Definition
Goodwill is not amortized by most entities. Under ASC 350-20, it is tested at least annually, and between tests when events make impairment more likely than not, at the reporting unit level. Entities may begin with a qualitative assessment. If a quantitative test is needed, the carrying amount of the reporting unit is compared with its fair value, and the impairment loss equals the excess of carrying amount over fair value, limited to the goodwill balance (ASU 2017-04 removed the second step). Private companies may elect the alternative that amortizes goodwill on a straight-line basis over ten years or less and tests only when a triggering event occurs.
Why it matters in an audit or review
Fair value estimates are sensitive to discount rates, growth, and market multiples, so auditors challenge assumptions and often involve a specialist under AU-C 620. Reporting units, cumulative losses, and headroom drive the risk.
Example
(Illustrative) A reporting unit has a carrying amount of $12.0 million, including $4.0 million of goodwill, and a fair value of $10.5 million. The loss is $1.5 million.
Common mistakes
- Not testing after a triggering event, such as loss of a major customer.
- Using a single entity-level test without reporting units when the private company alternative has not been elected.
Sources
- FASB ASC 350-20, Intangibles-Goodwill and Other, Goodwill (annual and triggering-event testing, qualitative assessment)
- FASB ASU 2017-04, Simplifying the Test for Goodwill Impairment
- FASB ASU 2014-02, Accounting for Goodwill (private company alternative)
- FASB ASU 2021-03, Accounting Alternative for Evaluating Triggering Events (private companies and not-for-profits)
- AICPA, AU-C Section 620, Using the Work of an Auditor's Specialist
Definitions paraphrase AICPA and FASB guidance; read the standard itself before relying on a requirement. Example figures are illustrative. This page is guidance, not professional advice. Report an error