Goodwill Impairment: How M&A Goodwill Gets Tested and Written Down

Goodwill impairment is the accounting write-down a company records when the fair value of a reporting unit falls below the carrying amount of the goodwill sitting on the balance sheet from a prior acquisition. It is one of the loudest signals in corporate finance that a deal did not work, and it shows up exactly where investors and acquirers look first: net income, earnings per share, and the equity value of the parent. When Kraft Heinz wrote off $15.4 billion of goodwill and intangibles in February 2019, the stock dropped 27 percent in a single session, the CFO was replaced inside the quarter, and the deal logic of the 2015 Kraft + Heinz merger was openly questioned by the analyst community.

For buyers, sellers, and operators working on M&A, goodwill impairment is not just an accounting line item. It is a red flag for past acquisitions, a deal-killer signal for new buyers reviewing a target’s balance sheet, and a real-cash event for management compensation, debt covenants, and stock price. This article walks through the full mechanics of ASC 350 testing as written by the Financial Accounting Standards Board (FASB), the five triggering events that force interim tests, real impairment cases worth more than $50 billion in aggregate write-downs, what acquirers actually look at during diligence, tax treatment under IRC Section 197, the private company alternative under ASU 2014-02, the IFRS comparison under IAS 36, and a 12-item diligence checklist for goodwill on any target you are evaluating in 2026.

What Goodwill Is and How It Gets Created in M&A

Goodwill is the residual line on a buyer’s balance sheet after a business combination. Under ASC 805, Business Combinations, the purchase price is allocated to identifiable assets acquired and liabilities assumed at fair value, including tangible assets like property and equipment, identifiable intangibles like customer relationships, trademarks, developed technology, and non-compete agreements, plus assumed liabilities. Whatever is left over after that allocation is goodwill. The formula is simple: Goodwill = Purchase Price minus Fair Value of Identifiable Net Assets Acquired.

Why does the residual exist at all? Buyers pay above book value for several reasons that accounting does not let you put on the balance sheet as separate assets. Synergies (cost takeouts, revenue uplift, supply chain consolidation) are real economic value but do not meet the recognition criteria for separate intangibles. The assembled workforce is explicitly carved out by ASC 805 from separate recognition and gets lumped into goodwill. Reputation, organizational culture, and the going-concern premium of a profitable enterprise also live in the residual. The AICPA Business Combinations Valuation Guide walks through which intangibles must be separately recognized and which fall into goodwill.

Goodwill as a share of the purchase price varies dramatically by sector. According to Kroll’s 2024 U.S. Goodwill Impairment Study, technology and software companies routinely book goodwill at 60 to 75 percent of purchase price because most of the economic value is workforce, code base, and customer base rather than fixed assets. Consumer goods deals run 35 to 45 percent goodwill, healthcare runs 30 to 40 percent, and asset-heavy sectors like industrial manufacturing and energy run 15 to 25 percent. The Houlihan Lokey Purchase Price Allocation Study, which samples completed deals each year, shows a multi-decade trend toward higher goodwill allocations as the economy has shifted from tangible to intangible asset bases.

Once recorded, public-company goodwill sits on the balance sheet at original cost and is never amortized for book purposes (unlike finite-lived intangibles, which run through the income statement over their useful life). It only moves when an impairment is recorded. That is what makes the impairment test the single line of defense between an overpaid acquisition and a clean balance sheet.

ASC 350 Impairment Test Step by Step

The ASC 350, Intangibles – Goodwill and Other framework requires public companies to test goodwill for impairment at least annually and more frequently if a triggering event occurs. The mechanics changed materially in 2017 when FASB issued Accounting Standards Update (ASU) 2017-04, which eliminated Step 2 of the old two-step test. Here is the current framework as of 2026.

