What Triggers a Goodwill Impairment Test? A Practical Guide for CFOs and Controllers

Aug 12

In today’s volatile economic climate, goodwill impairment testing is a critical tool for protecting financial integrity. Yet, many companies underestimate when they’re required to test goodwill, risking delayed recognition of impairment and increased audit scrutiny.

Whether you’re preparing for an annual audit or responding to a mid-year shift in business conditions, ASC 350 requires companies to evaluate goodwill for impairment when certain triggers arise. Understanding these triggers and knowing how to act on them is essential for CFOs, controllers, and finance leaders committed to staying ahead of risk.

Why Goodwill Impairment Matters More Than You Think

Under ASC 350, goodwill is not amortized but must be tested at least annually, and more frequently if events or changes in circumstances, known as “triggering events,” suggest it may be impaired.

Failing to recognize a triggering event can have serious consequences: delayed loss recognition, audit complications, and questions about the reliability of your financial reporting. Deferring the analysis doesn’t change the outcome, it only compounds the risk.

Understanding ASC 350: When Are You Required to Test for Impairment?

ASC 350 stipulates that companies are required to test goodwill for impairment at least once annually. When circumstances change, such as shifts in market conditions or internal business developments, an interim evaluation may be necessary. These in-between assessments are often prompted by triggering events, which can be internal or external in nature, and include one or multiple catalysts that have led to a decline in financial performance expectations. Auditors frequently identify these conditions, and it’s critical for management to respond swiftly and appropriately.

A triggering event hints that what the business is really valued may no longer match what it’s recorded as being valued, which could mean the company needs to adjust the carrying value accordingly.

Recognizing these signals early is essential to mitigating potential valuation and audit issues. When an event occurs, the impairment testing process typically begins with a qualitative assessment, known as “Step Zero,” which evaluates whether it’s more likely than not that a business unit’s fair value is less than its book value. If this initial review indicates possible impairment, the company must proceed to a quantitative assessment, or “Step One,” to determine the extent of any necessary write-down.

Common (and Often Overlooked) Goodwill Impairment Triggers

Understanding what to look out for when assessing the possibility of goodwill impairment pertains to a variety of issues that affect the trajectory or profitability of a business unit. This includes:

Internal Triggers:

Loss of a major customer or long-term contract
Weak demand for a product or service
Cost bloat or decline in margins
Revisions to internal financial projections
Strategic pivot away from a business unit toward another product or service

External Triggers:

Deterioration in macroeconomic or industry conditions
Regulatory changes impacting demand, speed to market, or profitability
Changes in technology or consumer preferences
New competitors entering the market
Volatility in rates of return, market capitalization, and/or valuation multiples

For public companies, a sustained drop in stock price can be an obvious indicator. For private companies, the signs can be less visible, but are nonetheless dependent on declining expectations of a business unit.

Step Zero: Qualitative Assessment (Your First Line of Defense)

The qualitative assessment asks: Is it more likely than not (greater than 50% probability) that the fair value of a reporting unit is less than its carrying amount? As noted above, factors to watch for include lowering of industry valuation multiples, slowing and lowering of M&A activity, and downward revisions to forecasted growth or profitability.

If management can reasonably assert that fair value still exceeds carrying value, no further testing is required. Inconclusive or negative indicators should move the company to quantitative testing.

Step One: Quantitative Assessment (When It’s Time to Dig Deeper)

If qualitative indicators suggest potential impairment, a full quantitative valuation is necessary. This involves estimating the reporting unit’s fair value using valuation methodologies such as:

Income Approach:

Discounted Cash Flow (DCF) analysis

Market Approach

Guideline Public Company Method
Comparable Transactions Method

If fair value is less than the carrying value, an impairment charge must be recorded. In audit reviews, documentation and analytical rigor are critical to provide a smooth process with high defensibility.

Real-World Insight: How Companies Get It Wrong

Even with a clear framework in place, many companies misjudge triggering events, often falling into the trap of wishful thinking. Overconfidence in a quick recovery, reliance on outdated or overly aggressive projections, and delaying action in hopes that market conditions will improve are common pitfalls. However, hoping things will turn around by the time the annual impairment test comes up may not pay off. In fact, postponing an impairment test can lead to restatements, increased auditor scrutiny, and damaged stakeholder confidence. In some cases, recognizing a full impairment loss earlier, while difficult, can ultimately protect the company’s credibility and prevent more serious issues down the line.

How Valuation Experts Help You Evaluate Impairment Triggers

Partnering with experienced valuation experts is critical when evaluating potential impairment triggers. An outside perspective brings objectivity and rigor to a process that often involves high-stakes judgment calls. Valuation professionals can assess the reasonableness of internal projections, benchmark performance against industry peers and broader market trends, and prepare detailed, defensible documentation that holds up under audit scrutiny. This kind of proactive collaboration helps finance teams identify risks early, make well-supported decisions, and avoid surprises at year-end or during audit fieldwork. Engaging with a trusted valuation partner ensures your impairment analysis is both thoughtful and audit-ready.

The Redwood Advantage: High-Touch Support, Audit-Ready Results

At Redwood Valuation, we combine deep technical expertise with a hands-on, collaborative approach to impairment testing. Our clients work directly with senior valuation professionals—including CPAs—ensuring each engagement is led by experienced experts who understand the nuances of ASC 350. We partner closely with CFOs, controllers, and finance teams to assess projections, identify risks, and deliver actionable insights rooted in the specific context of each business. Every impairment analysis we prepare is designed to withstand audit scrutiny, supported by clear, defensible documentation that streamlines conversations with auditors and regulators. Every engagement is tailored to reflect the company’s industry and unique circumstances. With deep experience across many industries and complex scenarios, Redwood is a trusted partner for companies navigating impairment evaluations in today’s uncertain environment.

Impairment Doesn’t Have to Be a Surprise

Beyond compliance, goodwill impairment testing is a critical signal to investors, auditors, and boards about the health of a business.

By recognizing triggers early, applying the right level of scrutiny, and partnering with trusted advisors, finance leaders can protect their companies and their reputations from unnecessary risk.

Redwood Valuation is here to help you navigate impairment testing proactively, strategically, and confidently.

Content Team