Goodwill Impairment: A Simple Test and Journal Entry

Goodwill impairment happens when a reporting unit’s carrying amount, including goodwill, is higher than its fair value. Under U.S. generally accepted accounting principles (GAAP) in ASC 350-20, the impairment loss equals that excess, but it can never be more than the goodwill assigned to the unit. If fair value equals or exceeds carrying amount, no loss is recorded.

Quick formula: Goodwill impairment loss = the lesser of (1) the reporting unit’s carrying amount minus its fair value, or (2) the goodwill allocated to that unit. If carrying amount minus fair value is zero or negative, the loss is $0.

Why does this matter? Under this model, goodwill is not amortized. Without an impairment test, goodwill could sit on the balance sheet at its original amount even after the acquired business has lost value. This guide supports Intermediate Accounting section 11.3; all examples and practice questions are hypothetical.

Goodwill and reporting units

Goodwill arises in a business combination after identifying and measuring acquired assets and assumed liabilities. Review our goodwill accounting calculation and acquisition entry if you need the starting point.

A reporting unit is the level used to test goodwill. It is an operating segment or, when the criteria are met, one level below. In classroom examples it is often described as a division. A division label alone does not establish that it qualifies; the examples here state that the unit is appropriate.

Carrying amount means the recorded net amount at the testing date. Use the reporting unit’s carrying amount, including allocated goodwill, and compare it with a consistently measured fair value for that same unit. Do not compare the goodwill balance alone with the value of the entire division.

When is goodwill impairment testing required?

Under the general model, test goodwill annually and between annual tests when events or changed circumstances make it more likely than not that the reporting unit’s fair value has fallen below carrying amount. The annual test can occur during the year if performed consistently at the same time.

Warning signs may include worsening operating results, loss of an important customer, or adverse market conditions. A warning sign does not itself tell you the dollar loss. It tells management to evaluate the relevant evidence and apply the testing requirements.

What does the optional qualitative assessment do?

A company may first look at qualitative factors to decide whether it is more likely than not (a likelihood of more than 50%) that the reporting unit’s fair value is below its carrying amount. If the answer is no, the company does not need the quantitative calculation for that unit in that period. If the answer is yes, it performs the quantitative test.

The company can also skip this optional assessment and go straight to the calculation. Many textbooks call the qualitative assessment “step zero.” Either way, goodwill is still evaluated every year. The qualitative assessment is simply a shortcut when the evidence clearly supports the carrying amount.

Apply the goodwill impairment test

The FASB’s Accounting Standards Update 2017-04 explains the reporting-unit comparison and goodwill cap. It eliminated the former second step that calculated implied goodwill fair value. The current authoritative requirements reside in ASC 350-20.

FASB project update (November 2026). On July 29, 2026, the FASB added a project to consider targeted improvements to the level and frequency of goodwill impairment testing. On November 11, 2026, the Board voted to remove that project from its agenda, as reported by Bloomberg Tax. The agenda decision did not amend ASC 350-20. This guide applies the existing general U.S. GAAP model, including annual testing at the reporting unit level.

Goodwill impairment example and journal entry

Hypothetical example. Pine Service Group has a qualifying reporting unit with identifiable net assets of $920,000 and goodwill of $180,000. Its carrying amount is therefore $1,100,000. The unit’s fair value is $970,000. Assume other required asset tests are already complete and tax effects do not affect the calculation.

The excess is $1,100,000 − $970,000 = $130,000. Because $130,000 is below the $180,000 goodwill balance, record the entire $130,000 as goodwill impairment.

Remaining goodwill is $180,000 − $130,000 = $50,000. The entry reduces earnings and assets. Recording the impairment does not require a new cash payment.

Heads-up on taxes: when goodwill is tax deductible, ASC 350-20-35-8B requires the impairment loss and its deferred tax effect to be calculated together, in a way similar to a business combination. The total loss still cannot exceed the goodwill allocated to the unit. Intermediate examples usually ignore this, and so does ours.

Want to see how this entry compares with impairment entries for other assets? Our impairment loss journal entry guide walks through a worked example. For the full chapter with video lessons, explore the Intermediate Accounting course, or try a lesson first in the free sample course.

What if the fair value were lower or higher?

In the last scenario, the goodwill test cannot absorb all $250,000. Its maximum loss is $180,000. Do not use the leftover amount as an automatic write-down of equipment. Other assets follow their own testing requirements, which are normally applied before the goodwill test when relevant. Our asset impairment test guide walks through that process.

How is goodwill impairment presented?

