Goodwill Impairment

Definition

An accounting process required under US GAAP/IFRS where the carrying value (book value) of Goodwill on the Balance Sheet is reduced if its fair value is determined to be lower. Goodwill must be tested for impairment at least annually.

Trigger

• Impairment occurs when the fair value of the reporting unit associated with the Goodwill falls below its carrying amount on the Balance Sheet.

Financial Statement Impact

When an impairment loss is recognized:

1. Income Statement:
   • An impairment loss/charge is recorded as an expense (often within operating expenses).
   • This is a non-cash expense.
   • It reduces Operating Income (EBIT) and Net Income.
2. Cash Flow Statement:
   • The impairment charge is added back to Net Income in the Cash from Operations (CFO) section because it is non-cash.
   • This negates the direct cash impact of the expense itself.
3. Balance Sheet:
   • The Goodwill asset account is reduced by the impairment amount.
   • Shareholders’ Equity decreases due to the reduction in Retained Earnings (caused by lower Net Income).

Key Characteristic

• Goodwill impairment charges are typically not reversible in future periods under US GAAP, even if the fair value recovers.

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See also: Goodwill, Impairment, Intangible Assets, Fair Value, Non-Cash Expenses