Chapter 2 — Financial Statement Accounting and Disclosure Topics

2.11 Impairments of Goodwill and Other Long-Lived Assets

2.11.1 Goodwill

2.11.1.1 MD&A Disclosures

Examples of SEC Comments

We note in your recent 10-K disclosures that at [October X, year 1], after considering the results of your most recent quantitative annual testing for each reporting unit and indefinite-lived intangible asset, results of valuations related to the acquisition of [Company A], the capital markets environment, macroeconomic conditions, [Industry B] competition and trends, our results of operations, and other factors, you concluded that it was not more likely than not that the fair values of your reporting units or indefinite-lived intangible assets were less than their respective carrying values and, therefore, did not perform a quantitative analysis. We further note in your 10-Q for the period ended [June Y, year 2], we note that your results of operations during the second and first six months of [year 2] reflected a difficult macroeconomic environment including a softening industry demand, lower volumes, inflationary impacts as well as other factors and that your net book value currently exceeds your market capitalization. However, we noted no revisions to your disclosures related to goodwill under critical accounting estimates in MD&A in subsequent quarterly filings that address these factors. Please revise future filings to address if and how these factors impacted your determination to test goodwill for impairment as of an interim date and, if not, explain why not. Please also revise future filings to explain if and how you consider market capitalization in determining the estimated fair values of reporting units. Refer to ASC 350-20-35-3C, ASC 350-20-35-22 to 24, and ASC 350-20-35-30.
Please disclose whether you believe the estimated fair values of your reporting units substantially exceed their carrying values. For any reporting units that have estimated fair values that do not substantially exceed their carrying values, please provide useful and meaningful information that would allow investors to better assess the probability of a future goodwill impairment, including the following:
- Identify the reporting unit and quantify the amount of goodwill allocated to the reporting unit.
- Disclose the percentage by which the estimated fair value exceeded carrying value as of the date of the most recent impairment test.
- Disclose and discuss the specific critical assumptions used in your fair value determination.
- Address the degree of uncertainty associated with your key assumptions and disclose how changes in key assumptions could impact your fair value determination.
- Describe potential events and/or changes in circumstances that could reasonably be expected to negatively affect your key assumptions.
You recognized [an] $[X] million goodwill impairment charge, or [Y]% of fiscal year [2] operating income, for your [Business A] reporting unit, resulting in remaining goodwill of $[Z] million. You state the impairment charge was primarily due to slower than anticipated recovery of . . . volumes as you emerge from the pandemic, competitive pressures, and rising interest rates. The analysis of [Business B] and [Business A] net sales . . . describes unit volume increases in both fiscal years [2] and [1] for most and all [Business B] and [Business A] products, respectively. . . . As such, there is a concern it may not be clear to investors what specific facts and circumstances occurred in your [Business A] reporting unit subsequent to your [year 1] goodwill impairment assessment in which you had concluded that the reporting unit’s fair value substantially exceeded the respective recorded value. Please expand your disclosures to provide [Business A] reporting unit specifics of the facts and circumstances that led to the quantitative assessment and material impairment charge. In this regard, we also did not note any disclosures in your interim reports regarding a material uncertainty with [Business A’s] goodwill. Please also address the following:
- A discussion of the degree of uncertainty associated with all of the key assumptions in the discounted cash flow analysis along with the potential impact changes in the key assumptions would have on your impairment analysis. For example, you state that [an X]% increase in the discount rate would result in an additional impairment charge but do not mention assumptions for future revenue growth, operating margin, and the weighted average cost of capital.
- A discussion of the potential events and/or changes in circumstances that could reasonably be expected to occur and negatively affect the key assumptions and result in a material impairment charge.
Refer to Item 303(b)(3) of Regulation S-K and Section 501.14 of the Financial Reporting Codification for guidance.