Step 0: Qualitative Assessment (Optional)

Before running quantitative numbers, the company can elect a qualitative assessment to determine whether it is more likely than not (a likelihood of more than 50 percent) that the fair value of a reporting unit is less than its carrying amount. Factors include macroeconomic conditions, industry and market considerations, cost factors, broad financial performance, entity-specific events, events affecting the reporting unit, and a sustained decrease in share price. If the qualitative assessment concludes it is not more likely than not, no further testing is required. If it concludes it is more likely than not, the company must proceed to the quantitative test.

The Quantitative Test (Single Step)

Under the post-2017 framework, the quantitative test is a single calculation. The company compares the fair value of the reporting unit to the carrying amount of the reporting unit, including goodwill. If carrying amount exceeds fair value, the impairment loss equals the difference, capped at the amount of goodwill allocated to that reporting unit. Before ASU 2017-04, companies had to do a second step that required calculating an implied fair value of goodwill (essentially redoing the original purchase price allocation), which was expensive and complex. FASB removed it because the cost-benefit no longer made sense.

Defining the Reporting Unit

The reporting unit is the level at which goodwill is tested. Under ASC 350-20, a reporting unit is an operating segment or one level below (a component) for which discrete financial information is available and segment management regularly reviews operating results. Companies cannot aggregate reporting units to mask impairments at the segment level if discrete financial information exists at the component level. Misallocating goodwill at the wrong reporting unit level is one of the most common audit issues raised by the Public Company Accounting Oversight Board (PCAOB) in inspection reports.

Measuring Fair Value

Fair value of the reporting unit is measured under ASC 820, Fair Value Measurement, typically using an income approach (discounted cash flow), a market approach (guideline public company or guideline transaction multiples), or a weighted combination. The discount rate selection is one of the most heavily scrutinized inputs. Most preparers build a weighted average cost of capital (WACC) using a build-up method that starts with the risk-free rate (10-year U.S. Treasury), adds equity risk premium (typically 5 to 6 percent per Damodaran’s annual data), a beta adjustment, size premium, and a company-specific risk premium. Sensitivity tables on discount rate and terminal growth are required disclosures in many 10-K filings.

Annual Test and Triggering Events

The annual test must be performed at the same time each year, typically Q4 for calendar-year filers. Interim tests are required whenever a triggering event occurs (covered in the next section). The output of the test is either no impairment (carrying amount less than fair value) or an impairment loss equal to the shortfall, capped at the goodwill balance. The loss flows through operating income and reduces the goodwill carrying amount on the balance sheet permanently. Once recorded, goodwill cannot be written back up if conditions improve. That asymmetry is a deliberate accounting conservatism.

The Five Triggering Events That Force an Interim Test

ASC 350-20-35-3C lists indicators that may suggest the fair value of a reporting unit has fallen below its carrying amount. In practice, auditors and the SEC focus on five recurring triggers.

1. Sustained share price drop. A market capitalization that falls below book equity for more than two consecutive quarters typically forces an interim test. AT&T’s DirecTV impairment was preceded by a long stock decline as cord-cutting accelerated.

2. Loss of major customer or key personnel. Customer concentration is a common feature of acquired businesses, and the departure of a top-10 customer can trigger an interim review. Same for the loss of founding executives within an earn-out window, which is why diligence files almost always pull the customer concentration schedule going back five years.

3. Regulatory shift. New rules, tariffs, sanctions, or licensing changes that affect the reporting unit’s served markets are explicit triggers. Pharmaceutical impairments tied to FDA decisions, energy impairments tied to EPA rules, and tech impairments tied to data privacy regulation are recurring examples.

4. Economic downturn in served markets. Sector-specific recessions can trigger impairments even when the broader economy is healthy. The Q1 and Q2 2020 wave of media and travel impairments was driven by COVID-related demand shocks rather than balance-sheet stress.

5. Restructuring or strategic shift. Decisions to exit a market, divest a segment, or reorganize reporting units can trigger an interim test. Carve-outs in particular force a reallocation of goodwill based on relative fair values, which often surfaces impairments that were latent under the prior segment structure.

