Impairment rules exist to keep assets from being carried above what they can recover. For private companies, two topics do most of the work: ASC 360-10 for property, plant and equipment and finite-lived intangible assets, and ASC 350 for goodwill and indefinite-lived intangible assets. Each has its own triggers, its own test and its own measurement. Private companies also have an accounting alternative for goodwill that changes the analysis substantially.
This guide covers both models, the private company goodwill alternative, the order in which tests are performed and what auditors test. It paraphrases the Codification and the related ASUs and is not a substitute for them.
Long-lived assets held and used: ASC 360-10
When to test
Long-lived assets held and used are not tested on a schedule. They are tested for recoverability whenever events or changes in circumstances indicate that the carrying amount of an asset group may not be recoverable. ASC 360-10 gives examples of such indicators, including:
- a significant decrease in the market price of a long-lived asset or asset group
- a significant adverse change in the extent or manner in which an asset is used, or in its physical condition
- a significant adverse change in legal factors or the business climate, including an adverse action by a regulator
- an accumulation of costs significantly in excess of the amount originally expected to acquire or construct the asset
- a current-period operating or cash flow loss combined with a history of losses, or a projection of continuing losses associated with the asset
- a current expectation that, more likely than not, the asset will be sold or otherwise disposed of significantly before the end of its previously estimated useful life
The trigger assessment should be documented each reporting period, even when the conclusion is that no indicator exists. A location with repeated losses and no documented trigger assessment is hard to defend.
The asset group
Testing is done at the level of the asset group: the lowest level for which identifiable cash flows are largely independent of the cash flows of other assets and liabilities. For a restaurant chain that is often an individual restaurant. For a single-plant manufacturer it may be the whole entity. Getting the asset group right matters more than any other input, because it decides which cash flows are compared with which assets.
Step 1: Recoverability
The carrying amount of the asset group is compared with the sum of the undiscounted cash flows expected to result from the use and eventual disposition of the group. The cash flows are estimated over the remaining useful life of the group's primary asset, which is the principal long-lived tangible asset or finite-lived intangible asset being depreciated or amortized that is the most significant component of the group.
If the undiscounted cash flows exceed the carrying amount, the group is recoverable and no impairment is recognized, even if fair value is lower.
Step 2: Measurement
If the carrying amount is not recoverable, an impairment loss is measured as the amount by which the carrying amount exceeds the group's fair value, determined under ASC 820. See ASC 820 fair value measurement. The loss is allocated to the long-lived assets of the group pro rata based on carrying amounts, but not below the fair value of an individual asset if that is determinable without undue cost and effort.
The adjusted carrying amount becomes the new cost basis. ASC 360 prohibits reversing a previously recognized impairment loss on assets held and used. Consider also whether the remaining useful life and depreciation method should be revised.
Assets held for sale
When an asset group meets the held-for-sale criteria in ASC 360-10, such as management commitment to a plan, availability for immediate sale, an active program to locate a buyer and an expected sale within one year, it is measured at the lower of its carrying amount or fair value less cost to sell, and depreciation stops. Later increases in fair value less cost to sell can be recognized, but not above the cumulative loss previously recognized.
Goodwill: ASC 350-20 without the alternative
When to test
Goodwill is tested for impairment at the reporting unit level at least annually, and between annual tests if an event occurs or circumstances change that would more likely than not reduce the fair value of a reporting unit below its carrying amount.
Optional qualitative assessment
An entity may first assess qualitative factors, often called step zero, to determine whether it is more likely than not that a reporting unit's fair value is less than its carrying amount. Factors include macroeconomic conditions, industry and market considerations, cost factors, overall financial performance and entity-specific events. If the answer is no, no quantitative test is needed. An entity can skip the qualitative assessment for any reporting unit in any period.
The quantitative test
Since ASU 2017-04, the goodwill impairment test is a single step. The entity compares the fair value of the reporting unit with its carrying amount, including goodwill. If the carrying amount exceeds fair value, an impairment loss is recognized for the excess, limited to the total goodwill allocated to the reporting unit. The former step two, which required a hypothetical purchase price allocation to measure implied goodwill, was eliminated.
Goodwill impairment losses cannot be reversed.
The private company goodwill alternative
The Private Company Council developed, and the FASB issued in ASU 2014-02, an accounting alternative for goodwill available to private companies. ASU 2019-06 extended it to not-for-profit entities. A private company that elects it:
- amortizes goodwill on a straight-line basis over 10 years, or less than 10 years if the entity demonstrates that another useful life is more appropriate
- tests goodwill for impairment only when a triggering event occurs that indicates the fair value of the entity (or reporting unit) may be below its carrying amount, rather than annually
- makes a policy election to test goodwill at the entity level or the reporting unit level
- measures any impairment as the excess of the carrying amount of the entity (or reporting unit) over its fair value, not exceeding the carrying amount of goodwill
- may still use the optional qualitative assessment when a trigger occurs
The amortization reduces the carrying amount of goodwill over time, which in turn reduces the likelihood and size of later impairments. For a private company, the alternative turns goodwill from an annual valuation exercise into a straightforward amortization schedule with event-driven testing.