We note your [Segment A] has generated operating losses in two of the three years presented, as well as a significant cumulative operating loss over the three year period. Please tell us and disclose in future filings, the percentage or amount by which the fair value of your reporting units exceeds their carrying value. To the extent you believe the fair value “substantially exceeds” the carrying values of your reporting units, please add disclosure stating such. For any reporting units that have fair values which are not substantially in excess of carrying values, provide information for investors to assess the probability of future goodwill impairment charges, including the following:
- the percentage by which fair value exceeded carrying value at the date of the most recent test;
- the specific critical assumptions used in your fair value determinations;
- a discussion of the degree of uncertainty associated with the assumptions; and
- a description of potential events and/or changes in circumstances that could reasonably be expected to negatively affect the key assumptions. Please refer to Item 303(b)(3) of Regulation S-K.

Section 9510 of the Division’s Financial Reporting Manual (FRM) discusses the SEC staff’s views on when goodwill impairment disclosures in the critical accounting estimates section of MD&A are appropriate and the extent of such disclosures. The staff has commented on a registrant’s compliance with the disclosure requirements of Regulation S-K, Item 303(b)(2)(ii), to discuss a known uncertainty — specifically, to disclose the potential for a material impairment charge — in light of potential impairment triggers (i.e., whether the registrant should have provided early-warning disclosures about the possibility of an impairment charge in future periods to help financial statement users understand these risks and how they could potentially affect the financial statements). The staff has noted that it may use these disclosures to assess whether a registrant’s goodwill impairment analysis is reasonable or whether the registrant should have performed an interim goodwill impairment analysis. See Section 3.1 for additional information about early-warning disclosures.

While registrants often provide the appropriate disclosures before incurring an impairment charge, the SEC staff has noted instances in which registrants did not disclose the specific events and circumstances that led to the charge in the period of impairment. Further, registrants should avoid attributing an impairment charge to general factors such as “soft market conditions” or expected reductions in sales price or sales volume. Instead, the disclosures should discuss (1) why the changes occurred, (2) why the change in forecasts or results occurred in the particular period of the impairment charge, and (3) what known developments or other doubts could affect the reporting unit’s fair value estimate.

2.11.1.2 Reporting Units

Examples of SEC Comments

Please clarify how you allocated goodwill to the two reporting units at the beginning of fiscal [year 2] in response to your new reporting structure. In that regard, explain how 80% of goodwill was allocated to [Reporting Unit A] when only 29% and 25% of your revenue was generated from your [Segment A] for [fiscal year 2] and [fiscal year 1], respectively. Reference ASC 350-20-35-45.
Your disclosures . . . indicate that you determined you had two operating segments and correspondingly two reporting units . . . . Your Form 8-K . . . indicates that . . . you now have four operating divisions . . . . Please disclose the impact of these recent organizational changes on your determination of operating segments and reportable segments pursuant to ASC 280 as well as the impact on your determination of reporting units for purposes of goodwill impairment testing pursuant to ASC 350-20.
Please explain to us your consideration of the definition of a reporting unit provided in ASC 350-20-20. Explain how you determined you operate as a single reporting unit, according to your goodwill disclosures . . . , yet your segment disclosures . . . indicate that you operate in several reportable segments.
We have read your [prior] response . . . and your disclosure that you operate under one reporting unit because all your business components have similar economic characteristics and are managed on an aggregated basis. Please more fully explain to us what your business components are and how you determined they all have similar economic characteristics. In this regard, please specifically address the fact that the fair values related to various contingent earn-out liabilities appear to change in disparate directions and the fact that, based on your disclosures of pro forma and historical revenue amounts . . . , the results of acquisitions appear to be dissimilar, for example, it appears to us that revenues related to [Component A] declined by approximately 50% in the current interim period relative to the comparative interim period.