Real Impairment Cases That Moved Markets

The most useful way to understand goodwill impairment is to walk through the actual write-downs that moved stock prices and changed M&A behavior. Each of the cases below is sourced from the company’s SEC EDGAR filings and major-firm research.

Company	Year	Impairment	Reporting Unit	Trigger	Stock Impact
Kraft Heinz	Feb 2019	$15.4 billion	U.S. Refrigerated + Canada Retail (Kraft + Oscar Mayer brands)	Brand value collapse, private label competition	-27% single day
AT&T DirecTV	Q1 2020	$15.5 billion	Video (Entertainment Group)	Cord-cutting, subscriber losses	-9% over quarter
General Electric (Power)	2018	$22 billion	Power segment (Alstom acquisition)	Gas turbine demand collapse	-12% single day Oct 2018
Verizon Yahoo/AOL (Oath)	Dec 2018	$4.6 billion	Oath / Verizon Media Group	Digital ad share loss to Google + Meta	-2% on announcement
WeWork (SoftBank parent)	2020	$1.7 billion	WeWork investment carrying value	IPO collapse, valuation rerating	SoftBank -7% in Q1 2020
General Mills (Yoplait)	2018-2019	$192 million + earlier write-downs	U.S. Yogurt	Greek yogurt share loss	Reported in segment

Kraft Heinz: $15.4 Billion (February 21, 2019)

Kraft Heinz announced on February 21, 2019, a $15.4 billion non-cash impairment charge against goodwill and intangible assets, primarily the Kraft and Oscar Mayer brands. The company also disclosed an SEC subpoena related to procurement accounting and cut its dividend by 36 percent in the same release. The impairment was driven by long-term forecasts that reflected private label competition, changing consumer preferences away from processed foods, and pricing pressure from retailers. The 10-K filed for fiscal 2018 detailed the brand-specific carrying values and the discount rate assumptions used in the test (the Kraft Heinz 2018 10-K on EDGAR). 3G Capital and Berkshire Hathaway, the controlling holders, took the brunt of the equity loss. The transaction logic of the 2015 Kraft + Heinz merger was openly criticized by Warren Buffett in subsequent Berkshire shareholder letters.

AT&T DirecTV: $15.5 Billion (Q1 2020)

AT&T disclosed a $15.5 billion impairment charge in Q1 2020 against the Video reporting unit within its Entertainment Group, the former DirecTV business acquired in 2015 for $48.5 billion. The trigger was a sustained pattern of subscriber losses driven by cord-cutting, exacerbated by the COVID-19 impact on advertising and content. The 10-Q disclosure walked through the discount rate and terminal growth assumptions (see AT&T 10-Q filings on EDGAR). The impairment foreshadowed the eventual 2021 spin of DirecTV into a partnership with TPG Capital at an implied enterprise value of $16.25 billion, less than half the 2015 acquisition price.

General Electric Power: $22 Billion (2018)

General Electric recorded a $22 billion goodwill impairment in October 2018 against the Power segment, the bulk of which related to the 2015 Alstom acquisition for approximately $10.6 billion. Gas turbine demand collapsed as utilities accelerated renewable investments and natural gas prices forced a rethink of base-load economics. The SEC also opened an enforcement investigation into the timing and adequacy of the impairment, which GE eventually settled for $200 million in December 2020 (see SEC press release 2020-312). Cumulative goodwill and intangible impairments across GE Power, Oil & Gas, and Capital exceeded $40 billion from 2017 through 2020 per the company’s 10-K filings.

Verizon Yahoo/AOL Oath: $4.6 Billion (December 2018)

Verizon’s Media Group, branded Oath and comprising the Yahoo (acquired June 2017 for $4.5 billion) and AOL (acquired June 2015 for $4.4 billion) businesses, took a $4.6 billion impairment in Q4 2018. The trigger was a forecast revision that recognized digital advertising market share would continue to consolidate around Google and Meta. Verizon eventually sold the Media Group to Apollo Global Management in 2021 for $5 billion, well below the combined acquisition cost. The 10-K disclosure is in the Verizon 2018 annual report on EDGAR.

