Andersen Global
Impairment Testing Amid Market Volatility: What Companies Need to Know
Recent market turbulence has significantly impacted the stock performance of many public companies, prompting renewed scrutiny of asset-carrying values on corporate balance sheets. This environment raises a critical question for financial reporting teams: whether interim impairment testing of goodwill and long-lived assets is warranted.
Under U.S. GAAP, companies are required to test goodwill for impairment annually or more frequently if triggering events indicate that it is more likely than not that the fair value of a reporting unit is less than its carrying amount. Similarly, long-lived assets—including property, plant, equipment, and finite-lived intangibles—must be tested when indicators suggest their carrying value may not be recoverable.
One of the most prominent triggering events is declining market capitalization. If a company's market value falls below its book value for a sustained period, it could imply that the market perceives the business to be worth less than its recorded net assets. This disconnect is a classic signal that interim goodwill impairment testing may be necessary. Other potential triggers include deteriorating macroeconomic conditions, changes in the regulatory environment, loss of key customers, a decline in financial performance, or underperformance relative to budgeted expectations.
For long-lived assets, the presence of a triggering event requires a two-step recoverability test under ASC 360. First, companies assess whether the undiscounted cash flows expected from the asset group exceed its carrying amount. If the carrying amount exceeds the undiscounted cash flows, a quantitative fair value test using market participant assumptions is required. The excess of carrying value over fair value represents the impairment loss, which is then allocated among the finite-lived assets within the asset group.
Goodwill impairment, on the other hand, is now governed by a one-step test under ASC 350. If the fair value of the reporting unit falls below its carrying amount, the difference—limited to the goodwill balance—is recognized as an impairment loss. In practice, this often necessitates complex valuation exercises, including discounted cash flow modeling or market-based approaches, which may involve engaging external valuation specialists.
Given the current economic uncertainty and widespread market corrections, many companies, particularly in sectors like technology, retail, and consumer discretionary, face heightened impairment risk. The SEC and audit firms are placing greater emphasis on management’s documentation and judgment in determining whether triggering events exist and how fair values are derived.
To prepare, companies should monitor key performance indicators closely and document any shifts in financial outlook, customer behavior, or capital markets. Early coordination with auditors and valuation professionals can streamline the process if impairment testing becomes necessary. Transparent disclosure of impairment testing methodology, assumptions, and outcomes is also critical for maintaining investor confidence and regulatory compliance.
The Takeaway
The volatile market environment demands heightened vigilance around asset impairment. By proactively evaluating triggering events and preparing for interim testing, companies can ensure that their financial statements remain an accurate reflection of economic reality.