Generally, a bankruptcy filing is not the first triggering event for an impairment assessment. Asset impairments usually precede a bankruptcy filing given the financial decline that a reporting entity typically faces, which may also be experienced throughout the industry in which it operates. Impairments are usually associated with declines in the reporting entity's cash flows from operating activities and a corresponding decline in the fair values of underlying assets. See BLG 2.2.1 through BLG 2.2.8 for important considerations regarding asset impairments in advance of a bankruptcy filing.

2.2.1 Goodwill (pre-bankruptcy)

Public business entities that are SEC filers, excluding smaller reporting companies as defined by the SEC, are required to measure a goodwill impairment loss as the amount by which a reporting unit’s carrying amount exceeds its fair value, not to exceed the carrying amount of goodwill. The current guidance was issued by the FASB in January 2017 as Accounting Standards Update 2017-04, Intangibles – Goodwill and Other (Topic 350): Simplifying the Accounting for Goodwill Impairment (ASU 2017-04), which eliminated the need for a hypothetical purchase price allocation to measure goodwill impairment.
All other entities that have not elected the accounting alternative to amortize goodwill, discussed further below, will be required to apply the guidance in fiscal years beginning after December 15, 2022. Early adoption is permitted; however, early adoption in a fiscal year is precluded if an impairment test earlier in that fiscal year applied the prior impairment guidance.
ASU 2017-04 also amended the testing for reporting units with zero or negative carrying amounts, and includes a new requirement to disclose the amount of goodwill attributed to these reporting units. See BCG 9.6.5 for goodwill impairment testing considerations for reporting units with zero or negative carrying amounts prior to the adoption of ASU 2017-04 and BCG for considerations subsequent to the adoption of ASU 2017-04.
Private companies and not-for-profit (NFP) entities are eligible to make an accounting policy election for the following accounting alternatives related to goodwill:
  • Amortize goodwill on a straight-line basis over 10 years, or less than 10 years if the entity demonstrates that a shorter useful life is more appropriate (“goodwill alternative”) (see BCG 9.11.1)
  • Evaluate goodwill impairment triggering events as of the end of a reporting period (whether interim or annual) rather than throughout the reporting period (see BCG 9.11.2)
An entity is not required to elect either of the alternatives and is not precluded from electing, or required to elect, one of the alternatives if it elects the other alternative. Private companies that have elected the goodwill alternative but not the Private Company Council (PCC) alternative to subsume certain intangible assets into goodwill (ASU 2014-08) have a one-time election to adopt ASU 2017-04. See BCG for additional information. A company that meets the definition of a public business entity, as well as employee benefit plans, are not eligible to apply the PCC alternatives.
The remainder of this section addresses the goodwill impairment considerations for entities not following the PCC alternatives discussed above. An entity is required to test the carrying amount of a reporting unit’s goodwill for impairment on an annual basis in accordance with ASC 350-20-35-28. Under ASC 350-20-35-30, an entity should also test goodwill for impairment between annual tests if an event occurs or circumstances change that would more likely than not reduce the fair value of a reporting unit below its carrying amount. ASC 350-20-35-3A defines “more likely than not” as “a likelihood of more than 50 percent.”
While ASC 350-20-35-3C(a) through 35-3C(g) provide examples of such events and circumstances (i.e., triggering events), a reporting entity should consider all available information when performing its qualitative goodwill impairment assessment as required by ASC 350-20-35-3F.
The AICPA’s Accounting and Valuation Guide, Testing Goodwill for Impairment (“AICPA Goodwill Guide”), includes helpful examples of events and circumstances that might trigger the need for an interim goodwill impairment test. The SEC staff has also provided the following examples of events that may indicate that an interim impairment test is necessary:
  • Impairments of other assets or the establishment of valuation allowances on deferred tax assets
  • Cash flow declines or operating losses at the reporting unit level (the greater the significance and duration of losses, the more likely it is that a triggering event has occurred)
  • Negative current events or long-term outlooks for specific industries impacting the reporting entity as a whole or specific reporting units
  • Failure to meet analysts expectations or internal forecasts in consecutive periods or downward adjustments to future forecasts
  • Planned or announced plant closures, layoffs, or asset dispositions
  • Market capitalization of the reporting entity below its book value
Based on its qualitative assessment, if a reporting entity concludes that it is more likely than not that the fair value of a reporting unit is greater than its carrying value, then quantitatively testing goodwill for impairment is not necessary. See BCG 9.6 for more information on the qualitative goodwill impairment assessment.
Alternatively, if the qualitative assessment indicates it is more likely than not that a reporting unit’s fair value is less than its carrying value, quantitative impairment testing must be performed in accordance with ASC 350-20-35. See BCG 9.5 and BCG 9.8 for more information on the goodwill impairment model and the quantitative goodwill impairment test, respectively.