WeWork: $1.7 Billion at SoftBank (Fiscal Year Ended March 2020)

SoftBank Group, which had invested more than $18 billion in WeWork by 2019, recorded a $1.7 billion impairment charge related to the WeWork investment in fiscal year 2020 (ending March 2020) following the failed IPO and the September 2019 valuation reset from $47 billion to approximately $8 billion. Additional write-downs followed through 2021 and 2022 as the SPAC merger eventually closed at a $9 billion enterprise value (BowX). SoftBank disclosed cumulative WeWork-related losses exceeding $14 billion in its annual reports filed under SoftBank Group’s investor relations site.

General Mills Yoplait

General Mills acquired the Yoplait business from PAI Partners and Sodiaal in 2011 and recorded multiple impairments over the following decade as U.S. yogurt share shifted to Greek yogurt brands led by Chobani. The fiscal 2019 10-K disclosed a $192 million impairment of the Yoplait U.S. brand intangible plus prior-year goodwill write-downs (see General Mills 10-K filings on EDGAR). Yoplait stands out as a slow-motion impairment over multiple reporting periods rather than a single headline charge.

What Goodwill Impairment Signals to Buyers

If you are evaluating an acquisition target, goodwill impairment history is a signal you read before you read the auditor’s opinion. The signal is not necessarily a deal-killer, but it changes how you price, how you structure, and what you ask for in reps and warranties. For a deeper framework on how to evaluate a target’s history, see our guide on quality of earnings analysis.

Past acquisitions overpriced. A history of impairments tells you management has overpaid or misjudged synergies in prior deals. The Kraft Heinz example is the canonical case: the 2015 merger was priced on a synergy model that did not survive the private label and category mix shift. Buyers reading impairment history should triangulate against the price paid, the cost synergy targets disclosed at the time of the deal, and the actual operating results in subsequent years.

Management’s M&A discipline questionable. Recurring impairments across multiple reporting units suggest a pattern, not a one-off. The General Electric experience covered three different reporting units over four years. When you see that pattern, you adjust your view of management’s capital allocation skill and the premium you are willing to pay for the strategic narrative.

Integration failure. Impairments tied to a single legacy acquisition (like DirecTV at AT&T or DXC at Computer Sciences Corporation) tell you the integration thesis did not hold. That has implications for any current deal: integration risk is not a checkbox item, it is the dominant driver of long-term goodwill durability.

Adjust offer price, reps, and earn-outs. Buyers respond to an impairment-heavy seller by tightening the offer. Specific tactics include lower offer multiple, more aggressive earn-out structures tied to post-close performance, expanded reps and warranties around customer concentration and forecast accuracy, larger escrows, and rep & warranty insurance with carve-outs for forecast risk.

The reverse signal. A target with low goodwill on the balance sheet has either grown organically or has been disciplined in past deals. That is a clean history and often a feature you pay a premium for. Investment banks frequently flag low-goodwill targets in pitch books as “clean balance sheet” candidates for new acquirers seeking a platform.

Goodwill Impairment vs Other Write-Downs

Goodwill impairment is one of several write-down mechanics in U.S. GAAP. Knowing which standard applies to which asset class prevents misclassification in financial models and diligence reports.

Write-Down Type	Standard	Asset Class	Reversal Allowed?	Frequency
Goodwill impairment	ASC 350-20	Goodwill from business combinations	No	Annual + triggering events
Indefinite-lived intangible impairment	ASC 350-30	Brands, trademarks with no useful life limit	No	Annual + triggering events
Finite-lived intangible amortization + impairment	ASC 350-30 + ASC 360	Customer lists, developed tech, non-competes	No (impairment); amortization is straight-line	Continuous amortization, impairment on trigger
Long-lived asset impairment	ASC 360-10	PP&E, finite-lived intangibles	No	Triggering events only
Inventory write-down (LCNRV)	ASC 330	Inventory	No	Each reporting period

The decision tree for any potential write-down starts with the asset class. Goodwill always goes through ASC 350-20. Indefinite-lived intangibles like a perpetual brand go through ASC 350-30. Finite-lived intangibles like customer lists are amortized over their useful life and tested for impairment under ASC 360-10 when triggering events occur. Property, plant, and equipment also goes through ASC 360-10. Inventory uses the lower of cost or net realizable value (LCNRV) test under ASC 330.

