US GAAP Impairment Test: Triggers, Steps, and Disclosure

The US GAAP impairment test is the procedure for deciding whether a long-lived asset’s book value is still recoverable, and if not, writing it down to fair value. Two codification topics split the work: ASC 360 covers property, plant, equipment, and finite-lived intangibles, while ASC 350 covers goodwill and indefinite-lived intangibles. The mechanics, timing, and even the comparison benchmark differ between the two, so the first task in any analysis is matching the asset to the right standard.

Which Standard Governs Your Asset

Tangible long-lived assets such as buildings, machinery, and leasehold improvements fall under ASC 360. So do intangibles with a definite useful life, like patents or customer-relationship intangibles being amortized over a set period. These assets are tested only when something happens that suggests the carrying amount may no longer be recoverable.

Goodwill and intangibles with indefinite useful lives sit under ASC 350. Unlike ASC 360 assets, they must be tested at least annually regardless of whether anything has gone wrong.¹ A trademark with no foreseeable expiration is a classic indefinite-lived intangible. If circumstances later force a finite useful life on that trademark, it migrates from ASC 350 to ASC 360 and shifts to the triggered-event model.

When Testing Is Required

For ASC 360 assets, impairment testing is event-driven, not calendar-driven. A company tests whenever circumstances suggest the carrying amount may not be recoverable. The codification lists examples without claiming to be exhaustive:²

A significant decrease in the asset’s market price.
A major change in the extent or manner of use, or physical deterioration beyond normal wear.
Adverse legal or business climate, including regulatory action, loss of a key customer, new competition, or unfavorable legislation.
Acquisition or construction costs running well above expectations.
Current-period operating or cash-flow losses combined with a history or forecast of continuing losses.
A current expectation of selling or abandoning the asset significantly before the end of its previously estimated useful life.

Other indicators to watch include technology shifts that render the asset obsolete, significant stock price declines, substantial doubt about going concern, and an impairment of goodwill in a related reporting unit.² The standard avoids bright-line thresholds on purpose, so each reporting period requires a judgment call about whether any indicator is present.

Indefinite-lived intangibles and goodwill are tested at least annually and additionally whenever a triggering event occurs between annual tests.

Grouping Assets Before You Test

A common mistake is testing an individual asset in isolation. ASC 360 requires grouping at the lowest level for which identifiable cash flows are largely independent of the cash flows of other assets. A single machine on a factory floor rarely has its own revenue stream. The production line, or possibly the entire facility, may be the appropriate asset group.

Grouping takes judgment. A retail chain would typically group assets by individual store, since each store generates separately identifiable revenue. A fully integrated factory feeding a single product line would likely form one group. Too broad a group can mask an impaired asset by averaging it with healthy ones. Too narrow a group can produce false positives.

The Two-Step Test for ASC 360 Assets

Step 1: Recoverability

Once a trigger occurs and the group is identified, compare the group’s carrying amount to the undiscounted sum of its expected future cash flows. This is a screen, not a valuation. If undiscounted cash flows exceed carrying amount, the asset passes and testing stops.

Take a manufacturing facility with a combined carrying value of $5 million across its asset group. If management projects $6.2 million in undiscounted net cash flows over the remaining useful life, including eventual sale proceeds, the group passes. No further work is required.

The use of undiscounted cash flows is deliberate. It sets a lower bar than a fair-value comparison would, because it ignores the time value of money. An asset can clear this screen even if its fair value sits below book value, as long as the raw dollars flowing in over its life exceed the carrying amount.

Cash flow projections should reflect the most likely economic conditions over the asset’s remaining life and include both inflows from continued operations and the net amount expected on eventual disposition. Projections must include outflows to maintain the asset’s existing service potential, such as routine maintenance or engine overhauls, but exclude capital expenditures that would expand service potential beyond current capacity.³ Interest expense is excluded, as are cash flows tied to a recognized asset retirement obligation.

