Last Updated: March 2026

Goodwill impairment testing is the annual process required under ASC 350 (Intangibles – Goodwill and Other) by which a company determines whether the carrying value of goodwill assigned to a reporting unit exceeds the fair value of that reporting unit. When carrying value exceeds fair value, an impairment charge is recorded equal to the difference, reducing the goodwill balance on the balance sheet and flowing through the income statement as a non-cash loss. Sofer Advisors, a nationally recognized business valuation firm led by David Hern CPA ABV ASA, provides goodwill impairment valuations for public companies, private companies under audit, and organizations subject to PCAOB or AICPA standards.

Goodwill impairment charges have affected hundreds of public companies and represent one of the largest sources of non-cash earnings volatility in GAAP financial statements. A single impairment charge can wipe out years of reported earnings and trigger investor, lender, and analyst scrutiny. For private companies under audit, an unsupported impairment conclusion invites auditor pushback and restatement risk. Getting the test right – with documented methodologies, supportable discount rates, and peer-reviewed projections – protects management, satisfies auditors, and provides defensible disclosure. Understanding the process from triggering event through final impairment conclusion is essential for every CFO and audit committee member responsible for financial reporting.

Key Takeaways

  • ASC 350 requires goodwill impairment testing at least annually, at the reporting unit level, as of a consistent annual testing date chosen by management.
  • A qualitative assessment (Step 0) may be performed first; if it is more likely than not that fair value exceeds carrying value, no quantitative test is required.
  • The quantitative test compares the fair value of the reporting unit to its carrying value; if carrying value exceeds fair value, the excess is the impairment charge (capped at the goodwill balance).
  • Triggering events between annual test dates – including significant revenue declines, loss of a major customer, or a sustained drop in market capitalization – require an interim impairment test.
  • Private companies that elect the PCC (Private Company Council) goodwill alternative may amortize goodwill over 10 years and test for impairment only when a triggering event occurs, significantly reducing the testing burden.

What Is a Reporting Unit and How Is Goodwill Assigned to One?

A reporting unit is an operating segment or one level below an operating segment (a component) that constitutes a business for which discrete financial information is available and regularly reviewed by segment management. Goodwill acquired in a business combination is assigned to one or more reporting units that are expected to benefit from the combined benefits of the combination, as of the acquisition date.

If a company has three operating segments but only two benefit from an acquired target’s customer relationships and brand, goodwill is assigned to those two reporting units in proportion to the expected combined value benefit. Once assigned, goodwill cannot be reallocated between reporting units except when a business is reorganized and reporting units are redefined, in which case goodwill is reallocated using a relative fair value approach.

The definition of reporting units is one of the most consequential management judgments in goodwill impairment testing because a broader reporting unit (combining a high-performing division with a struggling division) can mask impairment that would be visible at a more granular level.

When Is a Qualitative Assessment Sufficient?

The qualitative assessment, sometimes called Step 0 or the optional first step, allows a company to bypass the quantitative impairment test if management determines it is more likely than not (probability greater than 50%) that the fair value of the reporting unit exceeds its carrying value. Factors evaluated in the qualitative assessment include:

  • Macroeconomic conditions (interest rate changes, credit market conditions, currency fluctuations)
  • Industry and market conditions (competitive environment, regulatory changes, customer demand trends)
  • Cost factors (increases in raw material, labor, or overhead costs)
  • Overall financial performance of the reporting unit (revenue, margin, cash flow versus prior periods and internal projections)
  • Events affecting reporting unit value (change in key personnel, strategic changes, customer or contract losses)
  • Sustained decline in share price if the reporting unit corresponds to a publicly traded entity or segment

If the qualitative assessment concludes that impairment is more likely than not, the company must proceed to the quantitative test. If the qualitative assessment supports that fair value exceeds carrying value, no further analysis is required and no impairment charge is recorded.

How Does the Quantitative Impairment Test Work?

The quantitative test under ASC 350 (as revised by ASU 2017-04, eliminating the former Step 2 implied fair value of goodwill calculation) compares the reporting unit’s fair value to its carrying value in a single step:

If Reporting Unit Fair Value > Carrying Value: No impairment. Goodwill is not impaired.