The most common diligence mistake is treating customer list amortization as if it were a goodwill matter. It is not. Customer lists amortize through the P&L over their estimated useful life (typically 5 to 15 years per the AICPA Business Combinations Guide), and the unamortized balance is tested under the long-lived asset framework, not the annual goodwill test.

Tax Treatment of Goodwill Impairment

The tax treatment of goodwill is one of the cleanest book-tax differences in corporate accounting, and it is worth understanding before you build a quality of earnings adjustment. For a broader treatment of deal structures that affect tax goodwill, see our walkthrough of asset sale vs stock sale structures.

Book impairment is generally not tax-deductible. Under IRC Section 197, intangible assets acquired in connection with a trade or business, including goodwill, are amortized over a 15-year straight-line period for tax purposes regardless of the carrying value on the books. A book impairment does not accelerate the tax amortization. Instead, it creates a permanent or temporary book-tax difference that flows through deferred tax accounting under ASC 740, Income Taxes.

Section 197 details. The 15-year straight-line tax amortization applies to goodwill, going-concern value, workforce in place, information base intangibles, know-how, customer-based intangibles, supplier-based intangibles, licenses, permits, franchises, trademarks, and trade names. The amortization starts the month the asset is acquired or placed in service. Stock acquisitions do not generally create Section 197 tax goodwill at the corporate level (because no step-up occurs unless a Section 338(h)(10) or Section 336(e) election is made); asset acquisitions do.

Section 1060 allocation. In an asset acquisition, both buyer and seller must allocate the purchase price across seven asset classes per IRC Section 1060 and the associated Treas Reg 1.1060-1. The residual after Classes I through VI is goodwill (Class VII) plus going-concern (Class VII), and both buyer and seller file Form 8594 reporting consistent allocations. The Section 1060 allocation determines the tax goodwill that the buyer will amortize over 15 years and the character of gain or loss to the seller.

Deferred tax implications of impairment. When a book impairment is recorded on goodwill that originated in an asset acquisition (and therefore has a tax basis), the book carrying value drops below the tax basis. This creates a deductible temporary difference and a deferred tax asset. When the goodwill was created in a stock acquisition with no Section 338 election, there is no tax basis to begin with and the book impairment creates a permanent difference. Tracking the source of goodwill for each acquired entity is therefore essential to getting the deferred tax math right.

Private Company Council (PCC) Alternative

Public companies have to live with the annual impairment test. Private companies have a choice. The Private Company Council (PCC), an advisory body to FASB, issued Accounting Standards Update 2014-02 in January 2014, allowing private companies to elect to amortize goodwill on a straight-line basis over 10 years (or a shorter period if it can be demonstrated as more appropriate). The election removes the requirement to perform the annual impairment test and instead only requires impairment testing when a triggering event occurs.

The trade-off is straightforward. Annual impairment testing requires a valuation analysis (often a discounted cash flow at the reporting unit level), which carries audit and consulting costs that can run from $25,000 to over $250,000 per year depending on the complexity of the entity. The PCC alternative eliminates that recurring cost in exchange for a predictable amortization charge running through the income statement. For private equity-backed portfolio companies and family businesses, the math usually favors the election.

The election was further updated by ASU 2017-04 to align the impairment test mechanics (single-step) with the public company framework when an impairment trigger does occur. Disclosure requirements include the gross carrying amount, accumulated amortization, accumulated impairment loss, amortization expense, and impairment loss for each period presented. Companies that elect must apply the alternative to all existing goodwill and to all new goodwill from future business combinations, and must disclose the policy election in the significant accounting policies note.

