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, your 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.
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 disclosure that based on your assessment as of [the beginning of the second fiscal quarter], the estimated fair value of [Reporting Unit A], which represents the [year X] acquisition of [Company B], exceeded its carrying value, while the estimated fair value of each of the remaining reporting units significantly exceeded their carrying values. We also note that the goodwill related to [Reporting Unit A] was $[Y] million at [fiscal year-end]. For any reporting units where the fair value does not substantially exceed book value, please disclose the following:
- percentage by which fair value exceeded carrying value at the date of the most recent test,
- a more detailed description of the methods and key assumptions used and how the key assumptions were determined;
- 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(a)(3)(ii) of Regulation S-K and Section V of SEC Release No. 34-48960.
We note from your disclosure . . . that you reassessed the fair value of certain reporting units within your [Reportable Segment A] due to a forecasted reduction in revenue and profitability and an increase in interest rates and market volatility. We further note that you impaired one of the reporting units in each of fiscal [year 1] and [fiscal year 2]. Please revise to clarify whether any of the other reporting units are at risk of impairment and if so, disclose the percentage by which fair value exceeded carrying value as of the most recent test. Also, include a description of potential events and/or changes in circumstances that could reasonably be expected to negatively affect the key assumptions used in your evaluation. Otherwise, state, if true, that the fair value of each of your reporting units [is] substantially in excess of carrying value and [is] not at risk of failing. Refer to Item 303(b)(3) of Regulation S-K.

The SEC staff may ask for expanded MD&A disclosures and seek additional information if, during a goodwill impairment test, the fair value of a reporting unit does not substantially exceed its associated carrying value. Reporting units with a narrow difference between fair value and carrying value may give rise to additional questions since changes in key assumptions or valuation methods could change the outcome of the goodwill impairment test.

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.
You have identified one reporting unit for all of your service [lines] due to the economic similarity of the services provided to your partners. Please tell us the components you have aggregated and provide us with your analysis pursuant to ASC 350-20-35-35 that supports the aggregation.
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 components of an entity into a single reporting unit 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 your disclosure . . . that you have monitored events and conditions quarterly since [the end of fiscal year 1], and determined that no triggering event had occurred that would require goodwill to be tested for impairment at an interim date. You also disclose that you performed an annual goodwill impairment test and determined that goodwill was not impaired as of [the end of fiscal year 2]. We further note the Company’s market capitalization has remained below its total stockholders’ equity value for the last eight quarters through [the end of the second quarter of fiscal year 3] and your disclosure that the Company has one reporting unit as of [the end of fiscal year 2]. Please provide us a summary analysis of how you determined that goodwill was not impaired as of your annual testing date, including as part of your response the percentage or amount by which your estimated fair value exceeded carrying value.
We note that you have significant impairments . . . recorded in Other income (expense). . . . Additionally, it appears that the impairments of goodwill and intangible assets should be presented as part of operating loss. Please revise future filings accordingly.
We note that you included the impairment charges in the Selling, General, and Administrative expenses line item of the statements of earnings. Please present the charges related to impairments in a separate line item with charges related to goodwill presented separately from other impairment charges in accordance with ASC 350-20-45-2.

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.

The SEC staff may also comment on the financial statement presentation of goodwill impairment charges, including the requirement to present goodwill impairments as a separate line item within operating expenses in the income statement in accordance with ASC 350-20-45-2.

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].
Regarding your policies for testing your franchise agreements intangible assets for impairment, please tell us the basis for utilizing one unit of accounting for impairment testing rather than multiple units based on specific geographical areas in which you have obtained rights to operate. Refer to ASC 350-30-35-21 to 24.
Tell us how you considered the need to evaluate the recovery of your customer relations and technology intangible assets as of [the end of the fiscal quarter] in light of the adverse impacts due to industry technological changes and your loss of customers. Refer to ASC 350-30-35-14 and ASC 360-10-35-21.
We reference the disclosure here and throughout the filing that you recognized impairment for certain long-lived assets related to the [Product A] biopharmaceutical services developed technology, customer relationships and customer backlog finite-lived intangible assets due to “a significant change in the business environment.” In future filings, please provide more context regarding the nature and impact of any triggering events that require assessment for impairment of your intangible 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 and unit of account for impairment testing.
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 or loss of market share). Further, if a registrant has recorded an impairment charge without providing the fair value disclosures required under ASC 820-10-50, the staff may advise the registrant to provide such disclosures, including significant unobservable inputs used in Level 3 fair value measurements as required by ASC 820-10-50-2(bbb) when applicable. See Section 2.7 for further discussion of fair value disclosures.

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