If Carrying Value > Reporting Unit Fair Value: Impairment charge = Carrying Value minus Fair Value, capped at the goodwill balance assigned to that reporting unit.

Step Description Example
1 Determine reporting unit carrying value $85,000,000
2 Determine reporting unit fair value (DCF + market approach) $72,000,000
3 Compare: carrying value exceeds fair value $13,000,000 excess
4 Impairment charge (capped at goodwill balance of $20M) $13,000,000
5 Remaining goodwill balance post-impairment $7,000,000

The fair value of the reporting unit is typically determined using the income approach (discounted cash flow), the market approach (guideline public company multiples or guideline transaction multiples), or a weighted combination of both. The discount rate used in the DCF is the reporting unit’s weighted average cost of capital (WACC), which must reflect current market risk conditions at the testing date.

What Triggers an Interim Goodwill Impairment Test?

Triggering events require impairment testing between annual test dates. ASC 350-20-35-30 identifies triggering events that include, but are not limited to:

  • A significant adverse change in legal factors or the business climate
  • An adverse action or assessment by a regulator
  • Unanticipated competition, loss of key personnel, or loss of a major customer
  • A more-likely-than-not expectation that a reporting unit (or significant portion) will be sold or otherwise disposed of
  • A sustained and significant decline in share price
  • Testing or a determination during an interim period that a long-lived asset group within a reporting unit is impaired
  • A significant decline in revenue or operating cash flows versus plan or prior period that suggests potential impairment

For private companies, triggering events such as the loss of a contract representing more than 20% of revenue, a significant increase in discount rates due to credit market changes, or a deterioration in the macroeconomic environment affecting the company’s industry all require an interim assessment.

How Is the Reporting Unit Fair Value Determined in Practice?

Valuation specialists performing goodwill impairment analyses use a multi-method approach:

The income approach (DCF) develops a five-to-ten year projection of reporting unit free cash flow, applies a terminal value reflecting the long-run growth rate, and discounts at the reporting unit WACC. The WACC incorporates a risk-free rate, equity risk premium, beta (for public companies) or size premium and specific company risk premium (for private companies), and the after-tax cost of debt weighted by the target capital structure.

The market approach applies EBITDA or revenue multiples from guideline public companies or comparable M&A transactions to the reporting unit’s most recent trailing or projected metrics. The market approach serves as a cross-check on the income approach; significant divergence between the two warrants additional analysis.

The reconciliation of total enterprise value (sum of all reporting unit fair values plus unallocated corporate items) to the company’s overall market capitalization provides a reasonableness check for public companies. A significant and sustained premium of market capitalization over sum-of-parts fair value indicates the fair values may be understated; a significant discount may indicate market perception of impairment. If your reporting unit is approaching or below its carrying value threshold,.

Frequently Asked Questions

What is goodwill impairment testing under ASC 350?

Goodwill impairment testing under ASC 350 is the annual process by which a company determines whether the carrying value of goodwill assigned to a reporting unit exceeds the reporting unit’s fair value. If carrying value exceeds fair value, an impairment loss is recognized equal to the difference, capped at the goodwill balance. The test may begin with a qualitative assessment to determine whether the quantitative test is necessary.

How often must goodwill be tested for impairment?

Goodwill must be tested at least annually under ASC 350, as of a date consistently applied from year to year. Management selects the annual testing date, which can be any date during the fiscal year (not necessarily year-end). Interim impairment tests are required whenever a triggering event occurs between annual test dates. For private companies that adopt the PCC goodwill alternative, impairment testing is only required when a triggering event occurs, eliminating the annual testing requirement.

What is the difference between Step 1 and Step 2 of the goodwill impairment test?

Under the pre-2018 two-step process, Step 1 compared reporting unit fair value to carrying value, and Step 2 calculated the implied fair value of goodwill if Step 1 indicated impairment. ASU 2017-04 eliminated Step 2 for all entities. Under current ASC 350, the impairment charge is simply the excess of carrying value over fair value, capped at the goodwill balance. The elimination of Step 2 reduced the cost and complexity of impairment testing significantly, because the implied fair value of goodwill calculation required a hypothetical purchase price allocation.

