To calculate impairment loss under U.S. GAAP, subtract the asset’s fair value from its carrying amount once you’ve confirmed the asset fails a recoverability test: Impairment Loss = Carrying Amount − Fair Value. The formula itself is simple; the work is in identifying when a test is required, gathering the right inputs, and applying the correct framework for the asset in front of you. Long-lived tangible assets follow one path under ASC 360, goodwill follows another under ASC 350, and IFRS handles both differently under IAS 36.
When a Test Is Required
Most assets aren’t tested on a schedule. U.S. GAAP requires an impairment review of long-lived assets only when a triggering event suggests the carrying amount may not be recoverable. Common triggers include:
- A steep drop in the asset’s market price beyond ordinary depreciation.
- Physical damage or a significant change in how the asset is used.
- A pattern of operating losses tied to the asset, or projections showing losses will continue.
- New legal or regulatory restrictions, or the loss of a contract that was the asset’s primary revenue source.
- Construction or acquisition costs that have run far over budget, suggesting the asset may never earn back its carrying amount.
Goodwill is the exception. It must be tested at least annually, plus whenever a triggering event occurs between annual tests.
The Three Inputs You Need
For a long-lived asset, the calculation runs on three numbers. Getting each one right is where the real effort sits.
Carrying Amount
Original cost minus accumulated depreciation and any previously recognized impairment charges. Pull this directly from the balance sheet. Equipment bought for $800,000 with $300,000 of accumulated depreciation has a carrying amount of $500,000.
Undiscounted Future Cash Flows
The total nominal cash inflows the asset is expected to generate over its remaining useful life, plus any proceeds from eventual disposal. No present-value discounting is applied at this stage under U.S. GAAP. Financial teams build these projections from internal budgets and operating forecasts. IAS 36 caps formal projections at five years absent justification for a longer period; ASC 360 has no explicit cap, but most companies use a similar horizon because forecasts beyond it become unreliable.
Fair Value
The price a willing buyer would pay in an orderly sale, not a forced liquidation. Fair value can come from recent comparable sales, independent appraisals, or valuation techniques such as discounted cash flow models when no active market exists.
Calculating Impairment on Long-Lived Assets Under U.S. GAAP
ASC 360 uses a two-stage process for tangible long-lived assets like property, plant, and equipment, as well as definite-lived intangibles like patents. One detail matters before you start: you don’t test individual assets in isolation unless they generate their own independent cash flows. Most testing happens at the asset group level, which is the smallest collection of assets whose cash flows are largely independent of other groups.
Stage One: The Recoverability Test
Compare the asset group’s carrying amount to the sum of its undiscounted future cash flows. If the undiscounted cash flows equal or exceed the carrying amount, the asset is not impaired and no further work is required.
This threshold is intentionally generous. Because the cash flows aren’t discounted, an asset can pass the recoverability test even when its economic value has meaningfully declined. The test is a screen, not a valuation.
Stage Two: Measuring the Loss
If the carrying amount exceeds the undiscounted cash flows, the asset fails the recoverability test and you move to measurement:
Impairment Loss = Carrying Amount − Fair Value
A manufacturing line with a carrying amount of $500,000 and a fair value of $350,000 produces an impairment loss of $150,000. That $150,000 is recorded as a loss on the income statement, reducing reported earnings for the period. It’s a non-cash charge, but it directly hits net income.
Once the loss is recorded, $350,000 becomes the asset’s new cost basis. All future depreciation runs off that lower figure over the remaining useful life. Under U.S. GAAP, an impairment loss on a long-lived asset cannot be reversed later, even if the asset’s value recovers.
Calculating Goodwill Impairment
Goodwill is the premium paid in an acquisition above the fair value of net identifiable assets. It follows a different path under ASC 350.
Optional Qualitative Screen
Before running any numbers, you can perform a qualitative assessment. The question is whether it is more likely than not (greater than 50% probability) that the reporting unit’s fair value has fallen below its carrying amount. You weigh macroeconomic conditions, industry trends, competitive pressure, and the reporting unit’s own financial performance. If the answer is no, no quantitative test is required.
