Asset Impairment Testing: PP&E, Intangibles & Goodwill Under ASC 350/360

Published: March 27, 2026

Article by Ryan O'Connell, CFA, FRM

When a company overpays for an acquisition, deploys capital into underperforming equipment, or watches a brand lose market value, the balance sheet must eventually reflect that reality. That process is asset impairment — the recognition that an asset’s carrying amount can no longer be justified by the cash flows it will generate. Large impairment charges signal strategic missteps, overpriced M&A, or deteriorating competitive positions, and they flow directly through the income statement.

The stakes are enormous. In its preliminary Q4 2018 disclosure, Kraft Heinz recognized approximately $15.4 billion in combined goodwill and indefinite-lived intangible impairments on the Kraft and Oscar Mayer brands — roughly $7.1 billion in goodwill and $8.3 billion in trademark write-downs driven by declining brand values and rising private-label competition. That same year, GE recorded a $22 billion goodwill impairment on its power segment after demand for gas turbines collapsed, exposing the cost of its 2015 Alstom acquisition.

This article covers the mechanics of impairment testing and loss measurement under U.S. GAAP for three asset categories: PP&E and finite-life intangibles (ASC 360), goodwill (ASC 350), and indefinite-life intangibles (ASC 350). For background on how intangible assets are defined, classified, and amortized, see Intangible Assets & Goodwill. For M&A deal valuation and how goodwill arises in acquisitions, see Mergers & Acquisitions Valuation.

What Is Asset Impairment?

An asset is impaired when its carrying amount — original cost minus accumulated depreciation or amortization — exceeds the future economic benefit the asset can deliver. Unlike depreciation, which is a systematic allocation of cost over an asset’s useful life, impairment is an additional, non-scheduled write-down triggered by specific events or changed circumstances.

Impairment affects all three financial statements: the income statement (impairment loss reduces net income), the balance sheet (asset carrying amount decreases, reducing total assets and shareholders’ equity), and the cash flow statement (the loss is a non-cash charge added back in operating activities under the indirect method).

The Impairment Testing Framework

GAAP establishes separate impairment models under two codification topics. ASC 360 governs PP&E and finite-life intangible assets using a two-step approach. ASC 350 governs goodwill and indefinite-life intangibles using a one-step fair value test. The table below summarizes the key differences:

Note that IFRS (IAS 36) takes a different approach — it bypasses the undiscounted cash flow screen and goes straight to a “recoverable amount” test. This distinction is discussed further in the Limitations section below.

PP&E and Finite-Life Intangible Impairment Under ASC 360

Step 1 — Recoverability Test

The recoverability test is a screening step that uses undiscounted future cash flows — not discounted. Estimate the total expected net cash flows from the asset’s continued use and eventual disposition over its remaining useful life. If that sum exceeds the carrying amount, no impairment is recognized. If undiscounted cash flows fall below the carrying amount, the asset fails the screen and proceeds to Step 2.

Common triggering events that prompt a recoverability test include: a significant decline in the asset’s market price, a change in how the asset is used or its physical condition, adverse legal or regulatory developments, accumulation of costs significantly exceeding original expectations, and operating losses or negative cash flows associated with the asset.

Step 2 — Measuring the Impairment Loss

Once the recoverability test is failed, the impairment loss equals the asset’s carrying amount minus its fair value. Fair value is measured under the ASC 820 hierarchy: quoted market prices (Level 1), observable inputs (Level 2), or discounted cash flow models using unobservable inputs (Level 3). The asset’s new carrying amount is its fair value, and future depreciation or amortization is recalculated on this reduced basis over the remaining useful life.

Goodwill Impairment Under ASC 350

What Is a Reporting Unit?

Goodwill is assigned to reporting units at the time of acquisition. A reporting unit is an operating segment or one level below (a component with discrete financial information). Impairment is tested at this level — not at the individual asset level. This means a company can have goodwill impairment in one division while others remain healthy.

