Goodwill Impairment: Definition, Examples, Standards, and Tests

By Alicia Tuovila
Updated February 23, 2021
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David Kindness
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What Is Goodwill Impairment?

Goodwill impairment is an accounting charge that companies record when goodwill’s carrying value on financial statements exceeds its fair value. In accounting, goodwill is recorded after a company acquires assets and liabilities, and pays a price in excess of their identifiable net value.

Goodwill impairment arises when there is a deterioration in the capabilities of acquired assets to generate cash flows, and the fair value of the goodwill dips below its book value.

Key Takeaways

  • Goodwill impairment is an accounting charge that is incurred when the fair value of goodwill drops below the previously recorded value from the time of an acquisition.
  • Goodwill is an intangible asset that accounts for the excess purchase price of another company based on its proprietary or intellectual property, brand recognition, patents, etc., which is not easily quantifiable.
  • Impairment may occur if the assets acquired no longer generate the financial results that were previously expected of them at the time of purchase.
  • A test for goodwill impairment aligned with generally accepted accounting principles (GAAP) must be undertaken, at a minimum, on an annual basis.
Goodwill Impairment Goodwill Impairment

Michela Buttignol / Investopedia

How Goodwill Impairment Works

Goodwill impairment is an earnings charge that companies record on their income statements after they identify that there is persuasive evidence that the asset associated with the goodwill can no longer demonstrate financial results that were expected from it at the time of its purchase.

Goodwill is an intangible asset commonly associated with the purchase of one company by another. Specifically, goodwill is recorded in a situation in which the purchase price is higher than the net of the fair value of all identifiable tangible and intangible assets and liabilities assumed in the process of an acquisition. The value of a company’s brand name, solid customer base, good customer relations, good employee relations, and any patents or proprietary technology represent some examples of goodwill.

Because many companies acquire other firms and pay a price that exceeds the fair value of identifiable assets and liabilities that the acquired firm possesses, the difference between the purchase price and the fair value of acquired assets is recorded as goodwill. However, if unforeseen circumstances arise that decrease expected cash flows from acquired assets, the goodwill recorded can have a current fair value that is lower than what was originally booked, and the company must record a goodwill impairment.

Special Considerations

Changes in Accounting Standards for Goodwill

Goodwill impairment became an issue during the accounting scandals of 2000–2001. Many firms artificially inflated their balance sheets by reporting excessive values of goodwill, which was allowed at that time to be amortized over its estimated useful life. Amortizing an intangible asset over its useful life decreases the amount of expense booked related to that asset in any single year.

While bull markets previously overlooked goodwill and similar manipulations, the accounting scandals and change in rules forced companies to report goodwill at realistic levels. Current accounting standards require public companies to perform annual tests on goodwill impairment, and goodwill is no longer amortized.

Annual Test for Goodwill Impairment

U.S. generally accepted accounting principles (GAAP) require companies to review their goodwill for impairment at least annually at a reporting unit level. Events that may trigger goodwill impairment include deterioration in economic conditions, increased competition, loss of key personnel, and regulatory action.

The definition of a reporting unit plays a crucial role during the test; it is defined as the business unit that a company’s management reviews and evaluates as a separate segment. Reporting units typically represent distinct business lines, geographic units, or subsidiaries.

The basic procedure governing goodwill impairment tests is set out by the Financial Accounting Standards Board (FASB) in “Accounting Standards Update No. 2017-04, Intangibles—Goodwill and Other (Topic 350): Simplifying the Test for Goodwill Impairment.”

Example of Goodwill Impairment

Perhaps the most famous goodwill impairment charge was the $54.2 billion reported in 2002 for the AOL Time Warner Inc. merger. This was, at the time, the largest goodwill impairment loss ever reported by a company.

How Do Companies Report Goodwill Impairment?

Companies record goodwill impairment as an earnings charge on their income statements. This happens after they identify persuasive evidence that the asset associated with the goodwill can no longer demonstrate financial results expected from it at the time of its purchase.

What Is Goodwill?

Goodwill is an intangible asset that is recorded when one company is purchased by another. It is the portion of the purchase price that is higher than the sum of the net fair value of all of the assets purchased in the acquisition and the liabilities assumed in the process.

How Often Must Companies Test for Goodwill Impairment in the United States?

In the U.S., generally accepted accounting principles (GAAP) require companies to review their goodwill for impairment at least once a year at a reporting unit level. Catalysts for goodwill impairment include increased competition, economic deterioration, loss of key personnel, and regulatory action.

The Bottom Line

Goodwill impairment is an accounting charge incurred when the fair value of goodwill drops below the previously recorded value from the time of an acquisition. Goodwill in accounting is recorded after a company acquires assets and liabilities, and pays a price in excess of their identifiable net value.

Article Sources
Investopedia requires writers to use primary sources to support their work. These include white papers, government data, original reporting, and interviews with industry experts. We also reference original research from other reputable publishers where appropriate. You can learn more about the standards we follow in producing accurate, unbiased content in our editorial policy.

  1. Financial Accounting Standards Board, via Internet Archive Wayback Machine. “Accounting for Goodwill Impairment.”

  2. KPMG, via Internet Archive Wayback Machine. “Should Goodwill Amortisation Be Reintroduced?”

  3. Financial Accounting Standards Board, via Internet Archive Wayback Machine. “Summary of Statement No. 141.”

  4. U.S. Securities and Exchange Commission. “Form 10-K for the Fiscal Year Ended December 31, 2002: AOL Time Warner Inc.,” Page F-80.

  5. Time. “What AOL Time Warner’s $54 Billion Loss Means.”