Triggering event evaluation timing: ASU 2021-03
ASU 2021-03 gave private companies and not-for-profit entities another option. Entities that elect it evaluate goodwill impairment triggering events only as of the end of each reporting period, whether annual or interim, instead of monitoring for triggers continuously throughout the period. It does not change the test itself; it reduces the burden of identifying the precise date a trigger occurred.
Related intangible asset alternative
ASU 2014-18 lets private companies that acquire a business stop recognizing certain intangible assets separately from goodwill: customer-related intangibles unless they are capable of being sold or licensed independently, and noncompetition agreements. An entity that elects this alternative must also adopt the goodwill amortization alternative. The reverse is not required.
Once elected
The alternatives are accounting policy elections and should be clearly disclosed. Private companies that later expect to become public business entities should consider that the alternatives are not available to PBEs, and unwinding them can be costly.
Indefinite-lived intangible assets: ASC 350-30
Indefinite-lived intangibles, such as certain trademarks and licenses, are not amortized. They are tested for impairment at least annually, and more often if events indicate impairment, by comparing fair value with carrying amount. A qualitative assessment is also available. The private company goodwill alternative does not apply to them.
The order of testing
When several assets are tested at the same time, the order matters:
- Adjust other assets first, such as inventory, receivables and capitalized costs, under their own topics.
- Test indefinite-lived intangibles under ASC 350-30, because they sit outside the ASC 360-10 model and are adjusted before an asset group is tested for recoverability.
- Test long-lived assets under ASC 360-10, and adjust their carrying amounts.
- Test goodwill last, using carrying amounts after the earlier impairments.
Testing in the wrong order changes the result, because each later test uses the adjusted carrying amounts from the earlier ones.
What auditors test
Impairment analyses are accounting estimates under AU-C 540, often with high estimation uncertainty and subjectivity. A practical audit approach:
- Trigger assessment. Evaluate management's assessment of indicators against what the audit team learned elsewhere: losses by location, lost customers, covenant breaches, declining forecasts, board discussions.
- Asset groups and reporting units. Evaluate whether the unit of account matches how cash flows are generated and how the business is managed.
- Cash flow forecasts. Compare forecasts with historical results, budgets, board materials and the forecasts used in going concern, deferred tax valuation allowance and debt covenant analyses. Inconsistency across areas is a red flag. See going concern assessment and ASC 740.
- Fair value measurement. Where an outside valuation is used, evaluate the management's specialist under AU-C 500 and test the significant assumptions, such as discount rates, terminal growth and market multiples. Consider an auditor's specialist under AU-C 620 when the valuation is complex.
- Sensitivity. Assess how much headroom exists and which assumptions would eliminate it.
- Policy elections and amortization. For goodwill alternative adopters, recompute amortization, check the useful life and confirm the testing level matches the elected policy.
- Disclosures. Read impairment disclosures, policy elections and the description of methods against ASC 350 and ASC 360.
Record the analysis so a reviewer can follow the judgments, as AU-C 230 requires, and evaluate any misstatements under AU-C 450. The fixed asset rollforward template is a useful starting point for tying impairment entries to the asset ledger.
Frequently asked questions
Do private companies have to test goodwill annually?
Not if they elect the private company alternative. Companies that elect it amortize goodwill over 10 years or less and test it only when a triggering event occurs. Companies that do not elect it test at least annually at the reporting unit level.
What is the recoverability test under ASC 360?
It compares the carrying amount of an asset group with the undiscounted cash flows expected from its use and eventual disposition. If the undiscounted cash flows are lower, an impairment loss is measured as the excess of carrying amount over fair value.
Can an impairment loss be reversed?
No, not for long-lived assets held and used or for goodwill. The written-down amount becomes the new cost basis. Only assets held for sale can recover previously recognized losses, and only up to the cumulative loss recognized.
What did ASU 2017-04 change?
It eliminated step two of the goodwill impairment test. Impairment is now measured as the excess of a reporting unit's carrying amount over its fair value, limited to the goodwill allocated to it.
What does ASU 2021-03 allow?
Private companies and not-for-profit entities may elect to evaluate goodwill impairment triggering events only as of the end of each reporting period, rather than throughout the period.
CORAA prepares ready-to-review audit files for US CPA firms from QuickBooks books; you review and sign. See /us.
Sources
- FASB ASC 360-10-35, Impairment or Disposal of Long-Lived Assets
- FASB ASC 350-20, Goodwill, and ASC 350-30, General Intangibles Other than Goodwill
- FASB ASU 2017-04, Simplifying the Test for Goodwill Impairment
- FASB ASU 2014-02, Accounting for Goodwill (private company alternative); ASU 2014-18, Business Combinations (identifiable intangible assets); ASU 2019-06 (extension to not-for-profit entities); ASU 2021-03 (triggering event evaluation timing)
- FASB ASC 820, Fair Value Measurement
- AICPA, AU-C Section 230, 450, 500, 540 and 620
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