Optional Step Zero — Qualitative Assessment

Before running the quantitative test, management may perform a qualitative assessment (sometimes called “Step Zero”). If it is more likely than not (greater than 50% probability) that the reporting unit’s fair value exceeds its carrying amount, no further testing is required. Qualitative factors include macroeconomic conditions, industry and market trends, cost increases, declining cash flows, and market capitalization falling below book value. Step Zero is optional — companies can skip directly to the quantitative test.

Quantitative One-Step Test (Post-ASU 2017-04)

The simplified quantitative test compares the fair value of the entire reporting unit to its carrying amount including goodwill. If the reporting unit’s fair value equals or exceeds its carrying amount, goodwill is not impaired. If fair value falls below carrying amount, the shortfall is the impairment loss — but the loss is capped at the total goodwill assigned to that reporting unit. This one-step approach replaced the prior two-step method (which required a hypothetical purchase price allocation), phasing in for SEC filers for fiscal years beginning after December 15, 2019, with later adoption dates for other public and private entities.

Indefinite-Life Intangible Asset Impairment

Indefinite-life intangibles — such as broadcast licenses, certain trade names, and perpetual franchise rights — are not amortized but must be tested for impairment at least annually under ASC 350-30. Like goodwill, an optional qualitative assessment is available: if it is more likely than not that the asset’s fair value exceeds its carrying amount, the quantitative test can be skipped.

Unlike PP&E, there is no recoverability test using undiscounted cash flows. The test goes straight to fair value: if fair value is less than carrying amount, the difference is the impairment loss. Fair value is typically estimated via relief-from-royalty models or discounted cash flow analysis.

If circumstances change and an indefinite-life intangible is reclassified to finite-life, amortization begins and the ASC 360 two-step test applies going forward. For details on intangible asset classification and recognition, see Intangible Assets & Goodwill.

PP&E vs. Goodwill vs. Intangible Impairment

Common Mistakes in Impairment Testing

1. Using discounted cash flows in the ASC 360 recoverability test. Step 1 requires undiscounted future cash flows. Using discounted flows makes the hurdle harder to clear, potentially triggering a write-down that GAAP does not yet require. Discounting only enters at Step 2 when measuring fair value.

2. Applying the goodwill impairment cap to total goodwill instead of the reporting unit. The loss is capped at the goodwill assigned to the specific reporting unit being tested — not the company’s total goodwill balance. A loss on Unit A cannot be offset by headroom on Unit B.

3. Treating the Step Zero qualitative assessment as a formality. The qualitative screen must be a genuine evaluation of relevant factors. SEC staff have challenged companies that routinely elect Step Zero without substantive analysis, particularly when operating conditions are deteriorating.

4. Failing to retest after mid-year triggering events. A reporting unit tested in Q1 using year-end assumptions may be materially misstated if a major customer is lost in Q3. Impairment must be reassessed between annual test dates when triggering events occur, using current assumptions.

5. Not disclosing impairment charges separately from depreciation. Both are non-cash charges added back in operating activities under the indirect method. Goodwill impairment must be presented as a separate line item (ASC 350-20-45-2), and material ASC 360 impairments are typically presented separately as well — though GAAP permits note disclosure of the amount and income-statement caption as an alternative. Either way, bundling impairment with routine depreciation obscures the magnitude of the write-down from financial statement users — similar to how bad debt write-offs warrant separate disclosure from routine credit loss expense.

Limitations of Impairment Testing

Fair value estimation is inherently subjective. DCF models for reporting units require assumptions about discount rates, terminal growth rates, and cash flow projections that management controls. Small changes in the weighted average cost of capital can swing a reporting unit from impaired to not impaired.

Impairment recognition is backward-looking. By the time a multi-billion-dollar goodwill write-down is announced, equity markets have typically already priced in the deterioration. The charge confirms what investors suspected rather than providing new information.

Management has discretion over triggering event judgments. Whether conditions indicate impairment involves subjective assessment. Academic research documents that managers with goodwill on their books tend to delay impairment recognition relative to market signals, creating a potential gap between economic reality and reported book values.

Similar limitations apply to other asset write-downs — for example, inventory write-downs under the lower-of-cost-or-NRV rule reflect but do not remedy the underlying economic loss.