Goodwill Impairment
A non-cash charge recognizing that acquired goodwill is worth less than its book value.
What is Goodwill Impairment?
Goodwill impairment occurs when the carrying value of a reporting unit — including its allocated goodwill — exceeds its fair value. Under U.S. GAAP (ASC 350), companies test goodwill for impairment at least annually, and more frequently when triggering events such as a significant stock price decline, loss of key customers, or deteriorating industry conditions occur. The impairment charge is a non-cash expense that reduces goodwill on the balance sheet and flows through the income statement as a large one-time loss. Goodwill impairment signals that an acquisition did not deliver its expected economic value and is often associated with overpayment in the original deal.
Example
A company acquired a competitor for $500 million, paying $200 million above book value as goodwill. Three years later, the acquired business is struggling. An impairment test finds the reporting unit's fair value is $400 million, but its book value (including goodwill) is $480 million. The company must record an $80 million goodwill impairment charge, reducing earnings significantly for that quarter.
Source: FASB Accounting Standards Codification — ASC 350 Intangibles