The 2024-2026 Impairment Landscape

Goodwill impairments are a leading indicator of macro stress and a lagging indicator of M&A discipline. The Kroll 2024 U.S. Goodwill Impairment Study reported that U.S. public companies recognized approximately $94 billion of goodwill impairments in calendar 2023, the highest level since 2020 and a roughly 38 percent increase over 2022. The 2024 calendar year saw a continued elevated level driven by media, consumer goods, and rate-sensitive sectors.

Sectors most hit in 2023-2024. Media and entertainment, traditional cable and satellite, consumer staples with private label exposure, regional banking, commercial real estate, and select healthcare services. Tech impairments were concentrated in pre-2022 vintage acquisitions where deal multiples were set at peak valuations. Energy impairments tracked the volatility in oil and natural gas forward curves.

Discount rate effect. The Federal Reserve’s tightening cycle from March 2022 through July 2023, taking the federal funds rate from near zero to 5.25-5.50 percent per FOMC statements, lifted WACC inputs across nearly every industry. Higher discount rates reduce the present value of forecast cash flows, which pushed many borderline reporting units into impairment territory. The rate-cut cycle beginning in late 2024 (the FOMC cut 100 basis points cumulatively between September 2024 and December 2024) reversed part of that pressure heading into 2025.

2025 recovery and 2026 forecast. Impairment volumes moderated through 2025 as rates fell, equity markets recovered, and acquirers showed more discipline on deal pricing. The Houlihan Lokey, EY, and PwC outlook reports for 2026 forecast modestly lower aggregate impairment levels compared to 2023-2024 peaks, with continued elevated activity in media, regional banking, and any sector exposed to ongoing tariff or regulatory shifts. The EY Financial Reporting outlook and the PwC Business Combinations Guide both flag goodwill impairment as a top audit area for 2026 calendar-year filers.

IFRS Comparison: IAS 36 vs ASC 350

If you are evaluating cross-border deals or reading a non-U.S. target’s financials, you need to know how IAS 36, Impairment of Assets differs from ASC 350.

Topic	U.S. GAAP (ASC 350)	IFRS (IAS 36)
Testing unit	Reporting unit	Cash-generating unit (CGU) or group of CGUs
Test mechanic	Single-step: carrying amount vs fair value	Carrying amount vs recoverable amount (higher of fair value less costs of disposal or value in use)
Value in use	Not a separate concept	Pre-tax discounted cash flows, entity-specific
Frequency	Annual + triggering events	Annual + triggering events
Reversal of impairment	Not permitted	Permitted for assets other than goodwill; goodwill impairment is not reversible
Private company alternative	PCC election: 10-year amortization	No equivalent election; amortization of goodwill is not permitted
Allocation level	Reporting unit (operating segment or one level below)	CGU (smallest identifiable group generating largely independent cash inflows)

The most consequential difference for diligence is the CGU concept. CGUs are typically smaller than U.S. reporting units, which means IFRS testing often identifies impairments earlier than ASC 350 testing would on the same underlying business. The value-in-use concept also allows entity-specific assumptions that may diverge from market-based fair value. When comparing a U.S. target to a European peer set, normalize for this difference before drawing conclusions about relative balance sheet quality.

How Goodwill Impairment Hits the P&L, Cash Flow, and Covenants

The mechanics of how an impairment charge flows through the financial statements affects what management does with it and how analysts treat it. Knowing the flow is important when you are building a quality of earnings adjustment or covenant compliance model on a target.

Income statement. The impairment is recorded as an operating expense (typically a separate line called “Impairment of goodwill” or “Asset impairment charges”) above the operating income line. It reduces operating income, pre-tax income, and net income dollar-for-dollar. Because the impairment is generally not tax-deductible (see the tax section above), the after-tax impact is approximately equal to the pre-tax impact, with no offsetting tax benefit. Earnings per share takes the full hit. Kraft Heinz reported the $15.4 billion impairment as a $13.0 billion after-tax hit to net income in fiscal 2018 per the Kraft Heinz 2018 10-K.

