Goodwill Impairment (ASC 350 Intangibles – Goodwill and Other)

The ASC 350 Framework — Testing Goodwill for Impairment

ASC 350 Intangibles — Goodwill and Other dictates that goodwill must be tested for impairment at the Reporting Unit level. A reporting unit is an operating segment or one level below an operating segment (a component) for which discrete financial information is available and segment management regularly reviews the operating results.

Identifying the correct reporting units is the first critical step; aggregating units incorrectly can mask impairment in underperforming segments, while disaggregating too far can trigger unnecessary impairments in healthy ones.

The Annual Testing Requirement & Triggering Events

Goodwill must be tested annually at a consistent date (e.g., October 1st or December 31st). However, testing is also required between annual tests if a “triggering event” occurs that makes it more likely than not that the fair value of a reporting unit has fallen below its carrying amount.

Common Triggering Events in 2026 include:

• Macroeconomic deterioration: Sustained inflation, rising interest rates, or recessionary conditions.
• Industry and market changes: Increased competition, regulatory shifts, or technological obsolescence.
• Cost factors: Significant increases in raw materials, labor, or energy costs.
• Financial performance: Negative cash flows, declining revenues, or failure to meet budgeted earnings.
• Share price decline: A sustained drop in stock price (for public companies) that pushes market capitalization below book value.
• Entity-specific events: Loss of key personnel, loss of a major customer, or litigation.

The Impairment Testing Process

ASC 350 allows for a two-step approach to testing, beginning with an optional qualitative assessment.

Step 0: The Qualitative Assessment

Companies have the option to perform a qualitative assessment (“Step 0”) to determine whether it is more likely than not (a likelihood of more than 50%) that the fair value of a reporting unit is less than its carrying amount.

If InteleK’s analysis of relevant macroeconomic, industry, and company-specific factors concludes that fair value likely exceeds carrying value by a significant margin, no further testing is required. This approach saves time and resources for healthy reporting units. However, if the qualitative factors are inconclusive or indicate potential impairment, a quantitative test is mandatory.

The Quantitative Impairment Test

If the qualitative assessment is bypassed or failed, we proceed to the quantitative test. This involves determining the Fair Value of the reporting unit and comparing it to its Carrying Amount (including goodwill).

• If Fair Value > Carrying Amount: The reporting unit is not impaired, and goodwill is considered recoverable.
• If Fair Value < Carrying Amount: An impairment charge is recognized for the amount by which the carrying amount exceeds the fair value (limited to the total amount of goodwill allocated to that reporting unit).

Note: The complex “Step 2” calculation of implied fair value was eliminated by ASU 2017-04, simplifying the measurement of the impairment loss but increasing the importance of the initial Fair Value determination.

Determining Fair Value — Valuation Methodologies

Determining the Fair Value of a reporting unit requires the same rigor as valuing a standalone business. InteleK applies the valuation approaches most appropriate for the reporting unit’s industry and available data, consistent with ASC 820 Fair Value Measurement:

Income Approach (Discounted Cash Flow)

The DCF method is often the primary tool for goodwill impairment testing. It projects the reporting unit’s future cash flows and discounts them to present value using a Weighted Average Cost of Capital (WACC).

• Auditor Scrutiny: Auditors heavily scrutinize the WACC and long-term growth rates. In the high-interest-rate environment of 2026, a small increase in the discount rate can significantly reduce fair value and trigger impairment. InteleK builds discount rates based on observable market data and company-specific risk premiums that are robust and defensible.

Market Approach (Guideline Public Company & Transaction Methods)

We analyze valuation multiples (EV/EBITDA, EV/Revenue) of comparable public companies and recent M&A transactions.

• Control Premiums: Because reporting units are valued on a controlling basis, we apply appropriate control premiums when using public company data, supported by empirical transaction studies.

Reconciliation and “Sanity Checks”

For public companies, the sum of the fair values of all reporting units must be reconciled to the company’s market capitalization. A significant “control premium” implied by the gap between the sum-of-the-parts and the market cap is a frequent target of SEC comment letters. We perform this reconciliation proactively to ensure the concluded values are grounded in market reality.

Indefinite-Lived Intangible Assets

ASC 350 also governs the impairment testing of indefinite-lived intangible assets other than goodwill, such as tradenames, brand names, and FCC licenses. These assets are tested separately from goodwill, typically using the “Relief from Royalty” or “Greenfield” methods.

Unlike goodwill, which is tested at the reporting unit level, indefinite-lived intangibles are tested at the individual asset level. An impairment loss is recognized if the fair value of the asset is less than its carrying amount.

The 2026 Regulatory Landscape — SEC & Auditor Focus

Impairment testing is a top priority for the SEC and the PCAOB in 2026. Regulators are specifically targeting:

• “Too Little, Too Late”: Companies that delay recognizing impairment until a massive write-down is unavoidable.
• Forecast Optimism: Management projections that historically miss targets but are still used to support passing impairment tests.
• Discount Rate Consistency: Using a WACC that is inconsistent with the risks inherent in the cash flow projections.
• Triggering Event Documentation: Failure to document why a stock price drop or earnings miss did not trigger an interim test.

An independent valuation from InteleK provides the objective, third-party evidence necessary to defend your judgments against this heightened regulatory scrutiny.

InteleK’s Goodwill Impairment Approach

Our accredited appraisers bring deep ASC 350 and audit review experience to every engagement. Here’s what sets our process apart:

Audit-Ready Deliverables — Our reports are written for the eyes of the auditor. We explicitly address the qualitative factors of Step 0, document the selection of valuation inputs, and provide the sensitivity analyses that auditors require to sign off.

Proactive “Step 0” Screening — We don’t default to a full quantitative test if it isn’t necessary. We help you evaluate whether a qualitative assessment is sufficient, saving you time and fees.

Integrated Intangible Asset Testing — We test indefinite-lived intangibles (brands, licenses) alongside goodwill to ensure consistency in assumptions (revenue growth, royalty rates, discount rates) across your impairment testing.

Control Premium Support — For public companies, we perform a rigorous market capitalization reconciliation, providing empirical support for any implied control premium to preempt SEC comments.

Scenario Analysis — In uncertain economic times, a single set of projections may not tell the whole story. We use probability-weighted scenario analysis to capture the range of potential outcomes, providing a more robust conclusion of Fair Value.

Collaboration With Your Audit Team — We engage with your auditors early in the process to agree on methodologies, peer groups, and key assumptions before the final numbers are run, smoothing the review process and eliminating 11th-hour surprises.