What discount rate is used in a goodwill impairment DCF?

The discount rate used in a goodwill impairment DCF is the reporting unit’s weighted average cost of capital (WACC). The WACC reflects the cost of equity (risk-free rate + equity risk premium x beta + size premium + company-specific risk premium) and the after-tax cost of debt, weighted by the reporting unit’s target capital structure. Auditors closely scrutinize the WACC because a 1% change in discount rate can move reporting unit fair value by 8-12% in typical DCF models.

Can a company reverse a goodwill impairment charge?

No. Under US GAAP (ASC 350), goodwill impairment charges are not reversible. Once goodwill is written down, the reduced carrying value becomes the new basis. Even if the reporting unit’s fair value subsequently recovers and exceeds the prior carrying value, the impairment charge cannot be reversed. This is a key difference from IFRS, which permits reversal of impairment charges for certain assets (though IFRS also prohibits reversal of goodwill impairment specifically).

What is the PCC goodwill alternative and who can elect it?

The PCC (Private Company Council) goodwill alternative, codified in ASC 350-20, permits private companies (entities that are not public business entities, not-for-profit organizations, or employee benefit plans) to amortize goodwill over a useful life of 10 years (or less if another useful life is more appropriate) and to test goodwill for impairment only when a triggering event indicates that fair value may be below carrying value. The election reduces the annual reporting burden significantly and is a permanent election that, once made, applies to all existing and future goodwill.

How does a sustained share price decline trigger an impairment test?

For public companies, a sustained decline in share price such that the company’s market capitalization falls below its book value (carrying value of net assets) is a qualitative indicator of potential goodwill impairment. The ASC 350 framework does not specify a threshold percentage or duration, but auditors generally expect management to document its analysis when the market cap has been below book value for multiple consecutive quarters.

What happens if a reporting unit is reorganized or divested?

When a reporting unit is reorganized – for example, when two reporting units are combined into one or one unit is split into two – goodwill is reallocated to the new reporting units using a relative fair value approach. If a reporting unit or significant portion is disposed of, the goodwill associated with the disposed portion is included in the carrying value of the disposed business when calculating the gain or loss on disposal.

How does goodwill impairment testing differ for private vs. public companies?

For public companies, goodwill testing typically requires a full quantitative analysis with PCAOB auditor review, market capitalization reconciliation, and public disclosure in the financial statements. For private companies under GAAP audit, the process is similar but without the public market reference points. Private companies that elect the PCC alternative can amortize goodwill and test only on triggering events, significantly reducing annual testing costs.

How much does a goodwill impairment analysis cost?

A goodwill impairment analysis from an independent valuation specialist typically costs $10,000-$40,000 per reporting unit, depending on complexity, number of projections required, and the number of valuation methods applied. For multi-segment public companies with several reporting units, the total annual testing engagement can exceed $100,000. Sofer Advisors provides goodwill impairment analyses at boutique pricing with Big 4-quality deliverables, using documented DCF and market approach methodologies that satisfy PCAOB and AICPA auditing standards.

Related Case Studies

Executive Summary

Goodwill impairment testing under ASC 350 requires at least annual comparison of a reporting unit’s carrying value to its fair value, with an impairment charge recorded when carrying value exceeds fair value. The process begins with an optional qualitative assessment; if impairment is more likely than not, a quantitative DCF and market approach analysis follows. Triggering events require interim testing between annual dates. Private companies may elect the PCC alternative to amortize goodwill and avoid annual testing. Sofer Advisors performs goodwill impairment valuations accepted by Big 4 and regional auditors, providing documented, defensible fair value conclusions at the reporting unit level.

What Should You Do Next?

If your company has acquired businesses in recent years, goodwill likely sits on your balance sheet and requires defensible annual testing. A poorly supported impairment analysis creates audit friction, restatement risk, and regulatory scrutiny. David Hern CPA ABV ASA, founder of Sofer Advisors, and 14 W2 valuation professionals have performed goodwill impairment analyses for public and private companies across manufacturing, healthcare, technology, and professional services. Schedule your free consultation before your annual testing deadline and discover The Sofer Difference.

People Also Read

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.