Cash flow statement. The impairment is added back as a non-cash item in the operating activities section, alongside depreciation and amortization. Free cash flow is unaffected by the impairment in the period of the charge. Analysts and bankers therefore strip impairments out of normalized EBITDA when building forward models. For diligence purposes, however, the impairment is still a signal about the durability of the cash flows that were originally underwritten in the acquisition.

Balance sheet. Goodwill carrying amount is reduced by the impairment. Retained earnings (or accumulated deficit) is reduced by the after-tax impact. Equity falls by the same amount. Total assets fall by the impairment amount. Debt-to-equity ratios computed as debt divided by equity rise mechanically, even though no cash has moved.

Debt covenants. Most modern credit agreements define “Consolidated Net Income” and “Consolidated EBITDA” to exclude non-cash impairment charges, so financial maintenance covenants like debt-to-EBITDA ratio and interest coverage are usually not breached by a goodwill impairment in isolation. However, covenants that reference tangible net worth or equity-based metrics can be tripped. Loan agreements from the Loan Syndications and Trading Association (LSTA) standard form typically carve out non-cash impairments, but private credit and unitranche agreements vary. Always check the specific definitions before assuming a covenant impact.

Executive compensation. Equity-based compensation tied to total shareholder return takes a direct hit when an impairment drives the stock down. Performance share units tied to EPS targets often have a non-recurring item carve-out for impairments, but the compensation committee has discretion. The Kraft Heinz proxy statement disclosures in 2019 detailed the discretion exercised on incentive payments after the impairment, and proxy advisors Glass Lewis and Institutional Shareholder Services have flagged similar situations in subsequent voting recommendations.

Goodwill Impairment in Distressed and Restructuring Situations

Distressed companies and restructuring candidates are a special case for goodwill testing. The combination of declining cash flows, rising discount rates, and segment reorganizations virtually guarantees impairment when a triggering event occurs. The Q1 2020 wave of impairments tied to COVID-19 affected travel, hospitality, leisure, and energy in particular, with cumulative U.S. public-company impairments exceeding $140 billion in calendar 2020 per the Kroll Goodwill Impairment Study.

In a Chapter 11 filing under Title 11 of the U.S. Bankruptcy Code, the debtor typically writes goodwill down to fair value as part of fresh-start accounting under ASC 852, Reorganizations. Fresh-start accounting applies when the reorganization value of the emerging entity is less than the total of all post-petition liabilities and allowed claims, and pre-petition holders receive less than 50 percent of the voting shares of the reorganized entity. Under fresh-start accounting, all assets including goodwill are remeasured to fair value, and any pre-bankruptcy goodwill is effectively eliminated in the process. The Hertz Global Holdings emergence from Chapter 11 in 2021 and the Frontier Communications emergence in 2021 both involved fresh-start accounting per their disclosed 10-K filings.

For out-of-court restructurings that do not meet fresh-start criteria, the goodwill impairment test still applies and is often a quarterly exercise as the situation evolves. Strategic alternatives reviews, exchange offers, and management changes are all triggering events that force interim testing.

Pre-Deal Diligence Checklist for Goodwill

When you are running diligence on a target with material goodwill, work through this 12-item checklist. The goal is not just to spot prior impairments but to predict the likelihood of future impairments on the deal you are about to close. For a broader diligence framework, see our piece on sell-side due diligence.