The SEC staff has commented on identification of reporting units for the allocation of goodwill to reporting units and goodwill impairment testing, especially when changes appear to have been made to a registrant’s reporting structure (e.g., as the result of a reorganization, an acquisition, or a change in management). Given the interaction between the guidance on reporting units in ASC 350-20 and the guidance on operating segments in ASC 280, the staff may also ask questions to better understand (1) how the reporting units were identified; (2) how many reporting units were identified; (3) how the reporting units align with the registrant’s segment reporting; (4) whether and, if so, how the registrant aggregated reporting units to perform goodwill impairment testing; and (5) how goodwill was allocated to reporting units. For additional discussion about the identification and aggregation of operating segments, see Sections 2.20.1 and 2.20.2, respectively.

2.11.1.3 Goodwill Impairment

Examples of SEC Comments

We note that you performed an interim impairment analysis as of September 30, [year 1], recording [an $X] million impairment and also performed your annual impairment analysis as of October 1, [year 1], recording a $[Y] million impairment. Please address the following:
- Summarize for us the changes in circumstances and/or assumptions that led to the multiple impairment charges over a relatively short period of time.
- Explain the timing for recognizing the $[Y] million impairment and provide your basis for concluding that this additional impairment did not exist as of September 30, [year 1].
- Tell us whether your valuation assumptions changed between your September 30, [year 1] and October 1, [year 1] impairment tests.
We note that you performed an interim testing of impairment of [Intangible Asset A] due to the continuing challenging business conditions in certain markets as of the end of the third quarter . . . . Please tell us if you performed an interim testing of impairment of goodwill . . . due to these same market conditions and tell us if you determined the estimated fair value of your reporting units substantially exceeded their carrying value and the percentage by which the fair value of the reporting unit exceeded the carrying value as of the date of most recent test. If an interim impairment test of goodwill was not performed, please explain why you believe one was not required given your operating environment and market conditions.
Please revise your financial statements in future filings to disclose the amount of goodwill allocated to each reportable segment as required by ASC 350-20-50-1. In addition, we note subsequent to your acquisition . . . your stock price, market capitalization, and operating results have declined and your net book value currently exceeds your market capitalization; however, we noted no revisions to your disclosures related to goodwill under critical accounting estimates in MD&A in subsequent quarterly filings that address these factors. Please revise future filings to address if and how declines in your stock price, market capitalization, and operating results impact your determination to test goodwill for impairment as of an interim date and, if not, explain why not. Please also revise future filings to explain if and how you consider market capitalization in determining the estimated fair values of reporting units. Refer to ASC 350-20-35-3C, ASC 350-20-35-22 to 24, and ASC 350-20-35-30.
It appears that your goodwill balance exceeds your market capitalization. Tell us and disclose how you considered market capitalization when performing your goodwill impairment testing.

ASC 350-20 requires entities to test goodwill for impairment annually and also between annual tests if facts and circumstances indicate that goodwill may be impaired. If a registrant performs an interim impairment test, it should consider disclosing (1) that it performed the test, (2) the event that triggered the test, and (3) the test result regardless of whether goodwill was determined to be impaired. The SEC staff has asked registrants about negative trends that could trigger the requirement to test for impairment between annual tests and often asks them to describe the events leading up to the recording of an impairment charge, including how circumstances changed from prior quarters and from the last annual impairment test. The staff may also request an explanation of (1) how an impairment had not been reasonably foreseen during management’s prior-period assessments and (2) the timing of an impairment. Specifically, the staff may question why management did not identify an impairment during a previous quarter.

The SEC staff also frequently refers to a registrant’s market capitalization when commenting on the registrant’s testing of goodwill for impairment. When a registrant’s book value exceeds its market capitalization, questions may be raised about whether goodwill should be tested for impairment or, if goodwill was tested, whether goodwill at one or more reporting units is impaired. Accordingly, registrants should be prepared to explain how they considered market capitalization in connection with their testing of goodwill for impairment.

