Impairment of Capital Assets: ASC 360 Test, Goodwill, and Write-Downs

Under U.S. GAAP, the impairment of capital assets is the required write-down of a long-lived asset when its book value no longer reflects what the asset is actually worth to the business. Two codification topics govern the process. ASC 360 covers property, plant, and equipment along with finite-life intangibles like patents and customer lists. ASC 350 covers goodwill and indefinite-life intangibles such as trademarks and broadcast licenses. Each uses different triggers, different measurement logic, and in some cases a different testing cadence.

Which Rulebook Applies to Which Asset

Tangible assets held for use, plus intangibles with a finite useful life, sit under ASC 360. These are tested only when something adverse happens; there is no fixed schedule.¹

Goodwill and indefinite-life intangibles work differently. Because they are never amortized, there is no declining book value acting as a natural check, so ASC 350 requires at least an annual test whether or not anything has gone wrong.²

Assets reclassified as held for sale are a separate category. Depreciation stops, and the asset is carried at the lower of book value or fair value minus estimated selling costs.³ Held-for-sale assets also get a narrow reversal exception that nothing else enjoys.

What Triggers a Test for Assets in Use

For PP&E and finite-life intangibles still being used in operations, ASC 360-10-35-21 lists the events that force a company to run an impairment test:⁴

A significant drop in the asset’s market price.
A major change in how the asset is being used, or significant physical damage.
An adverse legal, regulatory, or business-climate change, including new competing technology.
Acquisition or construction costs running well beyond original estimates.
A current-period operating or cash flow loss tied to the asset, combined with a history of similar losses or forecasts of more to come.
A current expectation that the asset will likely be sold or disposed of well before the end of its useful life.

A trigger does not by itself mean a loss exists. It means the formal recoverability test has to be run. Depreciation keeps going throughout the process; it does not pause while testing is underway. If a write-down results, the reduced carrying amount gets depreciated over the asset’s remaining useful life from that point forward.⁴

Goodwill and indefinite-life intangibles are tested at least annually in all cases, and companies can also test between annual dates when a triggering event comes up.⁵

The Two-Step Test Under ASC 360

Testing for PP&E and finite-life intangibles usually happens at the asset group level, not asset by asset. An asset group is the lowest level at which identifiable cash flows are largely independent of other groups.⁶ A single machine on a production line rarely generates cash on its own; the line, the building, and the supporting equipment do. The grouping determines both whether impairment exists and how any loss gets spread.

Step 1: Recoverability

The company compares the asset group’s carrying amount to the sum of the undiscounted future net cash flows it is expected to generate through use and eventual disposal.³ “Undiscounted” is the critical word. No discount rate is applied, which makes this step a deliberately low bar. The question is simply whether the group will at least earn back its book value over its remaining life.

If undiscounted cash flows meet or exceed carrying amount, the asset passes and no loss is recorded.¹ If they fall short, the asset fails Step 1 and the measurement step begins.

Step 2: Measuring the Loss

Step 2 switches to fair value. The impairment loss equals the amount by which carrying value exceeds fair value.³ An asset group carried at $10 million with a fair value of $7.5 million generates a $2.5 million write-down. The reduction hits the carrying value immediately and the expense flows through the income statement.

When the loss applies to a group, it is allocated across the long-lived assets on a pro-rata basis using their relative carrying amounts. No individual asset can be written below its own determinable fair value; any excess from that cap gets redistributed to the other assets in the group.⁷

Testing Goodwill and Indefinite-Life Intangibles

Assets that are not amortized skip the undiscounted-cash-flow screen entirely and compare carrying amount directly to fair value.

Indefinite-Life Intangibles

For items like trademarks and broadcast licenses, companies can first run a qualitative assessment: is it more likely than not (greater than 50 percent likely) that the asset is impaired? If the answer is no, no further work is required.⁸ If the qualitative factors suggest impairment is possible, the company calculates fair value and records any shortfall below carrying amount.

Goodwill

Goodwill is only created in a business acquisition and represents the premium paid above the fair value of identifiable net assets acquired. It is tested at the reporting unit level, defined as an operating segment or one level below.⁹

The same qualitative screen is available for goodwill, sometimes called Step 0. Management weighs macroeconomic conditions, industry trends, cost pressures, and recent financial performance to judge whether the reporting unit’s fair value more likely than not sits below its carrying amount. A clean qualitative result lets the company skip the quantitative test for the year.⁵

If the qualitative review raises concerns, the quantitative test compares the reporting unit’s fair value to its carrying amount including goodwill. The excess of carrying amount over fair value is the impairment loss, with one ceiling: the loss cannot exceed the goodwill allocated to that reporting unit. This single-step quantitative approach came from ASU 2017-04, which replaced an older, more complex second step.¹⁰

How Fair Value Gets Measured

Fair value measurement under both ASC 360 and ASC 350 follows the three-level hierarchy in ASC 820:¹¹

Level 1 inputs are quoted prices in active markets for identical assets, which are the most reliable and must be used without adjustment when they exist.
Level 2 inputs are other observable data, such as prices for similar assets or market-corroborated information.
Level 3 inputs are unobservable, based on the company’s own assumptions, including internal cash flow projections.

