Insights Article
Get the latest insights and updates delivered to your inbox.
In December 2016, Sequential Brands Group—a New York–based brand management company whose stock had fallen more than 40% in a single quarter—conducted internal calculations showing that its goodwill was likely impaired. The numbers, generated using the same methodology Sequential had disclosed in its SEC filings and applied in its annual testing just weeks earlier, indicated the company would fail the first step of its goodwill impairment test.
Management did not write down the goodwill. Instead, the company performed a qualitative analysis that omitted any mention of the internal calculations, cherry-picked favorable evidence, and concluded that the $307.7 million of goodwill on its balance sheet—21.4% of total assets—was unimpaired. Sequential carried that goodwill for another year, misstating its financial statements across four consecutive quarters, before finally writing down all $304 million in the fourth quarter of 2017.¹
The SEC brought charges in December 2020, describing the qualitative analysis as “strained, biased, and outcome-driven.”¹ But Sequential’s conduct, while egregious enough to warrant enforcement action, was not an aberration of the accounting standard that governed it. It was an exploitation of the standard’s design—a design that gives management extraordinary discretion, insulates failed acquisitions from timely write-downs through structural features of the impairment test, and has resisted every attempt at reform for more than a decade.
The standard is ASC 350, “Intangibles — Goodwill and Other.” The asset it governs—goodwill—currently sits on U.S. corporate balance sheets at an estimated $5.6 trillion.² And the regime charged with ensuring that number bears some relationship to economic reality has, by nearly every measure available, failed.
Get the latest insights delivered to your inbox.
Goodwill is the residual paid above the fair value of identifiable net assets in a business combination. It is, by definition, the portion of an acquisition price that cannot be allocated to anything specific. As of 2021, S&P 500 companies carried approximately $3.6 trillion of it. Valuation Research Corporation estimated the total across all U.S. public companies at roughly $5.6 trillion.²
The concentration is remarkable. Of the 500 companies in the index, 459 carry goodwill, with the average constituent holding approximately $7.8 billion. Strip goodwill from every balance sheet in the S&P 500, and 88 companies flip to negative book value.³
All of that goodwill rests on a single assumption: that the acquisitions giving rise to it were worth what was paid. ASC 350 requires companies to evaluate whether that assumption still holds at least once a year.⁴ But the standard offers management so much discretion in how the evaluation is conducted—and contains such significant structural limitations in what the test itself can detect—that it has become one of the least informative disclosure mechanisms in U.S. GAAP.
The most consequential change to goodwill impairment testing in the past two decades came in 2011, when the FASB issued ASU 2011-08 and introduced what practitioners now call “Step 0″—a qualitative assessment allowing management to evaluate whether it is “more likely than not” that a reporting unit’s fair value has fallen below its carrying amount.⁵ If management concludes the answer is no, no quantitative test is required. The company affirms that goodwill is not impaired and moves on.
The stated purpose was to reduce unnecessary testing costs. The practical effect has been to create a procedural mechanism for avoiding quantitative scrutiny—one that academic research increasingly suggests is used strategically.
A 2025 working paper by Adame, Lem, and Mookerjee examined firms with no market-value cushion—companies whose market capitalization was at or below book value, where impairment indicators were strongest.⁶ Among this population, approximately 17% of firm-years relied on the qualitative assessment rather than proceeding to quantitative testing. Within that 17%, roughly 6% appeared to reflect strategic reliance—firms where management had both the incentive to delay impairment and the opportunity to do so undetected. The pattern disappeared in the presence of strong auditor scrutiny or analyst coverage, suggesting that it was monitoring, not economics, that determined whether the qualitative assessment was used to avoid uncomfortable answers.
Ramanna and Watts reached a consistent conclusion a decade earlier. Their landmark 2012 study in the Review of Accounting Studies examined companies whose book-to-market ratios had exceeded 1.0 for a full year—firms where the market was clearly signaling that assets, including goodwill, were worth less than what appeared on the books.⁷ Among those companies, 71% recognized no impairment. Non-impairment was associated with CEO tenure, debt contracting incentives, and proxies for managerial discretion—the hallmarks of agency cost, not faithful reporting.