2.11.2 Other Long-Lived Asset Impairments

Examples of SEC Comments

We note that you are temporarily idling . . . production at your . . . facilities . . . for a period of four months subject to market conditions. Please tell us and revise future filings to disclose the following:
- The carrying value of the assets that have been idled.
- Whether you performed an impairment analysis of the idled assets. Refer to ASC 360-10-35-21.
- If you have performed an impairment analysis, the key assumptions you used and whether the estimated fair values substantially exceeded carrying values.
- If you have not performed an impairment analysis, explain why you did not believe such an analysis was necessary.
Based on your disclosure, it does not appear you recorded any store level long-lived asset impairments in fiscal [year 1] or through the third quarter of fiscal [year 2]. Further, you state in your disclosure, “For store level long-lived assets, expected cash flows are determined based on management’s estimate of future sales, merchandise margin rates and expenses over the remaining expected terms of the leases.” In this regard, we note the comments made by management in the third quarter [year 2] earnings call that would imply that certain stores are cash flow negative. Additionally, we note declining sales and gross profit margins for the fiscal year ended [year 1], and the 13 and 39 weeks ended December 1, [year 1]. With reference to ASC 360-10-35-21, please clarify whether or not you tested any store level long lived assets for recoverability during the 39 weeks ended December 1, [year 1]. If not, please provide support for your conclusion that impairment testing was unnecessary. If you tested these assets for impairment, please refer to the guidance in ASC 360-10-35-29 through 33, and provide us with the summary results of your testing, including the underlying material assumptions you relied on in determining the estimates of future cash flows.
We note your disclosure explaining that you have not tested your long-lived assets for recoverability during any of the periods covered by your financial statements because you had not identified indicators that would require a formal impairment test. However, you have various disclosures within your periodic filings of circumstances that do not appear to be consistent with this determination. [C]onsidering the examples of indicators in FASB ASC 360-10-35-21(b), (c) and (e), we believe that you would need to test your long-lived assets for recoverability and should review your depreciation estimates and method of amortization to comply with FASB ASC 360-10-35-21 and 22. Please submit the analyses that you perform for recoverability of the amounts capitalized for your [assets].

In its comments on impairments of long-lived assets, the SEC staff may ask a registrant that has recorded, or is at risk of recording, impairment charges to disclose, or inform the staff about, the following:

The adequacy and frequency of the registrant’s asset impairment tests, including the date of its most recent test.
The factors or indicators (or both) used by management to evaluate whether the carrying value of other long-lived assets may not be recoverable.
The methods and assumptions used in impairment tests, including how assumptions compare to recent operating performance, the amount of uncertainty associated with the assumptions, and the sensitivity of the estimate of fair value of the assets to changes in the assumptions.
The registrant’s conclusions regarding its asset groupings.
The timing of the impairment, especially if events that could result in an impairment had occurred in periods before the registrant recorded the impairment. In these circumstances, the SEC staff may ask registrants to justify why the impairment was not recorded in the previous period.
The types of events that could result in impairments.
In the critical accounting policies section of MD&A, the registrant’s process for assessing impairments.
The facts and circumstances that led to the impairments. A registrant may also be required to disclose in MD&A risks and uncertainties associated with the recoverability of assets in the periods before an impairment charge is recorded. For example, even if an impairment charge is not required, a reassessment of the useful life over which depreciation or amortization is being recognized may be appropriate.

In addition, the SEC staff may ask why no impairment was recorded when the staff observes adverse economic conditions (e.g., decrease in net cash flow).

The SEC staff may also ask about the sale of assets that resulted in significant gains or losses. Under ASC 360-10-45-5, a “gain or loss recognized . . . on the sale of a long-lived asset (disposal group) that is not a discontinued operation shall be included in income from continuing operations before income taxes in the income statement of a business entity. If a subtotal such as income from operations is presented, it shall include the amounts of those gains or losses.” The staff may ask a registrant about the classification of gains or losses on the disposal of long-lived assets if not clearly disclosed.

Other Deloitte Resources

Roadmap, Goodwill and Intangible Assets

Roadmap, Impairments and Disposals of Long-Lived Assets and Discontinued Operations