Public Companies: Impairing Goodwill and Indefinite-Lived Assets

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Unlike routine depreciation of an asset for predictable wear and tear, impairment is an unscheduled accounting event concerning to both public and private companies alike. When an asset is impaired, the company’s overall value is negatively affected … which may, in turn, negatively impact its stock price.

However, when deemed necessary, impairment is an important accounting practice to get right. Accurately assessing asset impairment ensures the integrity of company financial statements, providing transparency for the investors and stakeholders who rely on those statements.

To fully understand impairment, we must first break down the asset types impacted by it (goodwill, indefinite-lived and long-lived), as well as be informed about the differences regarding how impairment can be accounted for by public versus private companies.

This article aligns us on the definitions, concepts and accounting standards regarding impairment and discusses best practices for public companies impairing goodwill and indefinite-lived assets. We have also written two other articles providing best practices for privately held entities, as well as best practices for the impairment of long-lived assets (for both public and private companies).

FIRST: Let’s Align on the Definitions, Concepts and Standards

It’s important to understand the definitions, concepts and standards that apply for public and private entities regarding impairment of goodwill and other assets (indefinite-lived or long-lived). Let’s align:

• Impairment: The definition of impairment is the same for both public and private entities: a non-cash adjustment to an entity’s asset, providing stakeholders and investors with the economic reality of the entity’s financial health. This happens when an asset’s recoverable (or fair-market) value falls below its book (or carrying) value. Making the adjustment helps ensure asset floor values (or recoverable amounts) are accurate in financial statements.
  
  
• U.S. GAAP: While the concept of impairment is the same for public and private companies, there are two different Generally Accepted Accounting Practice (GAAP) standards recognized by the Public Company Accounting Oversight Board (PCAOB) and the Private Company Council (PCC).
  • Accounting Standards Codification (ASC) 350 – Intangibles (Goodwill and Other): Outlines the model for impairment of goodwill and any indefinite-lived assets.
  • ASC 360 – Property, Plant and Equipment: Outlines the model for impairment of long-lived assets held and used.
    
    
• Goodwill: For both public and private companies, goodwill is defined as the excess of purchase price over the fair value of identifiable net assets in a business combination. In simpler terms, it is the premium a buyer pays to acquire a business. Goodwill is intangible, representative of elements like the acquired business’ brand reputation, employee talent and any synergies expected from the acquisition (e.g., expanded geographic reach or market consolidation).
  • Public Entities: Goodwill is considered intangible and is also generally considered indefinite-lived, especially for public entities.
  • Private Entities: We note that the PCC released different accounting alternatives for goodwill and related impairment assessments that can help simplify the accounting for these items. However, these options are only available to privately held entities.
    
    
• Assessing/Testing Impairment: For public companies, impairment over goodwill and indefinite-lived intangible assets should be assessed at the reporting-unit level rather than the consolidated or legal-entity level. This means goodwill should be tested at the same level that management reviews operating results, makes resource allocation decisions and assesses performance. Note that private companies adopting the PCC accounting alternatives can assess either at the reporting-unit level or entity level.
  • A reporting unit is an operating segment or one level below an operating segment (a component) as defined in ASC 280 – Segment Reporting.
  • The reason for testing at the reporting unit level for public companies is to avoid masking impairments in specific units that may be producing declining or adverse results. A consolidated analysis may hide the fact that one reporting unit with allocated goodwill is performing well, while another is performing poorly and is facing significant challenges.
    
    
• Clarifying Indefinite Assets/Life: Indefinite-lived assets can include items like trademarks or trade names, indefinite franchise rights, certain types of licenses, etc. — as long as the indefinite life is supportable. Although stating something has an indefinite useful life seems like an aggressive accounting position, there is a reason for this:
  • There is no predictable pattern of economic benefit that can be reliably measured over time.
  • Amortizing goodwill over a fixed period would not reflect the economic reality of how goodwill contributes to a business, as it tends to exist as long as the business itself exists.

GETTING TO IT

The remainder of this article will cover best practices and key points that will help a public entity accurately assess the value of its goodwill and indefinite-lived assets subject to impairment, under the scope of ASC 350 and PCAOB standards. Similar information for private companies can be found here.

Assessment of Impairment over Goodwill and Indefinite-Lived Assets for Public Companies

Whenever an entity enters into a business combination as the accounting acquirer, it is likely that the acquirer will need to recognize goodwill on their books and records. Goodwill is considered intangible and is also generally considered indefinite-lived, especially for public entities. Below, we provide the most conservative reporting structure for a public entity regarding goodwill and indefinite-lived assets. 

Impairment of goodwill and other indefinite-lived assets is governed by ASC 350 – Intangibles (Goodwill and Other). Because goodwill and other indefinite-lived assets are not amortized over time, ASC 350 requires an annual test for impairment (or more frequently if triggered) to ensure that any amounts on the balance sheet not subject to amortization are not overstated and are properly assessed. Best practices include:

• Test at the Same Time of Year: To maintain consistency, your annual test should typically be conducted at the same time each year.
  
  
• Conduct Interim Tests if Triggered: An interim test is required when a triggering event occurs (e.g., adverse market conditions, loss of key operating personnel, significant declines in financial performance, etc.).
  
