Managing Impairment Testing

---
name: managing-impairment-testing
description: Structures goodwill and long-lived asset impairment testing with fair value estimation and documentation. Use when testing for impairment, estimating fair values, or documenting impairment analysis.
tags:
  - management
  - accounting
metadata:
  author: casemark
  practice_areas:
    - Financial Reporting
    - Audit
    - Accounting
  document_types:
    - Management Report
  skill_modes:
    - Management
    - Coordination
---
# Managing Impairment Testing

Structures goodwill and long-lived asset impairment testing with fair value estimation and documentation.

## When To Use

- Annual goodwill impairment testing under ASC 350 (or IAS 36 for IFRS reporters) [VERIFY: applicable framework]
- Triggering-event assessment for long-lived assets under ASC 360
- Interim impairment testing when indicators of impairment arise (market cap decline, loss of key customer, adverse regulatory change, sustained operating losses)
- Acquisition-related purchase price allocation follow-up when reporting units are restructured
- Audit support — preparing or reviewing impairment workpapers for external auditors

## Inputs To Gather

- **Reporting unit / CGU structure**: Current reporting unit or cash-generating unit mapping, including any recent reorganizations
- **Carrying amounts**: Net book value of goodwill by reporting unit, and carrying amounts of long-lived asset groups (PP&E, definite-lived intangibles, ROU assets)
- **Financial projections**: Board-approved budgets, long-range plans, and discrete cash-flow forecasts (typically 5 years) with terminal growth assumptions
- **Discount rates**: Weighted-average cost of capital (WACC) inputs — risk-free rate, equity risk premium, size premium, company-specific risk, debt cost, capital structure weights [VERIFY: source for market data]
- **Market data**: Guideline public company multiples, precedent transaction multiples, quoted market prices if applicable
- **Triggering-event indicators**: List of qualitative and quantitative factors evaluated (macro, industry, entity-specific, reporting-unit-specific)
- **Prior-period workpapers**: Previous impairment analyses, fair value conclusions, and headroom/cushion amounts

## Workflow

1. **Scope the engagement**
   - Confirm which reporting units / asset groups are in scope
   - Determine whether a qualitative assessment (Step 0) is supportable or a quantitative test is required
   - Identify the measurement date and reporting deadline

2. **Evaluate triggering events (long-lived assets, ASC 360)**
   - Walk through the triggering-event checklist: significant adverse change in business climate, legal factors, market price, physical condition, use/expected use of the asset, or forecasted cash flows
   - Document conclusion on whether a recoverability test is warranted for each asset group
   - If no trigger exists, document the basis and stop

3. **Perform recoverability test (ASC 360) or quantitative goodwill test (ASC 350)**
   - *Long-lived assets*: Compare undiscounted future cash flows to carrying amount. If undiscounted cash flows < carrying amount, proceed to fair value measurement
   - *Goodwill*: Compare fair value of the reporting unit to its carrying amount (including goodwill). Impairment = carrying amount exceeding fair value, capped at goodwill balance

4. **Estimate fair value**
   - Apply at least two valuation approaches where practicable:
     - **Income approach**: Discounted cash flow (DCF) using entity-specific projections and market-derived discount rate. Reconcile WACC components to observable inputs
     - **Market approach**: Guideline public company method and/or guideline transaction method. Select and adjust multiples (EV/EBITDA, EV/Revenue) for size, growth, margins
   - Weight or reconcile approaches; document rationale for weighting
   - For long-lived assets measured at fair value, consider cost approach for specialized assets

5. **Calculate and allocate impairment loss**
   - Goodwill: Impairment charge = carrying amount of reporting unit − fair value (limited to goodwill balance). No Step 2 allocation required post-ASU 2017-04 [VERIFY: confirm entity has adopted ASU 2017-04]
   - Long-lived assets: Allocate impairment loss pro rata across long-lived assets in the group based on carrying amounts; do not reduce any asset below its individual fair value

6. **Prepare documentation package**
   - Triggering-event memo with conclusion
   - Valuation model with clearly labeled assumptions, sources, and sensitivity tables
   - Reconciliation of aggregate reporting-unit fair values to market capitalization (with implied control premium analysis)
   - Journal entry support and disclosure drafts (ASC 350-20-50, ASC 360-10-50)

7. **Coordinate review and approval**
   - Route workpapers for management review and sign-off
   - Address auditor PBC requests; prepare responses to valuation specialist inquiries
   - Update the impairment tracking schedule for next period's headroom analysis

## Output

The deliverable is a management-ready impairment testing package containing:

- **Triggering-event assessment memo** — qualitative and quantitative factors evaluated, conclusion, and supporting evidence
- **Fair value estimation workbook** — DCF model, market comparable analysis, assumption summary, and sensitivity/scenario tables
- **Impairment calculation schedule** — carrying amount vs. fair value by reporting unit / asset group, impairment charge (if any), and post-impairment carrying amounts
- **Market capitalization reconciliation** — aggregate fair value vs. observed market cap with implied control premium commentary
- **Disclosure draft** — quantitative and qualitative disclosures required under ASC 350/360 (or IAS 36) [VERIFY: applicable disclosure checklist]
- **Audit support binder** — organized PBC items, management representation points, and valuation specialist coordination notes

## Quality Checks

- Verify reporting unit structure matches the current organizational and segment reporting alignment
- Confirm discount rate build-up ties to observable market data as of the measurement date
- Test mathematical integrity of DCF model (foot cash flows, check terminal value reasonableness as % of total enterprise value — flag if >75%)
- Validate that revenue growth rates and margin assumptions are consistent with board-approved forecasts and do not exceed historical or industry benchmarks without documented support
- Reconcile sum of reporting-unit fair values to market capitalization; investigate and explain any implied control premium outside the 15–40% typical range [VERIFY: reasonableness range for industry]
- Ensure impairment charge does not reduce goodwill below zero or reduce individual asset carrying amounts below fair value
- Cross-check prior-period headroom to current-period results for directional consistency
- Confirm all [VERIFY] items have been resolved or flagged for management/auditor discussion before finalizing