Step 2: Measuring the Loss

If undiscounted cash flows fall short, the group has failed the screen and the company measures the actual loss by comparing carrying amount to fair value, following ASC 820.⁴ The impairment loss equals the amount by which carrying value exceeds fair value.

Suppose the same $5 million facility produced only $4.3 million in undiscounted cash flows and failed Step 1. A discounted cash flow analysis then determines fair value at $3.8 million. The impairment loss is $1.2 million, recorded on the income statement, and the asset group’s carrying value drops to $3.8 million.

Fair value under ASC 820 is the price that would be received to sell the asset in an orderly transaction between market participants. Three approaches are available: the income approach, which discounts projected cash flows at a risk-adjusted rate; the market approach, which uses observable prices or multiples for comparable assets; and the cost approach, which estimates replacement cost adjusted for depreciation and obsolescence. The income approach is the most common for operating assets, because active markets for specialized industrial equipment are often thin.

ASC 820 prioritizes inputs in a hierarchy. Level 1 is quoted prices in active markets for identical assets. Level 2 is observable data for similar assets. Level 3 is unobservable, relying on management’s internal projections.⁴ Most long-lived asset impairment valuations end up leaning heavily on Level 3 inputs, which is why those assumptions attract scrutiny during audits and SEC reviews.

Indefinite-Lived Intangibles (Non-Goodwill)

Intangibles with indefinite useful lives, such as perpetual trademarks or FCC broadcast licenses, follow a simpler model under ASC 350-30. These assets are tested annually and whenever a triggering event suggests the carrying amount exceeds fair value.¹

There is no undiscounted-cash-flow screen. The test compares carrying amount directly to fair value, and any excess is the impairment loss. A company may first perform a qualitative assessment of whether it is more likely than not that fair value exceeds carrying amount. If that qualitative screen is favorable, no quantitative calculation is needed.

Sequencing matters here. Indefinite-lived intangibles should be tested before the related long-lived asset group and before goodwill. An impairment of an indefinite-lived intangible changes the carrying amounts that feed into both the ASC 360 asset group test and the ASC 350 goodwill test.

Goodwill at the Reporting Unit Level

Goodwill does not generate cash flows on its own and cannot be sold separately. It is the premium paid in a business acquisition above the fair value of identifiable net assets. Because of that, goodwill is tested at the reporting unit level, not as a standalone asset.

A reporting unit is an operating segment, or one level below (a component), provided the component is a business with discrete financial information that segment management regularly reviews.⁵ A diversified company with three operating segments might have five or six reporting units. Goodwill from each historical acquisition is allocated to the reporting unit expected to benefit from the synergies of that combination.

Before running numbers, a company may perform a qualitative assessment to decide whether the quantitative test is even necessary. The question is whether it is more likely than not (greater than 50 percent) that the reporting unit’s fair value exceeds its carrying amount. Factors include macroeconomic conditions, industry trends, cost increases, financial performance, and entity-specific events such as management changes or litigation. If the qualitative review concludes that fair value most likely exceeds carrying amount, the company stops. Otherwise, the quantitative test is required. A company can also skip the qualitative step and go directly to the quantitative test in any period.

The quantitative test compares the fair value of the entire reporting unit to its carrying amount, including allocated goodwill. If carrying amount exceeds fair value, the shortfall is the impairment loss, capped at the total goodwill allocated to that reporting unit.⁶

Example: a reporting unit has a carrying amount of $100 million, including $20 million of goodwill, and a fair value of $85 million. The $15 million shortfall is less than the $20 million of goodwill, so the full $15 million is recorded as a goodwill impairment loss, leaving a $5 million goodwill balance. If the shortfall had been $25 million, only $20 million would be recognized, because the write-down cannot exceed the goodwill allocated to the unit.

