm with dual ABV and ASA credentials, assists acquirers and controllers with the goodwill impairment testing required to support these entries.

Goodwill impairment is one of the most consequential accounting entries a company can record. A large impairment charge reduces net income, shrinks equity on the balance sheet, and often signals to investors and lenders that an acquisition has underperformed. Controllers and CFOs who misapply ASC 350 risk restatements, SEC comment letters, and auditor disagreements. The journal entry itself is simple, but the valuation analysis supporting it is complex and must be defensible. Companies that treat goodwill impairment as a mechanical exercise rather than a rigorous fair value measurement expose themselves to regulatory and audit risk.

Key Takeaways

  • A goodwill impairment journal entry debits Goodwill Impairment Loss (income statement) and credits Goodwill (balance sheet) for the write-down amount.
  • ASC 350 requires annual goodwill impairment testing for all reporting units, plus interim testing whenever triggering events occur.
  • The 2017 FASB simplification eliminated Step 2 of the two-step test; impairment is now measured as the excess of a reporting unit’s carrying amount over its fair value, capped at the carrying value of goodwill.
  • Impairment losses are not tax-deductible unless the goodwill arose from an asset acquisition rather than a stock acquisition.
  • A qualified independent appraiser is required to determine the reporting unit’s fair value for Step 1 of the impairment test when management cannot support the FMV estimate internally.

What Is a Goodwill Impairment Journal Entry?

A goodwill impairment journal entry is the accounting entry that records a reduction in the carrying value of goodwill when the reporting unit’s carrying amount (including goodwill) exceeds its fair value. Under ASC 350-20-35, the impairment loss equals the amount by which the reporting unit’s carrying value exceeds its fair value, but cannot exceed the total carrying value of goodwill in that reporting unit.

The journal entry has two components:

Debit: Goodwill Impairment Loss (income statement expense account) – for the impairment amount

Credit: Goodwill (balance sheet intangible asset account) – for the same amount

For example, if a reporting unit has goodwill of $10 million and the impairment test reveals an impairment of $3 million:

Account Debit Credit
Goodwill Impairment Loss $3,000,000
Goodwill $3,000,000

The loss flows through the income statement as an operating expense, reducing pre-tax income. After the entry, goodwill on the balance sheet is $7 million. Goodwill that has been impaired can never be reversed; ASC 350 prohibits restoration of previously recognized impairment losses even if the reporting unit’s fair value subsequently recovers.

What Triggers a Goodwill Impairment Test?

Under ASC 350, companies must perform a quantitative or qualitative impairment test at least once per year, at a consistent measurement date. An interim test is required whenever a triggering event occurs between annual test dates.

Triggering events that require interim goodwill impairment testing include:

  • A significant adverse change in the business environment, legal factors, or market conditions affecting the reporting unit
  • A loss of key customers or revenue contracts representing 10% or more of the unit’s total revenue
  • An adverse change in the entity’s stock price (for public companies), particularly when market capitalization falls below book value
  • A significant change in the reporting unit’s personnel, particularly leadership of the acquired business
  • A more-likely-than-not expectation that the reporting unit will be sold or disposed of
  • An economic downturn or industry-wide margin compression materially affecting the unit’s financial projections

Companies that monitor triggering events proactively avoid the risk of recording a materially understated carrying value in an interim period without a corresponding impairment charge.

How Do You Calculate the Goodwill Impairment Amount?

Under the post-2017 simplified ASC 350 test, the goodwill impairment amount is calculated in a single step. The process begins with determining the reporting unit’s fair value (Step 1). If the reporting unit’s carrying amount (total assets minus total liabilities, including goodwill) is less than its fair value, no impairment exists. If the carrying amount exceeds fair value, the impairment loss equals that excess, capped at the carrying value of goodwill.

Fair value of the reporting unit is typically determined using three approaches:

The income approach (discounted cash flow) projects the reporting unit’s future free cash flows and discounts them at the weighted average cost of capital (WACC), reflecting the risk of the unit’s cash flows. The DCF is the most common primary method for operating businesses.

The market approach uses comparable company EBITDA multiples or precedent transaction multiples from similar acquisitions. This method provides a market-observable benchmark to cross-check the DCF result.

The asset approach values the reporting unit’s identifiable assets and liabilities at fair value. It is typically used as a secondary method or for holding companies with significant tangible asset bases.

