Enter Values

$
Book value of the asset or reporting unit
$
Cash flows from use and disposition (undiscounted)
$
Fair value from appraisal, market data, or DCF
$
Goodwill on the books (loss capped at this amount)
Impairment Test Summary
PP&E (ASC 360): 2-Step Test
Step 1: CF ≥ CV? → Step 2: Loss = CV − FV
Goodwill (ASC 350): 1-Step Test
Loss = CV − FV (capped at goodwill)
Ryan O'Connell, CFA
Calculator by Ryan O'Connell, CFA

Impairment Test Results

Test Result Pass — No Impairment
Impairment Loss $0
New Carrying Value $500,000
Write-Down (of CV) 0.0%
Remaining Goodwill $200,000

Formula Breakdown

Model Assumptions

  • Fair value is provided externally — this calculator does not compute fair value. Determine fair value using appraisals, market data, or DCF models.
  • Undiscounted cash flows are a pre-computed sum — includes cash flows from use and eventual disposition. No discounting or projection of individual periods.
  • No reversal of impairment losses — under U.S. GAAP (ASC 360 and ASC 350), previously recognized impairment losses cannot be reversed.
  • Goodwill cannot be written below zero — the impairment loss is capped at the goodwill balance.
  • Single-asset / single-reporting-unit model — real-world testing may involve asset groups (ASC 360) or multiple reporting units (ASC 350).
  • Quantitative test only — this calculator does not perform the optional qualitative (Step 0) goodwill screen.
  • Ignores deferred tax effects — tax-deductible goodwill and deferred tax impacts are not modeled.
  • Negative carrying values out of scope — reporting units with negative carrying amounts are not supported.

For educational purposes only. Not financial or accounting advice. Consult a qualified professional for impairment testing decisions.

Understanding Asset Impairment Testing

What is Asset Impairment?

Asset impairment occurs when the carrying value (book value) of an asset on a company's balance sheet exceeds its fair value. Under U.S. GAAP, different standards govern the impairment testing process depending on the type of asset being tested.

PP&E Impairment (ASC 360)

Two-Step Test:
Step 1: Compare undiscounted future cash flows to carrying value (recoverability test).
Step 2: If Step 1 fails, measure loss as carrying value minus fair value.

Goodwill Impairment (ASC 350)

One-Step Test:
Compare reporting unit fair value to carrying value. If CV exceeds FV, the loss equals the difference, but is capped at the goodwill balance.

Why Undiscounted Cash Flows for Step 1?

The recoverability test under ASC 360 intentionally uses undiscounted cash flows as a conservative screening mechanism. Since undiscounted cash flows are always higher than their present value, an asset only fails the test when it has a clear and significant decline in value. This prevents excessive write-downs from minor fair value fluctuations.

Important: Under U.S. GAAP, impairment losses cannot be reversed once recognized (ASC 360 and ASC 350). The written-down amount becomes the asset's new cost basis. This differs from IFRS, which permits reversal for assets other than goodwill.

Key Concepts

  • Carrying Value: The net book value of the asset (cost minus accumulated depreciation/amortization)
  • Fair Value: The price that would be received in an orderly transaction between market participants
  • Undiscounted Cash Flows: Sum of expected future cash flows without applying a discount rate
  • Goodwill Cap: Impairment loss on goodwill cannot exceed the goodwill balance allocated to the reporting unit
  • Triggering Events: Events that indicate an asset's carrying amount may not be recoverable (e.g., market declines, adverse legal changes)

Frequently Asked Questions

Asset impairment occurs when the carrying value (book value) of an asset on a company's balance sheet exceeds its fair value. Under U.S. GAAP, this triggers a write-down. For PP&E (ASC 360), the asset must first fail a recoverability test using undiscounted cash flows before the impairment loss is measured. For goodwill (ASC 350), the impairment loss equals the excess of carrying value over fair value, but is capped at the goodwill balance. Common triggers include significant declines in market value, adverse changes in business climate, or evidence that future cash flows will be lower than expected.

ASC 360 governs impairment of long-lived tangible assets (PP&E) and uses a two-step approach: first, a recoverability test comparing undiscounted future cash flows to carrying value, and if that fails, measuring the loss as carrying value minus fair value. ASC 350 governs goodwill impairment and uses a simplified one-step approach: compare the fair value of the reporting unit to its carrying amount. If the carrying amount exceeds fair value, the impairment loss equals the difference, capped at the total goodwill balance.

The recoverability test under ASC 360 intentionally uses undiscounted (not present value) cash flows as a conservative screening mechanism. By using undiscounted cash flows — which are always higher than their present value — the test sets a high bar for triggering impairment. An asset only fails the recoverability test if even its undiscounted future cash flows fall below the carrying value, indicating a clear and significant decline. This prevents excessive write-downs from minor fair value fluctuations.

No. Under U.S. GAAP, once an impairment loss is recognized on a long-lived asset (ASC 360) or goodwill (ASC 350), it cannot be reversed in subsequent periods, even if the asset's value recovers. The written-down amount becomes the asset's new cost basis. This differs from IFRS (IAS 36), which permits reversal of impairment losses on assets other than goodwill if conditions change. The GAAP prohibition is designed to prevent earnings manipulation through strategic reversal timing.

Under ASC 350, the goodwill impairment loss cannot exceed the total goodwill balance carried on the books for that reporting unit. For example, if a reporting unit has a carrying value of $1 million, a fair value of $600,000, and goodwill of $200,000, the raw loss would be $400,000 — but the recognized impairment loss is capped at $200,000 (the goodwill balance). This prevents the impairment test from writing down other assets of the reporting unit. After the cap, goodwill is reduced to zero.

For PP&E (ASC 360), companies must test for impairment whenever events or changes in circumstances indicate that the carrying amount may not be recoverable — known as “triggering events.” Examples include significant decreases in market price, adverse legal or regulatory changes, operating losses, or significant changes in how the asset is used. For goodwill (ASC 350), companies must test at least annually (typically at the same time each year) and also whenever triggering events occur. Companies may first perform an optional qualitative assessment to determine whether it is more likely than not that goodwill is impaired before proceeding to the quantitative test.
Disclaimer

This calculator is for educational purposes only and uses simplified textbook formulas. Real-world impairment testing involves additional factors including asset groups, multiple reporting units, deferred tax effects, and professional judgment. Consult a qualified accountant or auditor for actual impairment testing decisions. This tool should not be used for financial reporting purposes.

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