Most impaired long-lived assets lack active market pricing, so companies usually end up in Level 3, applying a discounted cash flow model (income approach) or using comparable transaction data (market approach). Goodwill testing often uses a blend. These valuations are among the most judgment-heavy areas in financial reporting and draw close auditor attention.

What a Write-Down Does to the Financial Statements

An impairment loss shows up across all three primary statements. On the income statement, it hits as an operating expense, often on its own line, and reduces net income for the period.

On the balance sheet, the asset’s carrying value drops to its new fair value, and retained earnings fall by the after-tax amount of the loss. A goodwill write-down shrinks the intangible assets line and can materially shift reported equity.

The cash flow statement is where confusion tends to show up. An impairment charge involves no cash outlay. Under the indirect method, the expense is added back to net income in the operating activities section, reconciling reported earnings to actual cash generated. Cash on hand is unchanged by the write-down itself.

The No-Reversal Rule and Its One Exception

Once a held-for-use asset has been written down, GAAP prohibits restoring its value in a later period even if the asset’s fair value recovers. ASC 360-10-35-20 states the rule plainly: restoration of a previously recognized impairment loss is prohibited. The written-down amount becomes the asset’s new cost basis for future depreciation.

The one exception is for assets held for sale. Under ASC 360-10-35-40, if fair value rises after a write-down, the company can recognize a gain, but only up to the cumulative loss already recorded.⁷ A held-for-sale asset can be restored to its original carrying amount but never above it. The logic is that held-for-sale assets face a near-term market test, unlike assets the company plans to keep using.

Why the Tax Deduction Usually Doesn’t Match

A GAAP impairment charge does not automatically produce a tax deduction in the same period. Under IRC Section 165, a business can deduct a loss sustained during the taxable year to the extent it is not compensated by insurance or other recovery, measured against the asset’s adjusted tax basis.¹² The IRS generally requires a closed or completed transaction, though. A mere decline in value, with no sale, abandonment, or similar disposing event, usually does not qualify for a current deduction. A GAAP write-down on an asset the company keeps using therefore typically creates a temporary difference between book and tax carrying amounts rather than an immediate tax benefit.

Goodwill has its own twist. For tax purposes, acquired goodwill is amortized ratably over 15 years under IRC Section 197 regardless of the asset’s actual performance.¹³ A book impairment of goodwill does not accelerate that tax schedule. The company keeps taking the same straight-line deduction over the remaining 15-year period even if the book goodwill balance has been written to zero. The resulting book-tax difference generally shows up as a deferred tax asset that unwinds as the remaining tax amortization is claimed.

The Private Company Election for Goodwill

Private companies and not-for-profit entities have an option that can cut down the cost of goodwill accounting. Under ASU 2014-02, later extended to nonprofits by ASU 2019-06, eligible entities can elect to amortize goodwill on a straight-line basis over 10 years, or a shorter period if more appropriate. Entities making this election are exempt from the annual goodwill impairment test and only test when a triggering event occurs.

The simplified test for electing private companies compares the reporting unit’s carrying amount to its fair value in a single step. Any excess is the impairment loss, capped at the carrying amount of goodwill. Electing entities also skip the tabular reconciliation of changes in goodwill that public companies include in their footnotes. Steady amortization over a decade avoids the surprise of a sudden large impairment charge in a down year.

1
Deloitte Accounting Research Tool. 2.2 When to Test a Long-Lived Asset (Asset Group) for Recoverability
2
Grant Thornton. Impairment: Indefinite-lived Intangibles and Goodwill
3
Deloitte Accounting Research Tool. Impairments and Disposals of Long-Lived Assets and Discontinued Operations
4
PwC. 5.2 Impairment of Long-Lived Assets to Be Held and Used
5
Deloitte Accounting Research Tool. When to Test Goodwill for Impairment
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RSM. Impairment Testing of Long-Lived Assets Classified as Held and Used
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EY. Financial Reporting Developments: Impairment or Disposal of Long-Lived Assets
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PwC. 8.3 Impairment of Indefinite-Lived Intangible Assets
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Deloitte Accounting Research Tool. 2.6 Identification of Reporting Units
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FASB. ASU 2017-04 Simplifying the Test for Goodwill Impairment
11
FASB. Fair Value Measurement (Topic 820)
12
Office of the Law Revision Counsel. 26 U.S. Code 165 – Losses
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Office of the Law Revision Counsel. 26 U.S. Code 197 – Amortization of Goodwill and Certain Other Intangibles