2.2.2 Indefinite-lived intangible assets (pre-bankruptcy)

ASC 350, Intangibles–Goodwill and Other, addresses impairments of indefinite-lived intangible assets. An indefinite-lived intangible asset is considered to be impaired when the asset’s carrying amount exceeds its fair value, as defined in ASC 360, Property, Plant, and Equipment. There are various approaches to determine whether an impairment should be recognized and, if so, how to measure and record such impairment in the financial statements. The identification of the applicable impairment approach is an important part of assessing and measuring an asset’s impairment.
The carrying amounts of any long-lived assets (including indefinite-lived intangible assets) that are not in the scope of ASC 360-10, other than goodwill, should be tested for impairment prior to testing long-lived assets for impairment, as discussed further in BLG 2.2.3. The order described therein for long-lived assets that are held and used differs from the held-for-sale impairment model discussed in BLG 2.2.4. Consistent with the goodwill impairment test previously discussed, ASC 350 allows an entity to first assess qualitative factors to determine whether events and circumstances indicate that it is more likely than not that an indefinite-lived intangible asset is impaired.
See BCG 8.3 for additional information regarding  the indefinite-lived intangible asset impairment model.

2.2.3 Long-lived assets to be held and used (pre-bankruptcy)

Unlike goodwill and indefinite-lived intangible assets, which are required to be tested for impairment at least annually, ASC 360-10 does not require annual impairment testing for long-lived assets that are held and used. Instead, a long-lived asset (asset group) that is held and used should be tested for recoverability whenever events or circumstances indicate that the carrying amount of the long-lived asset (asset group) may not be recoverable. Examples of such events or changes in circumstances, commonly referred to as impairment indicators or triggering events, are detailed in ASC 360-10-35-21. The examples provided should not be considered the only potential indicators that an asset (asset group) may not be recoverable.
When a reporting entity identifies an impairment indicator, it should perform a recoverability test, which is the first of two steps in the impairment test of long-lived assets. An asset (asset group) is considered to be recoverable when the entity-specific, undiscounted cash flows expected to be generated from the use and eventual disposition of the asset (asset group) are greater than its carrying amount. Depending on the reporting entity’s facts and circumstances, the use of an expected cash flow approach using a probability-weighted average of all possible cash flows, or the use of a single set of cash flows representing management’s best estimate of the most likely outcome within a range of possible estimated amounts, may be appropriate. PPE discusses this in more detail.
If the asset (asset group) is not recoverable (i.e., the net carrying value exceeds the entity-specific, undiscounted net cash flows), an impairment loss should be recognized based on the amount by which the carrying value of the asset (asset group) exceeds its fair value, which should be calculated based on the guidance in ASC 820-10.
The carrying amounts of any assets in the asset group that are not within the scope of ASC 360-10 (e.g., accounts receivable, inventory, indefinite-lived intangible assets other than goodwill) should be tested for impairment in accordance with other US GAAP prior to performing the impairment test on the long-lived assets (asset group). The carrying values are adjusted, if necessary, for the result of each impairment test prior to performing the next test. The determination of a reporting entity’s asset groups involves judgment and all relevant facts and circumstances should be considered. See PPE 5.2.1 for additional information on making this determination.
As discussed in PPE, reporting entities should evaluate whether a bankruptcy filing impacts management’s intended use of such assets (e.g., will they continue to be operated for their remaining useful lives beyond the expected emergence from bankruptcy or sold during bankruptcy to provide liquidity). Even before the filing, significant operating or cash flow losses that typically precede a bankruptcy filing would often trigger an impairment assessment of the long-lived assets. The cash flow forecasts used to test for recoverability would consider the likelihood of various outcomes, including whether a bankruptcy filing will occur and, if so, how that filing might impact the future cash flows and operations of the asset group. If a reporting entity is having difficulty financing its operations and if customers are unwilling to purchase from, or suppliers are unwilling to sell to the reporting entity because it is considering bankruptcy, these factors would impact the cash flow projections used in the recoverability test for long-lived assets. A probability-weighted cash flow analysis based on the facts and circumstances as of the trigger date is often used to assess recoverability when various outcomes, such as continued operation, sale, liquidation, or operating and emerging from bankruptcy, are considered.
Reporting entities should consider the appropriate disclosures when a bankruptcy filing occurs after the balance sheet date but before the date the financial statements are issued or available to be issued. Bankruptcy as a subsequent event is discussed in BLG 2.11. Additionally, as discussed in PPE, cash flow estimates should not be adjusted for a subsequent bankruptcy filing (i.e., cash flow estimates should reflect conditions and assumptions that existed as of the measurement date).
The method of depreciation and the remaining useful lives of a reporting entity’s long-lived assets should also be evaluated when impairment tests are performed even if the asset (asset group) is determined to be recoverable. For example, this evaluation may indicate that the anticipated life of a manufacturing facility should be shortened in light of reduced production volumes, resulting in increased depreciation over the remaining term.
See PPE 5.2 for further discussion of the impairment model for long-lived assets to be held and used.

