Goodwill and long-lived asset impairment testing under ASC 350, ASC 360 and IAS 36

Under US GAAP, yes, unless you've elected the private company alternative. ASC 350-20-35-28 requires an annual test of each reporting unit, at any point in the fiscal year as long as it is the same point every year, plus a test between annual dates when something changes (35-30).

You can start with a qualitative look. An entity has an unconditional option to skip it and go straight to the numbers (35-3B). The qualitative step asks whether it is more likely than not that the fair value of a reporting unit is below its carrying amount. If not, you stop.

The quantitative test, as simplified by ASU 2017-04, compares the fair value of the reporting unit with its carrying amount. The loss is the shortfall, capped at the goodwill allocated to that unit, and any tax effect of deductible goodwill is considered. The old second step is gone. For private companies the Update applies to tests in fiscal years beginning after December 15, 2022, the date ASU 2019-10 set when it deferred the original one.

IAS 36 also requires an annual test for goodwill acquired in a business combination, and for indefinite-life and not-yet-available intangibles.

A triggering event is a change after the last test that makes an impairment more likely than not. The Codification lists examples at 350-20-35-3C(a) through (g), and the list isn't exhaustive:

• Macroeconomic conditions: weaker general conditions, tighter access to capital, currency moves.
• Industry and market: more competition, lower market multiples, a regulatory or political change.
• Cost factors: raw material or labor cost increases that cut earnings and cash flow.
• Overall performance: negative or declining cash flows, or revenue and earnings below plan and prior periods.
• Entity-specific events: changes in management, key staff, strategy or customers; litigation; bankruptcy contemplation.
• Events affecting a reporting unit: a change in its net assets, an expected sale of part of it, or an impairment at a subsidiary.
• Share price: a sustained decrease, where there is one.

Private companies get relief. ASU 2021-03 offers a private company or not-for-profit the alternative of evaluating triggering events as of the end of each reporting period, so it doesn't have to monitor all year or work out when a trigger occurred. The Update added no new disclosures and is effective for fiscal years beginning after December 15, 2019, applied prospectively. Whichever route you take, the triggering event memo should be dated as of the reporting date and keep to the facts known then.

Yes. Under the Private Company Council alternative in ASC 350-20-35-62 onward, a private company can amortize goodwill on a straight-line basis over 10 years, or fewer if it shows a shorter useful life is more appropriate (35-63). It then elects at adoption to test at the entity level or the reporting unit level (35-65), and tests only when a triggering event occurs (35-66).

That trades annual testing for a recurring expense. Amortization lowers reported earnings every year, so check how your credit agreement defines EBITDA and net income before electing. A company that has taken the further alternative in ASU 2014-18, to leave certain intangibles inside goodwill, must also adopt this one.

IFRS offers no amortization route for goodwill under IAS 36 and IFRS 3. A US subsidiary on this alternative therefore carries a GAAP-to-IFRS difference every year, which belongs in the bridge for the IFRS reporting pack.

Equipment, capitalized software, right-of-use assets and finite-life intangibles are tested only when an indicator appears, such as a significant decrease in market price, an adverse change in use, a cost overrun or a history of operating losses (listed in FASB Statement 144, now ASC 360-10). The test applies to an asset group, the lowest level with largely independent cash flows.

If goodwill and another asset in the same reporting unit are tested together, ASC 350-20-35-31 has the other asset tested first, and any loss is booked before the goodwill test runs.

The model is management's. It starts from the forecast the board approved, converts it to cash flows, discounts them at a rate that reflects the risk of the reporting unit, and adds a terminal value. A market cross-check, such as multiples from comparable businesses or the price paid in the original deal, tests the answer.

Finbryn builds the model shell, ties the carrying amount to the trial balance, formats the sensitivity table (discount rate against terminal growth, typically) and writes the memo. The inputs that carry judgment, the discount rate and the market comparables, come from management or the independent specialist it engages. The fair value concepts behind them are explained on the ASC 820 and IFRS 13 fair value measurement page.

Two checks save time with an auditor. Back-test last year's forecast against actual results and explain any miss. And reconcile the sum of the reporting unit values to the company's own market value, whether a recent financing round, an offer or an equity valuation, so the total isn't a surprise.

If the headroom is thin, say so in the memo and show what happens at a half-point change in the rate. The reader should never be the first to find the sensitivity.

Auditors apply SAS 143 to estimates such as a fair value in a goodwill test. It took effect for audits of periods ending on or after December 15, 2023 (GAO summary of AICPA standards) and covers the auditor's responsibilities for accounting estimates and for indicators of possible management bias. In practice that means they test the data behind the forecast, the method, the discount rate support and whether last year's estimate was close.

An impairment loss goes through earnings in the period recognized. Under IFRS 18, effective for annual periods beginning on or after 1 January 2027, a goodwill impairment loss falls in the operating category of the statement of profit or loss, as the IFRS Foundation's illustrative presentation shows.

Expect these follow-on effects: a deferred tax adjustment if the goodwill was tax-deductible, a covenant calculation if the credit agreement uses earnings or net worth, and a lower base for future amortization or depreciation on any written-down asset. Finbryn lists them in the memo so the finance lead sees all of them at once. The financial statement preparation service carries the write-down into the statements and notes.