Private Company Alternatives

Private companies and not-for-profit entities can elect two accounting alternatives that simplify goodwill accounting. First, they may amortize goodwill on a straight-line basis over ten years, or a shorter period if the entity demonstrates a more appropriate useful life.⁷ Second, they may evaluate goodwill triggering events only as of the end of each reporting period rather than monitoring continuously. Either alternative can be elected independently.

Amortization reduces the goodwill balance over time, which lowers the dollar exposure to any eventual impairment charge. The tradeoff is a recurring amortization expense hitting the income statement each period.

Assets Held for Sale

Different rules apply once a company commits to selling an asset or disposal group. ASC 360 requires held-for-sale classification when all of the following are true:⁸

Management with proper authority commits to a plan to sell.
The asset is available for immediate sale in its present condition.
An active program to locate a buyer has begun.
The sale is probable and expected to close within one year.
The asset is being actively marketed at a price reasonable relative to current fair value.
Significant change or withdrawal of the plan is unlikely.

Once held for sale, the asset is measured at the lower of carrying amount or fair value less costs to sell.⁹ The undiscounted-cash-flow screen does not apply. Depreciation stops the moment the asset is classified as held for sale.

What Happens After the Write-Down

An impairment loss is not just an income statement event. The reduced carrying amount becomes the asset’s new cost basis going forward. If the asset is depreciable, that new basis is depreciated over the remaining useful life, and the company should reassess whether remaining life and salvage value assumptions still make sense in light of what triggered the impairment.

US GAAP prohibits the reversal of an impairment loss on an asset held and used, even if fair value later recovers above the new carrying amount.⁹ Once written down, the asset stays down. IFRS permits reversal on non-goodwill assets; US GAAP does not.

Recording and Disclosure

The impairment loss is recognized in the period it is identified and reported as a component of income from continuing operations. If the asset relates to a discontinued operation, the loss sits within that section of the income statement, net of tax.

ASC 360-10-50-2 requires the following in the notes for the period the loss is recognized:¹⁰

A description of the impaired asset or asset group and the facts and circumstances that led to the impairment.
The amount of the loss and where it appears in the income statement, if not separately presented on the face of the statement.
The method used to determine fair value, whether a quoted market price, comparable asset pricing, or another valuation technique.
The reporting segment in which the impaired asset sits, if the entity reports segment information under ASC 280.

Companies relying on Level 3 inputs need to describe the key assumptions driving the valuation, since those assumptions represent the area of greatest estimation risk.

Tax Treatment of the Impairment

A GAAP write-down does not automatically produce a tax deduction. Tax rules generally wait until the asset is sold or disposed of before allowing a deduction for a decline in value. This creates a temporary difference between the reduced book carrying amount and the unchanged tax basis.

When tax basis exceeds book carrying amount after an impairment, the result is a deductible temporary difference under ASC 740. The company recognizes a deferred tax asset equal to the difference multiplied by the applicable tax rate, subject to a valuation allowance assessment. A $400,000 write-down that leaves book value at $1.6 million while the tax basis remains at $2 million generates a deferred tax asset of $84,000 at a 21 percent federal rate.

The valuation allowance question matters here. If the same circumstances that triggered the impairment also cast doubt on the company’s ability to generate future taxable income, a valuation allowance may erase some or all of the deferred tax benefit. The worse things get operationally, the less likely the deferred tax asset provides real relief.

1
Deloitte. Intangible Assets Not Subject to Amortization
2
Deloitte. When to Test a Long-Lived Asset (Asset Group) for Recoverability
3
Ernst & Young. Financial Reporting Developments: Impairment or Disposal of Long-Lived Assets
4
SEC.gov. Note 10 – Fair Value Measurements
5
Deloitte. Identification of Reporting Units
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Deloitte. Quantitative Assessment (Step 1)
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FASB. Accounting Standards Update 2021-03: Accounting Alternative for Evaluating Triggering Events
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SEC.gov. Assets Held for Sale and Discontinued Operations
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FASB. Summary of Statement No. 144
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Deloitte. Disclosures Related to Recognition of an Impairment Loss