2.2.4 Long-lived assets to be disposed of by sale (pre-bankruptcy)

Companies progressing toward bankruptcy often sell assets or dispose of noncore operations to increase liquidity. The primary guidance applicable to the disposal of long-lived assets is ASC 360, which addresses the determination of the disposal group, whether the long-lived assets (disposal group) should be reported as held for sale, and whether the operations of the long-lived assets (disposal group) should be classified as discontinued operations. ASC 360-10-45-9 requires that a long-lived asset (disposal group) should be classified as held for sale in the period in which all of the held-for-sale criteria are met. All criteria must be met as of or prior to the balance sheet date for a long-lived asset (disposal group) to qualify as held for sale.
If all of the criteria are met, the asset (disposal group) should be measured at the lower of its carrying amount or fair value less costs to sell. Depreciation or amortization of long-lived assets included in the disposal group is suspended once held-for-sale classification has been met. Further, consideration should be given to the criteria in ASC 205-20, Discontinued Operations, to determine whether discontinued operations classification is appropriate. See FSP 27.3 for further discussion.
See PPE 5.3.1 for further discussion of the held-for-sale accounting model and PPE 6 for asset dispositions.

2.2.5 Leases (pre-bankruptcy)

As previously mentioned, a reporting entity should evaluate whether a potential bankruptcy filing will impact its intended use of long-lived assets, which includes right-of-use assets accounted for under ASC 842, Leases. See LG 5 for a discussion of the accounting if a lessee makes modifications, including terminations, to its leases.
Reporting entities may also experience significant operating or cash flow losses prior to a bankruptcy filing that may trigger an impairment assessment. As discussed in PPE 5.2.7, a reporting entity should include the carrying value of any right-of-use asset in an asset group for purposes of impairment testing in accordance with ASC 360.
Reporting entities that have not yet adopted ASC 842 should follow the guidance within ASC 840, Leases, discussed in LG and LG 9.5 for lessees and lessors, respectively.

2.2.6  Inventories (pre-bankruptcy)

A bankruptcy filing is typically preceded by reduced sales volume, declining gross margins, and reduced operating profits. Entities should consider the impact of these declining operating results on inventories and whether any inventory reserves are needed. For example, a decline in product gross margin resulting from reduced sales prices or higher costs may indicate that an inventory reserve is necessary to reduce the carrying value of inventory to net realizable value. Inventory quantities might also be in excess of forecasted sales volumes given the overall sales pipeline and projections. This could result in the need for a reserve for excess or obsolete quantities. Consistent with the view of the SEC staff, the impact of write-downs on inventory should be classified as cost of goods sold on the statement of operations, even when the inventory reserves are directly associated with a reporting entity’s restructuring activities.
Another important area for companies to consider prior to a bankruptcy filing is whether under-absorbed overhead or production costs should be expensed when production volumes decrease due to reduced demand or unplanned facility downtime. When production levels are determined to be abnormally low, the portion of the fixed production overhead attributable to the underutilized capacity should not be allocated to and capitalized as a cost of inventory. Rather, it should be recognized as an expense (within cost of goods sold) in the period in which it is incurred. Judgment is required to determine when a production level is abnormally low—that is, outside the range of the expected variation in production. See IV 1.4 for further discussion of full absorption costing and IV 1.5.7 for further discussion of cost of goods sold.

2.2.7 Accounts receivable, contract assets, and supply agreements (pre-bankruptcy)

Entities proceeding toward a bankruptcy filing may find it increasingly difficult to collect outstanding receivables. As customers become aware of the financial difficulties of a reporting entity, they may have concerns that certain support or warranty obligations may not be performed, and therefore delay or withhold payments until the financial viability of the reporting entity is more certain.
A reporting entity experiencing financial distress or operating in a distressed industry should consider a customer’s credit risk as it relates to measuring impairment losses for accounts receivable and contract assets based on guidance in ASC 310, Receivables (credit losses are determined based on the guidance in ASC 326, Financial Instruments – Credit Losses, once adopted). For example, management may make billing adjustments, such as changes in the transaction price of its goods or services, or it may need to update its estimate of collections for previously satisfied performance obligations. Reporting entities should consider whether an adjustment represents a change in revenue or represents an adjustment to the measurement of the receivable or contract asset under ASC 310 (ASC 326, once adopted). See RR 4.2 for additional information.
Reporting entities progressing toward a bankruptcy filing may also amend existing customer supply agreements, which may result in revenue-related accounting issues under ASC 606, Revenue from Contracts with Customers.

2.2.8 Investments (pre-bankruptcy)

Reporting entities should periodically assess their investments for declines in value. Entities in troubled industries with investments within that industry are more likely to experience declines in investment values, which may result in the recognition of impairment charges. Circumstances leading to an investee considering a bankruptcy filing would likely trigger an impairment assessment by the investor.
See LI 2 for impairments of investments in equity securities, LI 7 and LI 8 for discussion of the impairment model for investments in debt securities and EM 4.8 for impairments of equity method investments.
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