Managing Impairment Testing

Managing Impairment Testing

Structures goodwill and long-lived asset impairment testing with fair value estimation and documentation.

When To Use

• Annual goodwill impairment testing under ASC 350 (or IAS 36 for IFRS reporters) [VERIFY: applicable framework]
• Triggering-event assessment for long-lived assets under ASC 360
• Interim impairment testing when indicators of impairment arise (market cap decline, loss of key customer, adverse regulatory change, sustained operating losses)
• Acquisition-related purchase price allocation follow-up when reporting units are restructured
• Audit support — preparing or reviewing impairment workpapers for external auditors

Inputs To Gather

• Reporting unit / CGU structure: Current reporting unit or cash-generating unit mapping, including any recent reorganizations
• Carrying amounts: Net book value of goodwill by reporting unit, and carrying amounts of long-lived asset groups (PP&E, definite-lived intangibles, ROU assets)
• Financial projections: Board-approved budgets, long-range plans, and discrete cash-flow forecasts (typically 5 years) with terminal growth assumptions
• Discount rates: Weighted-average cost of capital (WACC) inputs — risk-free rate, equity risk premium, size premium, company-specific risk, debt cost, capital structure weights [VERIFY: source for market data]
• Market data: Guideline public company multiples, precedent transaction multiples, quoted market prices if applicable
• Triggering-event indicators: List of qualitative and quantitative factors evaluated (macro, industry, entity-specific, reporting-unit-specific)
• Prior-period workpapers: Previous impairment analyses, fair value conclusions, and headroom/cushion amounts

Workflow

1. Scope the engagement

   • Confirm which reporting units / asset groups are in scope
   • Determine whether a qualitative assessment (Step 0) is supportable or a quantitative test is required
   • Identify the measurement date and reporting deadline

2. Evaluate triggering events (long-lived assets, ASC 360)

   • Walk through the triggering-event checklist: significant adverse change in business climate, legal factors, market price, physical condition, use/expected use of the asset, or forecasted cash flows
   • Document conclusion on whether a recoverability test is warranted for each asset group
   • If no trigger exists, document the basis and stop

3. Perform recoverability test (ASC 360) or quantitative goodwill test (ASC 350)

   • Long-lived assets: Compare undiscounted future cash flows to carrying amount. If undiscounted cash flows < carrying amount, proceed to fair value measurement
   • Goodwill: Compare fair value of the reporting unit to its carrying amount (including goodwill). Impairment = carrying amount exceeding fair value, capped at goodwill balance

4. Estimate fair value

   • Apply at least two valuation approaches where practicable:
     • Income approach: Discounted cash flow (DCF) using entity-specific projections and market-derived discount rate. Reconcile WACC components to observable inputs
     • Market approach: Guideline public company method and/or guideline transaction method. Select and adjust multiples (EV/EBITDA, EV/Revenue) for size, growth, margins
   • Weight or reconcile approaches; document rationale for weighting
   • For long-lived assets measured at fair value, consider cost approach for specialized assets

5. Calculate and allocate impairment loss

   • Goodwill: Impairment charge = carrying amount of reporting unit − fair value (limited to goodwill balance). No Step 2 allocation required post-ASU 2017-04 [VERIFY: confirm entity has adopted ASU 2017-04]
   • Long-lived assets: Allocate impairment loss pro rata across long-lived assets in the group based on carrying amounts; do not reduce any asset below its individual fair value

6. Prepare documentation package

   • Triggering-event memo with conclusion
   • Valuation model with clearly labeled assumptions, sources, and sensitivity tables
   • Reconciliation of aggregate reporting-unit fair values to market capitalization (with implied control premium analysis)
   • Journal entry support and disclosure drafts (ASC 350-20-50, ASC 360-10-50)

7. Coordinate review and approval

   • Route workpapers for management review and sign-off
   • Address auditor PBC requests; prepare responses to valuation specialist inquiries
   • Update the impairment tracking schedule for next period's headroom analysis

Output

The deliverable is a management-ready impairment testing package containing:

• Triggering-event assessment memo — qualitative and quantitative factors evaluated, conclusion, and supporting evidence
• Fair value estimation workbook — DCF model, market comparable analysis, assumption summary, and sensitivity/scenario tables
• Impairment calculation schedule — carrying amount vs. fair value by reporting unit / asset group, impairment charge (if any), and post-impairment carrying amounts
• Market capitalization reconciliation — aggregate fair value vs. observed market cap with implied control premium commentary
• Disclosure draft — quantitative and qualitative disclosures required under ASC 350/360 (or IAS 36) [VERIFY: applicable disclosure checklist]
• Audit support binder — organized PBC items, management representation points, and valuation specialist coordination notes

Quality Checks

• Verify reporting unit structure matches the current organizational and segment reporting alignment
• Confirm discount rate build-up ties to observable market data as of the measurement date
• Test mathematical integrity of DCF model (foot cash flows, check terminal value reasonableness as % of total enterprise value — flag if >75%)
• Validate that revenue growth rates and margin assumptions are consistent with board-approved forecasts and do not exceed historical or industry benchmarks without documented support
• Reconcile sum of reporting-unit fair values to market capitalization; investigate and explain any implied control premium outside the 15–40% typical range [VERIFY: reasonableness range for industry]
• Ensure impairment charge does not reduce goodwill below zero or reduce individual asset carrying amounts below fair value
• Cross-check prior-period headroom to current-period results for directional consistency
• Confirm all [VERIFY] items have been resolved or flagged for management/auditor discussion before finalizing