What Are the FASB 142 Rules for Goodwill Impairment?

The Financial Accounting Standards Board (FASB) introduced Statement 142 to change how companies account for goodwill and other intangible assets. This standard moved accounting practices away from a systematic write-down of these assets toward a model based on periodic value assessments. While Statement 142 itself has been superseded, its core principles are now integrated into the FASB Accounting Standards Codification (ASC), primarily under ASC 350. This codification now governs how these assets are treated on corporate balance sheets after they are first recorded, a shift driven by feedback from financial statement users who found the previous method less useful for analysis.

The Shift from Amortization to Impairment

Prior to the changes, accounting principles required companies to amortize goodwill, systematically reducing the asset’s value over a period as long as 40 years. This approach treated goodwill like a “wasting asset,” one that predictably lost value over time. For public companies, the new standard eliminated this automatic amortization for goodwill, requiring an impairment-only model instead. A loss is only recorded when the asset’s carrying value on the books is greater than its current fair value.

An accounting alternative is available for private companies and not-for-profit entities. These organizations can elect to amortize goodwill on a straight-line basis, typically over ten years. If this option is chosen, they are only required to test for impairment when a “triggering event” suggests a potential drop in value, rather than performing the test annually.

This change acknowledged that goodwill does not always lose value in a predictable pattern; in some cases, its value might not decrease at all. This results in financial statements that can show more volatility, as a large impairment loss can be recognized in one period, whereas the old amortization method produced a smooth, consistent expense year after year.

Assets Covered by the Impairment Rule

The impairment rule targets goodwill and other intangible assets that are determined to have an indefinite useful life. Goodwill is an asset that arises during a business acquisition, representing the amount paid for a company that exceeds the fair value of its identifiable assets and liabilities. It can be thought of as payment for non-identifiable assets like a strong brand reputation, a loyal customer base, or proprietary technology.

Intangible assets are categorized based on their expected useful lives. Those with finite useful lives, such as patents or copyrights that expire on a specific date, continue to be amortized over their respective lives. A common example of an intangible asset with an indefinite useful life is a trademark for a well-established brand that is expected to be renewed continuously.

Performing the Goodwill Impairment Test

Companies using the impairment-only model must test goodwill for impairment at least once a year. The test must also be performed between these annual assessments if a “triggering event” occurs. A triggering event is an event or change in circumstances that suggests it is more likely than not that the asset’s fair value has fallen below its carrying amount. Examples include a significant downturn in the economy, increased competition, or the loss of key personnel.

As an initial step, a company has the option to perform a qualitative assessment, sometimes referred to as “Step 0.” This allows the company to evaluate economic conditions, industry trends, and other specific factors affecting the business unit to which the goodwill is assigned. If this qualitative review indicates the fair value is likely greater than the carrying amount, no further testing is needed for that period. If the qualitative assessment indicates a potential decline in value, or if the company chooses to bypass it, the quantitative impairment test is required.

This is a single-step test where the company compares the fair value of the reporting unit to its carrying amount, which includes the recorded goodwill. A reporting unit is an operating segment of a company or a component one level below an operating segment. If the carrying amount of the reporting unit exceeds its fair value, the company must recognize an impairment loss equal to this excess.

The recognized loss cannot be greater than the total amount of goodwill allocated to that reporting unit. This single-step process was simplified by a later update, which eliminated a more complex second step that required calculating the implied fair value of goodwill.

Reporting and Disclosing Impairment Losses

When a goodwill impairment loss is identified, it must be recognized as a non-cash charge on the income statement. It is presented as a separate line item within income from continuing operations. Simultaneously, the impairment loss reduces the carrying value of goodwill on the balance sheet. This write-down is permanent; the value of goodwill cannot be written back up in future periods if the fair value of the reporting unit recovers.

Companies are also required to provide detailed disclosures in the footnotes to their financial statements to offer context for investors and other stakeholders. Key required information includes a description of the facts and circumstances that led to the impairment. The company must also disclose the amount of the impairment loss and the method used to determine the fair value of the reporting unit.