  
• Conduct Two Key Assessments:
  • Qualitative: The first assessment should be a qualitative analysis over the goodwill by management that determines whether it is more likely than not (defined as greater than 50% likelihood) that the goodwill allocated to a reporting unit is less than its current carrying amount on the balance sheet. If management can conclude, based on a sufficiently supported qualitative assessment, that it is more likely than not that the fair value of a reporting unit is less than its carrying amount, then the quantitative assessment is not required to be performed. Below are some qualitative factors that may be considered, but management should tailor and potentially expand the factors they consider to their specific business:
    • Industry-specific trends
    • Macroeconomic conditions and overall market trends
    • Changes in cost structure
    • Material adverse changes in financial performance
    • Entity-specific events (including significant management changes, litigation and regulatory changes affecting the entity)
    • Trends in share price if the entity is a publicly traded entity
  • Quantitative: If the qualitative assessment indicates that impairment is likely at the reporting-unit level, the second assessment is initiated and a quantitative analysis is required. However, management may decide to move directly to the quantitative assessment if they have the resources and want to ensure conservatism in their financial reporting.
    • The starting point of the quantitative analysis is to determine the carrying value of the reporting unit subject to goodwill impairment testing, which will include all assets and liabilities assigned to the unit (including goodwill).
    • To be included, the assets must be employed in the operating of a reporting unit and the liabilities must relate to the operations of the reporting unit. For further assessment on what should or should not be included in your analysis, we recommend consulting ASC 350-20-35-39 through ASC 350-20-35-44.
      
      
• ASC 820 – Fair Value: Once you have determined the carrying value of the reporting unit, management will now estimate the fair value of the reporting unit in accordance with ASC 820 – Fair Value Measurement. Under ASC 820, fair value is defined as “the price that would be received to sell the reporting unit as a whole in an orderly transaction between market participants at the measurement date.” As a result, market participant assumptions and valuation models should be utilized, which includes the income approach, market approach or cost approach.
  • Income Approach: Utilizes the discounted cash flow model and projects future discounted cash flows of the reporting unit using a market-based discount rate.
  • Market Approach: Utilizes valuation multiples from comparable guideline companies or transactions that are public information.
  • Cost Approach: Based on the replacement cost of the unit’s assets.
    
    
• NOTE: Because these methodologies are complex and involve numerous valuation assumptions, it is highly recommended that a third-party specialist is hired by management to help perform these analyses. This third-party specialist should also be independent of your audit firm, if applicable, as it will provide the most reliable and audit-ready analysis.

If Fair-Market Value is Lower than Carrying/Book Value = Impaired Asset

Now that management has performed the quantitative assessment, comparison of the fair value acquired from the above quantitative assessment versus the carrying amount will determine if impairment is needed. 

If the fair value is lower than carrying value, management will write down the original carrying value to this new fair value. If the fair value is higher than carrying value, no entry is generated and the entity’s goodwill or indefinite-lived asset is deemed not impaired.

• NOTE: An impairment loss cannot be reversed in future periods once it is recorded.

Required Disclosures

Management should ensure disclosures are adequate under ASC 350 for proper transparency to financial statement users. When a goodwill impairment loss is recognized, the following should be disclosed:

• A description of the facts and circumstances that led to the impairment loss recorded, which includes a narrative explaining what triggered the impairment.
• The dollar value of the impairment loss and where the loss is recorded on the income statement, if not obvious.
• The methodology utilized to determine fair value and whether it was performed internally or by a third-party.
• Key assumptions used in the valuation model, which includes discount rates, growth rates, terminal value assumptions and any other inputs deemed significant to the analysis.
• Identification of the specific reporting units to which the goodwill impairment applies.
• Descriptions on how the reporting units align with the segments disclosed under ASC 280, if applicable.

The Objective: Represent Economic Reality for the Integrity of the Financial Statements

Hopefully this article has helped to clarify the process of assessing impairment under ASC 350, particularly as it relates to goodwill and indefinite-lived intangible assets for public companies. While these assets may not be amortized, their valuation must still reflect economic reality to preserve the integrity of the financial statements. By identifying triggering events early, understanding the importance of the reporting-unit level and applying a disciplined approach to both qualitative and quantitative assessments, public entities can ensure their financial reporting remains transparent and decision useful.

PKF O’Connor Davies brings the technical expertise and valuation insight needed to support your team through each step of the impairment process — from identifying risk indicators to developing robust fair value models. Our goal is to support your compliance with both the formal requirement and underlying intent of ASC 350, while aligning your impairment practices with your broader financial reporting objectives.

Additional Resources

This article was published along with two others that also discuss impairment of goodwill and other assets. We encourage you to reference or share as needed:

• Private Companies: Impairing Goodwill and Indefinite-Lived Assets
• Impairing Long-Lived Assets (for Both Public and Private Entities)

Contact Us

We welcome the opportunity to answer any questions you may have related to this topic or any other matters concerning accounting and assurance. Please contact your PKF O’Connor Davies client service team or either of the Accounting and Assurance team members below:

Jonathan Zuckerman, CPA
Partner
Accounting & Assurance
jzuckerman@pkfod.com | 646.699.2842

Kenneth Sumsky, CPA, CISA
Director
Accounting & Assurance
ksumsky@pkfod.com | 332.910.7951