Goodwill Impairment Testing
What is Goodwill Impairment Testing?
Goodwill impairment testing is the process of evaluating whether the carrying value of goodwill on your balance sheet exceeds its fair value. Under ASC 350 – Intangibles – Goodwill and Other, all public and private companies that report goodwill must perform impairment testing at least annually, or more frequently if there are triggering events.
Examples of triggering events include:
A significant decline in financial performance
Loss of key customers or contracts
Market capitalization falling below book value
Industry or economic downturns
Reorganization or restructuring
Why You Need an ASC 350 Goodwill Impairment Test
If you carry goodwill on your balance sheet, you are required by U.S. GAAP to test for impairment and report any necessary write-downs. Failing to do so can result in:
Material misstatements of financial statements
Audit delays and qualified opinions
SEC scrutiny or restatements
Loss of investor or lender confidence
A credible, well-documented goodwill impairment test provides transparency and protects your reputation.
How Goodwill Impairment Testing Works
ASC 350 allows companies to follow a structured process to assess impairment:
Step 0: Qualitative Assessment (Optional)
Companies may first perform a qualitative assessment (“Step 0”) to evaluate whether it is more likely than not (>50%) that the fair value of a reporting unit is less than its carrying amount.
Factors considered:
Macroeconomic conditions
Industry trends
Cost factors
Overall financial performance
Entity-specific events
If the qualitative assessment indicates no impairment, no further testing is required.
Step 1: Quantitative Test
If Step 0 is skipped or fails, you must estimate the fair value of the reporting unit and compare it to its carrying amount:
If fair value exceeds carrying value, goodwill is not impaired.
If fair value is below carrying value, you must record an impairment loss equal to the shortfall (limited to the amount of goodwill).
Note: Under the simplified ASC 350 model, Step 2 (assigning implied fair value of goodwill) was eliminated for most companies in 2017.
Valuation Approaches for Fair Value Measurement
ASC 820 requires fair value to reflect market participant assumptions. The most common methods used in goodwill impairment testing are:
1. Income Approach – Discounted Cash Flow (DCF)
Projects future cash flows of the reporting unit
Applies a risk-adjusted discount rate
Calculates present value of expected earnings
2. Market Approach – Guideline Public Company Multiples
Uses trading multiples of comparable public companies
Applies EBITDA, revenue, or earnings multiples to the reporting unit
3. Market Approach – Precedent Transaction Method
Applies transaction multiples from recent M&A deals in your industry
Often, a weighted combination of these approaches provides the most reliable indication of fair value.
Risks of Inadequate Goodwill Impairment Testing
Many companies underestimate the complexity of ASC 350 compliance. Common pitfalls include:
Overly optimistic cash flow projections
Outdated or unsupported discount rates
Ignoring market participant assumptions
Lack of clear documentation
These missteps can lead to:
Audit challenges and delays
Restatements of financials
Impairment losses in future periods
Damage to management credibility
How Wyckoff Valuation Delivers Audit-Defensible Goodwill Impairment Reports
At Wyckoff Valuation, we provide clear, credible goodwill impairment analyses designed to withstand scrutiny from auditors and regulators.
Why clients trust us:
30+ Years of Experience – We’ve worked with public companies, private equity firms, and growth-stage businesses across industries.
Fixed-Fee Pricing – No surprise hourly fees.
Rigorous Methodologies – ASC 820-compliant valuation models and supportable assumptions.
Fast Turnaround – Reports delivered on your timeline.
Responsive Senior-Level Support – Direct access to experienced professionals throughout the process.
