CFA Level II Exam · Intercorporate Investments

Goodwill Impairment and Its Analytical Implications

Updated 7 October 2026 · Fact-checked

Goodwill impairment is a write-down of goodwill when its carrying amount exceeds what it is worth. Under IFRS you test the cash-generating unit against its recoverable amount. Under US GAAP you compare a reporting unit's fair value with its carrying amount. Then adjust ratios, equity and earnings for the non-cash charge.

Understand Goodwill Impairment and Analytical Implications

When a company buys another under the acquisition method, it pays more than the fair value of identifiable net assets. The excess is goodwill. Goodwill is not amortised under IFRS, or under US GAAP for public companies. (US private companies may elect to amortise it.) It stays on the balance sheet until it is written down.

A write-down is needed when the asset is worth less than its carrying amount. This is impairment. Goodwill cannot be tested alone, because it produces no cash flows by itself. So it is tested as part of a group of assets.

Under IFRS (IAS 36), goodwill is allocated to cash-generating units (CGUs) expected to benefit from the combination. You test at least annually. You compare the CGU's carrying amount (including goodwill) with its recoverable amount, the higher of fair value less costs of disposal and value in use. If carrying amount is higher, the loss is recognised. It is applied first to goodwill, then to the other assets pro rata. Goodwill impairment can never be reversed.

Under US GAAP, goodwill is tested at the reporting unit level, at least annually. Current practice compares the reporting unit's fair value with its carrying amount. If carrying amount is higher, the loss equals the excess, capped at the goodwill balance. This is a one-step test. Goodwill impairment is also not reversed. Under US GAAP a company may first do an optional qualitative assessment.

The analytical point is that impairment is a non-cash charge. It cuts net income, assets and equity in the period. It does not change cash flow. Future returns can look better because the asset and equity base is lower. Under IFRS, goodwill itself is not amortised, though an impairment allocated to other assets pro rata can reduce their future depreciation or amortisation. Impairment also signals that the acquirer overpaid or that expected synergies failed.

Key formulas to remember

IFRS impairment loss (CGU): Loss = Carrying amount of CGU − Recoverable amount, if positive; Recoverable amount = higher of fair value less costs of disposal and value in use. Allocate loss to goodwill first, then other assets pro rata.
US GAAP impairment loss (reporting unit): Loss = Carrying amount of reporting unit − Fair value of reporting unit, limited to goodwill balance; Single comparison of the unit's fair value with its carrying amount.
Goodwill at acquisition (full goodwill, IFRS): Goodwill = Consideration + Fair value of NCI − Fair value of identifiable net assets; Partial goodwill method uses NCI's share of identifiable net assets instead. IFRS permits full or partial goodwill; US GAAP requires full goodwill.
Post-impairment ratio effects: New equity = Old equity − (Loss − Tax benefit, if any); new total assets = Old assets − Loss; Equity falls by the loss net of any tax benefit. With no tax effect, the full loss is deducted from equity. Most goodwill impairments are not tax deductible, so use a tax benefit only if the vignette gives one. Use the new figures to recompute ROE, ROA, debt-to-equity and asset turnover. This gives the reported, post-impairment ratios.
Analyst adjustment: Adjusted ROE = (Net income + Impairment loss) ÷ Equity before the impairment; The analyst-adjusted ROE uses pre-impairment net income and pre-impairment equity, so it shows operating performance as if no impairment had occurred. Keep it separate from reported ROE, which uses post-impairment net income and equity. In the IFRS example, adjusted ROE = 120 ÷ 1,000 = 12%, while reported ROE is −20 ÷ 860 = −2.33%. Also consider removing goodwill entirely from equity and assets.

How to solve Goodwill Impairment and Analytical Implications questions

Use the same sequence for any vignette question on goodwill, impairment or acquisition-method comparability.

1Identify the framework: IFRS or US GAAP. The vignette will say. Note whether the test unit is a CGU or a reporting unit.
2Find the carrying amount of the unit, including goodwill, and the comparison value: recoverable amount (IFRS) or fair value (US GAAP).
3Compute the shortfall. If carrying amount is not above the comparison value, there is no impairment.
4Cap the loss at goodwill under US GAAP. Under IFRS, apply it to goodwill first, then to other assets pro rata.
5Update net income, assets and equity. Check whether the exhibit gives a tax effect. If not stated, assume none.
6Recompute the ratio asked: ROE, ROA, debt-to-equity, asset turnover or margin. Use the right denominator, ending or average, as the exhibit states.
7State the direction: impairment lowers current earnings, equity and assets, raises leverage, and signals earlier overpayment. Later-year ROE may rise because of lower equity and no further charge on the written-off goodwill.

Quickest way: Loss first, ratios second

When to use it: When time is short and the item set gives carrying amount, fair or recoverable value and a ratio to update.