Quantitative Test
If you skip the qualitative screen or it points toward possible impairment, compare the fair value of the entire reporting unit to its carrying amount, including goodwill. If fair value is higher, goodwill is not impaired.
If carrying amount is higher, recognize an impairment loss for the difference, subject to one cap: the loss cannot exceed the total goodwill allocated to that reporting unit.1FASB. Goodwill Impairment Testing If a reporting unit’s carrying amount exceeds its fair value by $12 million but only $8 million of goodwill sits there, the impairment loss is capped at $8 million. This simplified one-step approach replaced an older two-step method that required computing an implied fair value of goodwill through a hypothetical purchase price allocation.
Private companies can elect a further simplification under ASU 2014-02: amortize goodwill on a straight-line basis over ten years (or a shorter period if justified), and test at either the entity level or the reporting unit level.2Financial Accounting Standards Board (FASB). Accounting for Goodwill – Accounting Alternative for Private Companies (ASU 2014-02) Because goodwill is being written down each year, large impairment charges become less likely over time.
Goodwill impairment cannot be reversed under either U.S. GAAP or IFRS.
How the Calculation Changes Under IFRS
If your company reports under IFRS, IAS 36 changes both the math and, sometimes, the outcome.
Skip the Undiscounted Screen
IFRS has no recoverability test. You go straight to comparing the asset’s carrying amount against its recoverable amount, defined as the higher of fair value less costs of disposal and value in use.3IFRS Foundation. IAS 36 Impairment of Assets Value in use is the present value of expected future cash flows, discounted at an appropriate rate.
This is the biggest technical difference from U.S. GAAP. Because discounted cash flows are always lower than undiscounted ones, IFRS can flag an impairment that the U.S. GAAP screen would miss. An asset might generate enough total undiscounted cash to pass Stage One under ASC 360, yet once those flows are discounted, the present value drops below carrying amount and produces a loss under IAS 36.
Cash-Generating Units
Where U.S. GAAP tests at the asset group level, IFRS uses cash-generating units, defined as the smallest group of assets that generates cash inflows largely independent of other assets.3IFRS Foundation. IAS 36 Impairment of Assets The concept is similar, but differences in how companies define these units can produce different results on the same underlying facts.
Reversals Are Required, With a Ceiling
For assets other than goodwill, IAS 36 requires companies to assess at each reporting date whether indicators exist that a previously recognized impairment has decreased or no longer applies. If the estimates behind the original loss have changed, the loss must be reversed, capped so the new carrying amount does not exceed what the depreciated cost would have been had no impairment ever been recorded.4IFRS Foundation. IAS 36 Impairment of Assets
A Full Walk-Through
A company owns a packaging line carried at $600,000 on the balance sheet: original cost of $1,000,000 minus $400,000 in accumulated depreciation. A major customer cancels a long-term supply contract. That’s a triggering event.
The finance team projects the line will generate $550,000 in total undiscounted cash flows over its remaining eight-year life, including estimated salvage. Because $550,000 is less than the $600,000 carrying amount, the asset fails the recoverability test.
An independent appraisal values the line at $420,000. The impairment loss is $600,000 − $420,000 = $180,000. That $180,000 is recognized on the income statement. Going forward, depreciation runs off the new $420,000 basis over the remaining useful life.
Under IFRS, the recoverability screen wouldn’t run at all. The company would compare $600,000 directly to the higher of fair value less disposal costs and the present value of the $550,000 in future cash flows. At an 8% discount rate, the present value of those flows spread over eight years would be meaningfully lower than $550,000 nominal, potentially producing a larger loss than the U.S. GAAP calculation.
One Boundary on the Tax Side
Recording an impairment loss on the books does not create an immediate tax deduction. For federal income tax purposes, you generally cannot deduct the write-down until you actually dispose of the asset by selling it, abandoning it, or closing the location where it was used. The same holds for goodwill: no tax write-off until the reporting unit is sold or shut down.
The timing gap between book recognition and tax deduction creates a temporary difference. Book basis (reduced by the impairment) is now lower than tax basis (unchanged), typically producing a deferred tax asset that unwinds when the asset is eventually disposed of. When business property is disposed of, the loss is generally reported on Form 4797.5Internal Revenue Service. Instructions for Form 4797