1. Trend in goodwill as a percentage of total assets. Pull the last 5 to 10 years. A rising ratio with declining ROIC is a warning.
2. Last impairment date and amount. Pull from the 10-K notes (or annual report for IFRS filers). Look at the disclosed assumptions.
3. Reporting unit map. Get the target’s current reporting unit definitions and the goodwill allocated to each.
4. Segments where goodwill is concentrated. Often the segments under most pressure are also the ones with the most goodwill (acquired growth, not organic).
5. Acquisition history. Build a table of every business combination over the last 10 years, the purchase price, the goodwill allocated, and the current goodwill balance net of any subsequent impairments.
6. Discount rate documentation. Request the most recent impairment testing memo. Check the WACC build-up and the comparable peer set.
7. Sensitivity tables. Disclosed in many 10-Ks. Look at the cushion (fair value minus carrying amount as a percentage of carrying amount) and how it shrinks under stressed scenarios.
8. Comparable peer impairments. If peers have impaired recently, the target is on the watch list even if its own test passed.
9. Customer concentration trend. Top 10 customers as a percentage of revenue, year over year. A rising concentration is a leading indicator.
10. Key personnel retention. Founder and senior executive retention through the integration window. Departures within the first 24 months are correlated with subsequent impairments.
11. Regulatory exposure. Any pending regulatory changes affecting served markets, tariffs, sanctions, licensing.
12. Carve-out impact. If you are buying a carve-out, goodwill must be reallocated based on relative fair values. Run the reallocation early because it often surfaces impairments that were latent.

Common Goodwill Mistakes

Even sophisticated preparers and acquirers make recurring mistakes on goodwill. The four below show up in PCAOB inspection reports, SEC comment letters, and audit findings with frustrating regularity.

Allocating goodwill at the wrong reporting unit level. Aggregating to the segment level when discrete financial information exists at the component level is a common audit issue. It masks impairments and creates restatement risk. Document the reporting unit conclusion every period.

Missing triggering events. The annual test is only one of two required tests. Triggering events between annual test dates are equally enforceable. SEC enforcement actions, including the GE settlement noted earlier, often focus on the timing of recognition rather than the existence of an impairment.

Weak discount rate documentation. A WACC build-up that does not document the source of each input (risk-free rate, equity risk premium, beta, size premium, company-specific risk premium) is a top audit comment. Use a published source like Damodaran’s annual data, Kroll’s Cost of Capital Navigator, or a Big 4 valuation specialist’s standard inputs, and document the date of the source.

Ignoring carve-out impacts. In a divestiture, goodwill must be reallocated between the disposal group and the remaining business based on relative fair values. Sellers frequently get this wrong and discover the issue at audit. Buyers acquiring carve-outs should request the allocation memo as part of diligence.

TLDR and Seven Decision-Stage Takeaways

If you read nothing else, internalize these seven points. They will get you 80 percent of the way to making good decisions on any deal where goodwill matters.

1. Goodwill impairment is the accounting write-down when a reporting unit’s fair value falls below its carrying amount. It is recorded under ASC 350 and is permanent, with no write-up if conditions improve.
2. The test is single-step under post-2017 rules. Compare carrying amount to fair value, impair to the lesser of the shortfall or the goodwill balance. Annual test plus triggering events.
3. Real impairments move markets. Kraft Heinz, AT&T DirecTV, GE Power, Verizon Oath, and WeWork together represent more than $50 billion of write-downs that changed valuations and management compensation.
4. Past impairments tell you about M&A discipline. Recurring impairments suggest pattern overpayment. Clean histories suggest the opposite. Adjust offer price, earn-outs, and reps accordingly.
5. Tax treatment is its own world. IRC Section 197 amortizes tax goodwill over 15 years straight-line. Book impairment does not accelerate that. Build the deferred tax math early.
6. Private companies have an alternative. ASU 2014-02 lets private companies amortize over 10 years and skip the annual test. For PE portfolio companies and family businesses, the math usually favors the election.
7. The 2024-2026 environment is elevated but moderating. Kroll reported $94 billion of impairments in 2023. Rate cuts in late 2024 reduced pressure. Media, consumer goods, and regional banking remain the highest-risk sectors heading into 2026.

For more on valuation mechanics that feed the impairment test, see our deep dive on business valuation formulas and math, our guide to how to determine the value of a business, and our walkthrough on selecting an M&A advisor when the deal involves complex purchase price allocation.