Fair Value Measurement: Practical Guidance and Implementation, 2nd Edition

CHAPTER FIVE

Impairment

Impairment, according to the FASB Master Glossary, is “the condition that exists when the carrying amount of a long-lived asset (asset group) exceeds its fair value.” Goodwill and intangible assets must be tested for impairment annually, or sooner if events and circumstances indicate the asset may be impaired. If testing indicates that goodwill or an intangible asset is impaired, it must be written down to fair value immediately. Under U.S. GAAP, once goodwill and intangible assets are written down, they cannot be written back up when conditions improve.

The recent financial crisis gave rise to a sharp spike in goodwill impairments. Before the crisis began, publicly traded companies in the United States wrote off approximately $6 billion of impaired goodwill in 2006. By 2007, goodwill impairments rose to $54 billion, and then increased by more than three times to $188 billion in 2008. By 2009, the level of goodwill impairments was much lower at $26.4 billion and remained relatively steady through 2010 at $29.7 billion.1 While the leveling off of goodwill impairments in 2009 and 2010 could be seen as an indication of better economic conditions, another view is that goodwill impairments declined because most companies' goodwill was already fully impaired leaving nothing to write off in 2009 and 2010. Exhibit 5.1 shows the spike in goodwill impairments as a result of the financial crisis.

EXHIBIT 5.1 Goodwill Impairment, U.S. Companies (in $billions) vs. ...