Sofer Advisors performs fair value analyses for reporting units using all three approaches, delivering written reports in a format accepted by Big 4 auditors and SEC reviewers.

What Is the Difference Between Qualitative and Quantitative Testing?

ASC 350 permits companies to first perform a qualitative assessment (Step 0) to determine whether it is more likely than not (greater than 50% probability) that goodwill is impaired before proceeding to the quantitative test.

The qualitative assessment considers factors such as macroeconomic conditions, industry trends, cost factors, overall financial performance relative to prior periods, entity-specific events, and sustained decreases in market capitalization below book value. If the qualitative assessment concludes that impairment is not more likely than not, no further testing is required for that year.

If the qualitative assessment indicates impairment is more likely than not, or if the company elects to skip the qualitative assessment, a full quantitative test is required. Many audit firms encourage clients in acquisition-heavy industries or those who have missed prior projections to proceed directly to quantitative testing, because the qualitative assessment alone may not satisfy auditor scrutiny.

Companies with goodwill in a single reporting unit, newly acquired goodwill, or goodwill in reporting units that have historically been close to the impairment threshold should perform quantitative tests annually.

What Are the Tax Implications of a Goodwill Impairment Charge?

A goodwill impairment charge is generally not tax-deductible because book goodwill (recorded under purchase accounting) is a separate concept from tax goodwill. The deductibility of the impairment loss depends on how the underlying acquisition was structured.

If the acquisition was structured as an asset purchase or a Section 338(h)(10) election, tax goodwill exists and is amortized over 15 years under IRC Section 197. In this case, book impairment does not change the tax amortization schedule, and the impairment loss creates a deferred tax asset representing the temporary difference between book and tax bases.

If the acquisition was structured as a stock purchase without a 338 election, there is no tax goodwill. The impairment loss is purely a book entry with no tax consequence. No deferred tax asset arises.

Controllers recording a goodwill impairment entry must consult with the company’s tax advisors to determine whether the impairment creates a deferred tax asset and at what rate the benefit should be calculated. Errors in deferred tax accounting related to goodwill impairment are a common source of restatements.

Frequently Asked Questions

What is the journal entry for goodwill impairment?

The goodwill impairment journal entry debits Goodwill Impairment Loss (an income statement expense) and credits Goodwill (a balance sheet intangible asset) for the amount of the write-down. For example, a $2 million impairment is recorded as Debit: Goodwill Impairment Loss $2,000,000 / Credit: Goodwill $2,000,000. The loss reduces pre-tax income and reduces the carrying value of goodwill on the balance sheet. Once recorded, goodwill impairment cannot be reversed under US GAAP even if fair value subsequently recovers.

Can goodwill impairment be reversed?

No. ASC 350-20-35-16 explicitly prohibits the reversal of a previously recognized goodwill impairment loss. Once goodwill has been written down, the reduced carrying amount becomes the new cost basis for future impairment tests. This differs from IFRS, which also prohibits reversal of goodwill impairment but applies slightly different impairment testing mechanics. US companies that see a recovery in reporting unit value after an impairment cannot restore the goodwill balance on the balance sheet.

How often must goodwill be tested for impairment?

Goodwill must be tested for impairment at least annually, at the same date each year, at the reporting unit level. The annual test date does not need to be the fiscal year-end; many companies choose a date earlier in the year to allow time to complete the analysis before the audit. An interim impairment test is required whenever a triggering event occurs between annual test dates.

What happens to goodwill after impairment?

After an impairment charge is recorded, the carrying value of goodwill on the balance sheet is reduced by the impairment amount and remains at that lower value. The impaired goodwill is not amortized going forward, but it continues to be subject to annual impairment testing. If a subsequent annual test shows the reporting unit’s fair value exceeds carrying amount, no additional entry is required (and no reversal is made).

Who determines the fair value of the reporting unit?

The fair value of the reporting unit for ASC 350 impairment testing is determined by management, but the analysis must be supportable and may require engagement of an independent valuation specialist. Auditors routinely assess whether management’s fair value estimate is reasonable and whether the assumptions used (discount rate, revenue growth, margin projections) are supportable. For material goodwill balances and reporting units at or near the impairment threshold, engaging an independent appraiser with ABV or ASA credentials provides the defensibility auditors expect.