Show goodwill separately on the balance sheet. Present the goodwill impairment loss as a separate line item on the income statement, before the income from continuing operations subtotal, unless it relates to a discontinued operation. Notes explain changes in the carrying amount and relevant impairment information.

A simple reconciliation could show beginning goodwill of $180,000, no acquisitions or other adjustments, a $130,000 impairment, and ending goodwill of $50,000. That connects the income statement charge to the lower balance sheet asset.

A bargain purchase gain is different: it arises from acquisition-date measurements, whereas goodwill impairment addresses goodwill already recorded.

Common mistakes in goodwill impairment questions

Watch for these traps on exams and homework:

• Using the wrong test. The undiscounted cash flow recoverability test is for long-lived assets under ASC 360. Goodwill uses a fair value comparison at the reporting unit level.
• Comparing with the purchase price. Compare fair value with the reporting unit’s current carrying amount, not the original acquisition price.
• Leaving goodwill out. The carrying amount you test must include the goodwill assigned to the unit.
• Ignoring the cap. The loss can never exceed the goodwill balance of the unit.
• Writing goodwill back up. A later recovery in value never reverses a recognized goodwill impairment loss.

The last point is crucial: a recognized goodwill impairment loss is not reversed under this model. A later recovery in value does not recreate the old asset.

Practice questions with explained answers

1. Carrying amount is $720,000, including $90,000 of goodwill. Fair value is $680,000. What loss is recorded?

Answer: $40,000. The excess is $720,000 − $680,000, below the $90,000 cap. Debit impairment loss and credit goodwill for $40,000.

2. Carrying amount is $720,000, goodwill is $90,000, and fair value is $590,000. What is the goodwill loss?

Answer: $90,000. The $130,000 excess exceeds recorded goodwill, so the loss is capped at $90,000. Remaining goodwill is zero.

3. Fair value increases after a $40,000 goodwill impairment was recognized last year. Can the company reverse the loss?

Answer: No. A subsequent improvement does not permit reversal of the recognized goodwill impairment loss.

Frequently asked questions

Is an annual test the same as annual amortization?

Answer: No. Amortization allocates cost over time. An impairment test can produce no expense when the required comparison supports the carrying amount.

What happens when fair value equals carrying amount?

Answer: There is no excess and no goodwill impairment loss.

Does every entity use this nonamortization model?

Answer: No. Eligible private companies and not-for-profit entities can elect an accounting alternative. Under it, goodwill is amortized on a straight-line basis over 10 years, or less if a shorter life is more appropriate, and it is tested for impairment only when a triggering event occurs. This article follows section 11.3’s general model.

How is goodwill impairment different under IFRS?

Answer: Under IAS 36, goodwill is allocated to a cash-generating unit or group of units expected to benefit from the acquisition. The allocation reflects the lowest level at which goodwill is monitored internally and cannot exceed an operating segment before aggregation. Testing is required at least annually and whenever there is an indication of impairment. A loss occurs when carrying amount exceeds recoverable amount, which is the higher of fair value less costs of disposal and value in use. The loss reduces goodwill first, then other assets pro rata. An individual asset cannot be reduced below the highest of its fair value less costs of disposal (if measurable), value in use (if determinable), and zero. A goodwill impairment loss is never reversed.

Is goodwill impairment a cash expense?

Answer: No. It is a noncash charge that reduces net income and total assets. Recognizing the impairment does not itself require a cash payment. On a statement of cash flows prepared with the indirect method, the impairment loss is added back to net income in operating activities.

Key takeaways

• Goodwill impairment loss = the lesser of the goodwill allocated to the reporting unit and the positive excess of its carrying amount (including goodwill) over fair value. If carrying amount equals or falls below fair value, the loss is $0.
• Test goodwill at least annually, at the same time each year, and between annual tests when events make it more likely than not that fair value is below carrying amount.
• The qualitative assessment, often called step zero, is optional. A company can go straight to the quantitative test.
• The journal entry is a debit to Goodwill impairment loss and a credit to Goodwill.
• A recognized goodwill impairment loss is never reversed under U.S. GAAP.
• Impairment of other intangible assets follows different rules. See our guide to intangible asset impairment.

Sources and lesson context

This original guide supports Wiley Intermediate Accounting, section 11.3: Goodwill. The key current Codification paragraphs for this guide are ASC 350-20-35-3A (optional qualitative assessment), 350-20-35-8 (loss measurement and the goodwill cap), 350-20-35-13 (no reversal), 350-20-35-28 (annual test timing), and 350-20-35-30 (testing between annual dates). The linked ASU 2017-04 shows how the FASB amended Subtopic 350-20 to remove the old second step. Read added and deleted text carefully in amendment documents; current Codification text governs.

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