A Brief Guide To Understanding The Goodwill Impairment Test

The assets that companies acquire usually change in value throughout their useful lifecycle. They also typically require periodic reassessment to determine their current economic useful life and enable financial statements to constitute an accurate value. These regular assessments apply to all company assets, whether tangible or intangible.

One of the most common intangible assets a company can own is goodwill, and the goodwill impairment test evaluates the underlying value of the cash generating units of the business compared with the fair market value. Goodwill impairment testing was considered an expensive and complex process that relied on the valuation of the net assets  to determine the “leftover” value attributable to goodwill.

Fortunately, new guidelines that greatly simplified the process of goodwill impairment testing have been put in place recently. Read on to learn more about the goodwill impairment test and how the current method for impairment testing differs from the old one.

What is “goodwill?”

The term “goodwill” basically refers to an intangible asset that only emerges from an acquisition when a buyer pays a higher price than the measurable intangible and collective tangible assets to obtain a business. The excess amount of the purchase price is what constitutes the value of the goodwill.

The buyer’s balance sheet usually lists goodwill and long-term assets as intangible assets. Now, since the goodwill value is subjective, it is required by accounting standards that the goodwill must be tested for impairment regularly and written down if the impairment does happen.

What the New Goodwill Impairment Test Brings

The new goodwill impairment test essentially brings about the elimination of quantitative assessment. This new standard compares the measurable assets’ actual fair value against the acquired company’s overall book value. It assumes that any difference between the two indicates only the amount of goodwill impairment. The balance sheet then reflects such a difference as a reduction in the long-term assets of the company.

For instance, if company ABC buys company DEF for $250,000, and the measurable assets of company DEF at the time of sale were $200,000, the goodwill’s carrying value is $50,000. If, after a year, the measurable assets obtained from company DEF are revalued and if they are worth  less than their fair value at the time of measurement, this reduction in asset value is attributed to goodwill impairment.

The Difference Between the Former and the Current Standard for Goodwill Impairment Testing

The former standard for determining goodwill impairment constituted a three-step procedure:

1. Qualitative assessment to identify whether the fair value of company DEF is likely less now than its carrying amount.

2. If the answer to the first assessment is yes, then quantitative assessment follows to determine whether the actual fair value of company DEF is now less than its carrying amount.

3. Suppose the answer to the second assessment is yes  In that case, another quantitative evaluation is conducted to determine whether goodwill’s implied fair value is now less than its carrying value. If the answer to this assessment is still yes, then the difference between the current implied fair value and the carrying value is considered goodwill impairment.

Impairment can occur due to cost increases, declining cash flow, recession, sustained decrease in share price, management changes, or other factors.


Overall, goodwill impairment testing is significant because goodwill can represent a huge part of a company’s value. If a company does not test for goodwill impairment regularly, it might overstate its value, which can have serious legal consequences. When calculating your assets’ value, including goodwill, engaging the services of a professional and reliable firm is highly recommended.

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*The above represent our views and opinions and does not necessarily reflect the position of any entities mentioned.