What is the difference between goodwill impairment and amortization?

Goodwill impairment is an event-driven write-down based on a fair value test; it is recorded only when and to the extent the reporting unit’s carrying amount exceeds its fair value. Goodwill amortization is a systematic allocation of cost over a useful life, which is not permitted for publicly traded companies under US GAAP (ASC 350). Private companies that have elected the Private Company Council alternative may amortize goodwill over 10 years and use a simplified impairment test.

Does goodwill impairment affect cash flow?

A goodwill impairment charge is a non-cash expense. It reduces net income and therefore reduces operating cash flow on an indirect method statement of cash flows, but is then added back as a non-cash adjustment to reconcile net income to cash provided by operating activities. Net cash provided by operations is not affected by the impairment charge because no cash changes hands.

How do you disclose goodwill impairment in financial statements?

Goodwill impairment requires disclosure in the notes to the financial statements under ASC 350-20-50. Required disclosures include: the reporting unit affected, the amount of the impairment loss, the method used to determine fair value, and significant assumptions used in the fair value measurement. Public companies must also disclose whether the impairment relates to a specific segment. Material impairments may also trigger an MD&A discussion of the business circumstances that led to the write-down and management’s assessment of future reporting unit performance.

What is a reporting unit for goodwill testing purposes?

A reporting unit is the level at which goodwill is tested for impairment under ASC 350. It is defined as an operating segment or one level below an operating segment (a component), provided that the component constitutes a business and has discrete financial information available. Companies may aggregate components with similar economic characteristics into a single reporting unit. Goodwill is assigned to the reporting unit that is expected to benefit from the combined benefits of the business combination that gave rise to the goodwill.

Is goodwill impairment different under IFRS?

Yes. Under IFRS (IAS 36), goodwill is allocated to cash-generating units (CGUs) rather than reporting units. The impairment test compares the CGU’s carrying amount to its recoverable amount, which is the higher of fair value less costs of disposal or value-in-use. Under US GAAP, the test compares carrying amount to fair value only, with no separate recoverable amount concept. IFRS and US GAAP both prohibit reversal of goodwill impairment. For companies reporting under both frameworks, the impairment amounts may differ due to these definitional and measurement differences.

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Executive Summary

A goodwill impairment journal entry debits Goodwill Impairment Loss and credits Goodwill for the amount by which a reporting unit’s carrying value exceeds its fair value, capped at the goodwill balance. ASC 350 requires annual impairment testing plus interim tests when triggering events occur. The 2017 FASB simplification eliminated the old Step 2 calculation. Fair value of the reporting unit is typically determined using the income approach (DCF), market approach (EBITDA multiples), and asset approach. Impairment losses are not tax-deductible for stock acquisitions and create no deferred tax asset in that scenario. Sofer Advisors provides reporting unit fair value analyses accepted by Big 4 auditors.

What Should You Do Next?

Controllers and CFOs facing a goodwill impairment test need a fair value analysis that will hold up under auditor scrutiny. The journal entry is straightforward; the valuation behind it is not. David Hern CPA ABV ASA, founder of Sofer Advisors, leads a team with 15+ years of experience supporting reporting unit fair value analyses for companies in all 50 states. Sofer’s 180+ five-star Google reviews and dual ABV+ASA credentials reflect the standard of work product that auditors and boards expect. Schedule a consultation before your next impairment test date and discover The Sofer Difference.

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About the Author

This guide was prepared by David Hern CPA ABV ASA, founder of Sofer Advisors – a business valuation firm headquartered in Atlanta, GA serving clients across the United States. David holds dual accreditations as an Accredited Senior Appraiser (ASA) and is Accredited in Business Valuation (ABV), credentials recognized by the IRS, SEC, and FINRA. He also holds the Certified Exit Planning Advisor (CEPA) designation. With 15+ years of valuation experience, David has served as an expert witness in 11+ cases across multiple jurisdictions and built Sofer Advisors into an Inc. 5000-recognized firm with 180+ five-star Google reviews. The firm’s full W2 employee team maintains subscriptions to all major valuation databases and operates under a next business day response policy.

For professional business valuation services, visit soferadvisors.com or schedule a consultation.

This article provides general information for educational purposes only and does not constitute legal, tax, financial, or professional advice, consult qualified professionals regarding your specific circumstances.