Goodwill Impairment — Recording Losses and Crafting Disclosures

Once goodwill impairment is identified through a quantitative assessment, the loss must be recorded in the period it is incurred, with precise presentation in the financial statements.

Disclosure requirements are extensive and must communicate not only the amount and timing of impairment but also the key assumptions and sensitivity used in the valuation process.

1. Recognizing the impairment loss

Timing

The impairment loss must be recognized immediately in the period the test is performed—either during the annual assessment or following a triggering event.

Financial statement impact

• Income statement: Record the impairment as a separate line item within continuing operations, typically labeled “Goodwill impairment loss.”

• Balance sheet: Reduce the carrying amount of goodwill. No liability is created; the loss simply decreases total assets and equity.

No reversal allowed

• Under US GAAP, goodwill impairments are permanent—reversals are prohibited.

• Under IFRS, reversals are also prohibited even if fair value increases in future periods.

2. Allocation of impairment loss (IFRS only)

IFRS Allocation Order	Application of Loss
Step 1	Reduce goodwill to zero
Step 2	Allocate any remaining loss to other assets in the CGU, pro rata based on carrying amounts (excluding certain items)

Assets excluded from allocation:

• Inventories

• Deferred tax assets

• Employee benefit assets

• Financial assets

Each asset cannot be written down below the highest of:

• Its fair value less costs of disposal

• Its value in use

• Zero

3. Journal entry to record goodwill impairment

Example (US GAAP):Impairment loss identified: $18,000,000

Entry:

• debit Goodwill impairment loss .................................... 18,000,000

• credit Goodwill ..................................................................... 18,000,000

This directly reduces the goodwill balance and appears on the income statement.

4. Presentation in financial statements

Income statement:

• Show the impairment loss as a separate line item, not combined with depreciation, amortization, or operating expenses.

• Label clearly (e.g., “Impairment of goodwill”) and report within income from continuing operations, not as an extraordinary or discontinued item.

Cash flow statement:

• The impairment is a non-cash expense. It is added back in the reconciliation of net income to net cash from operating activities under the indirect method.

Segment reporting (if applicable):

• Attribute the impairment to the appropriate operating segment under ASC 280 or IFRS 8.

5. Disclosure requirements — US GAAP and IFRS

Disclosure Area	Details to Provide
Description of impairment	Events or changes in circumstances that led to impairment
Amount of loss	Total amount and reporting units/segments affected
Valuation method used	Whether fair value was determined using DCF, market multiples, or a combination
Key assumptions	Discount rate, growth rates, terminal value assumptions
Sensitivity analysis (IFRS emphasis)	Disclosure of how much headroom existed before impairment would occur
If no impairment but at risk (IFRS)	If recoverable amount is close to carrying value, disclose headroom and assumptions

6. Sample disclosure wording (IFRS-style)

“The Group performed its annual goodwill impairment test as of December 31, 2024. The recoverable amount of each CGU was determined using a value-in-use calculation based on discounted future cash flows. The test for CGU X indicated that its carrying amount exceeded recoverable value by €12 million. A goodwill impairment loss of €12 million was recognized and presented separately in profit or loss. Key assumptions included a 9.5% post-tax discount rate and terminal growth rate of 2.0%.”

7. Audit and internal control considerations

Auditors will assess:

• The rigor of the valuation models used

• Consistency of key assumptions with budgets and forecasts

• Adequacy of impairment documentation

• Whether controls over management estimates (including override risks) are operating effectively

Internal controls must ensure timely identification of triggering events, management challenge of assumptions, and review of third-party valuations if used.

Key take-aways

• Record the impairment loss immediately and separately in the income statement, reducing goodwill without creating liabilities.

• Disclosures must clearly explain the rationale, valuation method, assumptions, and sensitivity of the impairment conclusion.

• Under IFRS, if goodwill is impaired to zero, remaining loss must be allocated across the CGU with appropriate limitations.

• Transparent impairment disclosures help users understand the drivers of value loss and assess future performance expectations.