Compute loss = carrying amount − comparison value. Stop if negative.
Subtract loss from net income and from equity. Subtract from total assets.
Divide to get the new ratio. Compare only direction if options differ clearly.
Remember: leverage ratios rise, return ratios fall in the impairment year, and later-year returns may rise if earnings are unchanged on a lower equity base.

Common mistakes in Goodwill Impairment and Analytical Implications

Using fair value alone for the IFRS test
US GAAP uses fair value and students blend the two.
Fix: Under IFRS use recoverable amount, the higher of fair value less costs of disposal and value in use.
Reversing a goodwill impairment later
Other assets can have impairment reversals under IFRS, so students generalise.
Fix: Goodwill impairment is never reversed under IFRS or US GAAP.
Treating impairment as a cash outflow
The charge reduces profit, so it feels like a payment.
Fix: It is non-cash. Add it back in operating cash flow reconciliation. Cash ratios do not change.
Not capping the US GAAP loss at goodwill
The shortfall can exceed the goodwill balance.
Fix: Recognise the lower of the shortfall and the goodwill carried.
Assuming ROE falls in every later year
Students stop at the impairment year.
Fix: After impairment, equity is lower, so later ROE may be higher if earnings are unchanged on the lower equity base. Say this only if the numbers support it.
Applying a tax shield by default
Most expenses reduce tax.
Fix: Use a tax effect only if the vignette gives one. Goodwill impairment is often not deductible.

Worked examples

Example 1

A company reports under IFRS. A cash-generating unit has a carrying amount of €900 million, including goodwill of €150 million. Fair value less costs of disposal is €700 million and value in use is €760 million. Before impairment, net income is €120 million and total equity is €1,000 million. Questions: (1) What is the impairment loss? (2) How is it allocated? (3) What is ROE after impairment using ending equity, assuming no tax effect?

Show the solution

Recoverable amount is the higher of 700 and 760, so €760 million.
Loss = 900 − 760 = €140 million.
Apply to goodwill first. Goodwill is €150 million, so goodwill falls to €10 million. No loss is allocated to other assets.
Net income after impairment = 120 − 140 = −€20 million.
Ending equity = 1,000 − 140 = €860 million.
ROE = −20 ÷ 860 = −2.33%.

Answer: (1) €140 million. (2) All of it to goodwill, leaving €10 million. (3) ROE is about −2.3%.

Example 2

A company reports under US GAAP. A reporting unit has a carrying amount of $500 million including goodwill of $80 million. Its fair value is $380 million. Total assets are $2,000 million and total liabilities are $1,200 million. Questions: (1) What is the impairment loss? (2) What is the debt-to-equity ratio before and after? Treat liabilities as debt, and assume no tax effect.

Show the solution

Shortfall = 500 − 380 = $120 million.
Goodwill is only $80 million, so the loss is capped at $80 million.
Equity before = 2,000 − 1,200 = $800 million. Debt-to-equity before = 1,200 ÷ 800 = 1.50.
After: assets = 2,000 − 80 = $1,920 million. Equity = 800 − 80 = $720 million (no tax effect, so the full loss is deducted).
Debt-to-equity after = 1,200 ÷ 720 = 1.67.

Answer: (1) $80 million. (2) Debt-to-equity rises from 1.50 to about 1.67.

Exam tips

Read the first line of the vignette for IFRS or US GAAP. The test differs, and wrong-framework options are common distractors.
Watch for the cap: US GAAP loss cannot exceed goodwill. IFRS first hits goodwill, then other assets.
When asked about effects, think in directions: impairment year lowers income, equity and assets, raises leverage ratios, leaves cash flow unchanged.
For comparability questions, check goodwill method: full goodwill versus partial goodwill changes goodwill, equity and ratios.
Show the arithmetic quickly. Most answer options differ by the cap or by the choice of recoverable amount.

Goodwill Impairment and Analytical Implications in other exams

The same ground in other exams, if you are preparing for more than one or want another angle on it.

Goodwill Impairment and Analytical Implications: frequently asked questions

What is the main difference between IFRS and US GAAP goodwill impairment?

IFRS tests a cash-generating unit against its recoverable amount. US GAAP tests a reporting unit against its fair value. Both test at least annually and neither allows reversal of goodwill impairment.

How does goodwill impairment affect financial ratios?

In the year of impairment, net income, assets and equity fall. Return ratios usually drop and leverage ratios such as debt-to-equity rise. Cash flow from operations is unchanged because the charge is non-cash.

How does acquisition accounting affect return on equity?

Goodwill and fair-value step-ups raise assets, and they raise equity too if shares are issued as consideration. This lowers ROA and, in that case, ROE after the deal. A later impairment reduces equity, so ROE in later years can recover. Compare ROE with and without goodwill to judge operating performance.

What adjustments do analysts make for goodwill?

Analysts often add back impairment charges to judge recurring earnings. Some also remove goodwill from assets and equity to compare firms that grew by acquisition with those that grew organically. A large impairment also tells you management overpaid.