Journal Entries for Goodwill Impairment: A Complete Guide

Quick Answer

When goodwill is impaired, debit the Impairment Loss account and credit the Goodwill account for the impairment amount. Under US GAAP (ASC 350), goodwill impairment is recognized when the carrying amount of a reporting unit exceeds its fair value. Under IFRS (IAS 36), impairment is recognized when the recoverable amount of the cash-generating unit falls below its carrying amount. The journal entry is the same under both frameworks: Dr. Impairment Loss / Cr. Goodwill.

What Is Goodwill Impairment?

Goodwill is an intangible asset that arises when one company acquires another for a price exceeding the fair value of the identifiable net assets. Unlike tangible assets, goodwill is not amortized under US GAAP (for public entities) or IFRS. Instead, it must be tested for impairment at least annually, or more frequently if triggering events suggest a decline in value.

Impairment occurs when the carrying value of goodwill on the balance sheet exceeds its implied fair value. When this happens, a company must write down the goodwill and recognize an impairment loss on the income statement. Understanding how goodwill and intangible assets work is essential before diving into impairment entries.

When to Test for Goodwill Impairment

Annual Testing

Both US GAAP and IFRS require annual impairment testing regardless of whether indicators of impairment exist. The test can be performed at any time during the fiscal year, provided it is done consistently each year at the same time.

Interim Testing Triggering Events

Between annual tests, impairment must be assessed if a triggering event occurs. Common triggering events include:

• Significant adverse changes in the business climate or legal environment
• A decision to dispose of a reporting unit or cash-generating unit
• Unexpected decline in cash flows or profitability
• Loss of key personnel or major customers
• Significant negative regulatory or competitive developments

Goodwill Impairment Testing: Step by Step

Under US GAAP (ASC 350)

Since the 2017 amendments to ASC 350, the impairment test follows a simplified one-step approach:

• Step 1: Compare the fair value of the reporting unit to its carrying amount (including goodwill). If fair value exceeds carrying amount, no impairment exists. If carrying amount exceeds fair value, recognize an impairment loss equal to the excess, capped at the carrying amount of goodwill.

Prior to the amendment, a two-step process was required. The updated guidance eliminates Step 2 (the implied goodwill calculation), making the process more straightforward.

Under IFRS (IAS 36)

Impairment testing under IFRS follows a recoverable amount approach:

• Compare the carrying amount of the cash-generating unit (including goodwill) to its recoverable amount (the higher of fair value less costs of disposal and value in use).
• If the carrying amount exceeds the recoverable amount, recognize an impairment loss. The loss is first allocated to reduce goodwill, then to other pro-rata assets.

Journal Entry for Goodwill Impairment

When impairment is identified, the journal entry is straightforward:

The debit flows through the income statement as an operating expense (or sometimes a separate line item for material impairments). The credit reduces the goodwill balance on the balance sheet. Once written down, goodwill may not be reversed under US GAAP. Under IFRS, reversal of goodwill impairment is specifically prohibited.

Numerical Example

Suppose ABC Corp acquired a subsidiary for $5 million, with $1.2 million allocated to goodwill. After a significant downturn in the reporting unit's industry, the fair value of the reporting unit is assessed at $3.5 million, while its carrying amount (including goodwill) is $4.2 million.

Impairment loss = Carrying amount ($4,200,000) - Fair value ($3,500,000) = $700,000

After this entry, the goodwill balance is reduced from $1,200,000 to $500,000.

Partial vs. Full Goodwill Impairment

Under the simplified ASC 350 model, impairment can be partial. The loss equals the amount by which the carrying amount exceeds fair value, but it cannot exceed the total goodwill allocated to that reporting unit. This differs from the pre-2017 two-step approach, which sometimes resulted in full goodwill write-offs.

Under IFRS, the impairment loss also first reduces goodwill before being allocated to other assets of the cash-generating unit. If the impairment exceeds the goodwill balance, the excess is allocated pro rata to other assets within the unit.

Common Mistakes in Goodwill Impairment Accounting

• Skipping interim impairment tests. Waiting for the annual test when triggering events have occurred can result in overstated assets and delayed loss recognition.
• Incorrectly allocating goodwill. Goodwill must be allocated to reporting units (US GAAP) or cash-generating units (IFRS) at the acquisition date. Misallocation leads to incorrect impairment calculations.
• Reversing goodwill impairment. Neither US GAAP nor IFRS allows reversal of goodwill impairment once recognized. Any subsequent recovery in value cannot be recorded as a write-up.
• Failing to consider tax effects. While the impairment loss itself is typically not tax-deductible, it may affect deferred tax assets or liabilities associated with the reporting unit. Review journal entries for deferred tax assets and liabilities for guidance on the interplay.
• Mixing up depreciation and impairment. Goodwill is not depreciated or amortized (for public US GAAP filers). Impairment is a separate concept. For guidance on depreciation entries, see journal entries for depreciation.

Impact on Financial Statements

Income Statement

The impairment loss appears as an expense, reducing net income. If material, it is typically presented as a separate line item. The loss is a non-cash expense, meaning it does not affect operating cash flow.

Balance Sheet

Goodwill on the balance sheet is reduced by the impairment amount. Total assets decrease, which may affect financial ratios such as return on assets and debt-to-equity.

Cash Flow Statement

Since impairment is a non-cash charge, it is added back to net income in the operating section of the cash flow statement when using the indirect method. This ensures that the impairment does not distort the company's actual cash generation.

Disclosure Requirements

Both US GAAP and IFRS require extensive disclosures when goodwill impairment is recognized:

• A description of the facts and circumstances leading to the impairment
• The method used to determine fair value (income approach, market approach, or cost approach)
• The amount of the impairment loss and where it appears in the income statement
• The reporting unit or cash-generating unit affected

For a broader overview of journal entry mechanics across multiple topics, refer to our complete guide to journal entries for small business.

Key Takeaways

• Goodwill impairment is recognized with a debit to Impairment Loss and a credit to Goodwill.
• US GAAP uses a one-step test comparing fair value to carrying amount at the reporting unit level.
• IFRS compares recoverable amount to carrying amount at the cash-generating unit level.
• Goodwill impairment cannot be reversed under either US GAAP or IFRS.
• Interim testing is required when triggering events occur between annual test dates.
• Impairment is a non-cash charge that reduces net income but does not affect operating cash flow.