The FASB designed impairment testing on the theory that management would use fair-value estimates to communicate private information to investors. Two decades of academic evidence suggest they use it to protect themselves.
Management discretion, however significant, is only half of the problem. Even when companies bypass the qualitative assessment and proceed to a full quantitative test, a structural feature of the impairment framework systematically delays recognition of losses.
Goodwill is tested at the reporting unit level.⁸ The test compares the reporting unit’s total fair value to its total carrying amount. Impairment is recognized only when fair value falls below carrying amount. The problem is what fair value captures that carrying amount does not.
After an acquisition closes, the acquiring company continues to create value organically—new customers, workforce development, operational improvements, brand growth. None of this internally generated goodwill is recognized on the balance sheet under U.S. GAAP. But all of it is captured in the reporting unit’s fair value, because fair value reflects total economic value, not just recorded book value. The result is a built-in cushion. Academics and regulators call it the “shielding effect,” and it is the single most important structural limitation of the impairment test—and the one least understood by institutional investors.⁹
An acquisition can fail entirely. Synergies can evaporate. The acquired business can deteriorate to a fraction of what was paid. And if the rest of the reporting unit generates enough organic value to offset that loss, fair value never breaches carrying amount, and no impairment is ever recorded. In practical terms, billions in acquisition value can be destroyed without producing a single dollar of write-down, as long as the legacy business is performing well enough to compensate.
The International Valuation Standards Council has catalogued four distinct mechanisms that produce this result: headroom from the legacy business’s internally generated goodwill, artificial headroom created by the amortization of acquired intangible assets, overly broad triggering-event criteria, and behavioral reluctance by management to acknowledge deterioration.¹⁰ The IASB explored a “pre-acquisition headroom” approach during its post-implementation review of IFRS 3 that would have attempted to neutralize the shielding effect, but ultimately abandoned it as too costly and complex to implement.¹¹
The consequence is that failed acquisitions can remain on balance sheets for a decade or more before the cushion finally erodes and management runs out of room. By that point, the executives who approved the original deal have often moved on. The compensation tied to the transaction has vested. The write-down, when it comes, gets labeled a “legacy” matter—and accountability dissipates.
Get the latest insights delivered to your inbox.
If the impairment regime were functioning as intended, write-downs would flow at a pace roughly proportional to acquisition activity and the well-documented fact that approximately one-third of goodwill may represent overpayment at the time of acquisition.¹²
The data shows something very different. Impairments cluster around economic crises and are conspicuously modest during expansionary periods—precisely the pattern predicted by a regime dominated by discretion rather than economics.
Kroll’s annual U.S. Goodwill Impairment Studies document the pattern in detail. Total goodwill impaired spiked to $188.4 billion during the 2008 financial crisis, fell to $71 billion by 2019, then surged again to $142.5 billion in 2020 at the onset of the pandemic.¹³ In 2024, approximately $96 billion was impaired across 8,134 companies—a 16% increase from roughly $83 billion in 2023—with the top ten impairments accounting for $51 billion (53% of the total) and three sectors (Communication Services, Consumer Staples, and Healthcare) representing approximately 67% of total goodwill impaired.¹⁴
The 2019 figure is particularly instructive. In a year when total goodwill across all U.S. public companies exceeded $5 trillion, aggregate write-downs were $71 billion—roughly 1.4% of the total.¹⁵ Either American M&A has an almost perfect success rate, or the testing regime is systematically failing to capture real economic losses.
A study published in October 2025 by Stanley and Kinsman leaves little doubt about which interpretation is correct. The researchers examined 399 S&P 500 companies over the 2018–2023 period, isolating a cohort of 49 with unusually high ratios of goodwill and intangible assets to total capitalization—household names including AT&T, Disney, Pfizer, and Verizon.¹⁶ Compared against the remaining 350 companies, the high-goodwill cohort underperformed on every metric studied: lower gross margins in all six years, EBIT margins of 5.7% versus 20.2% in 2023, and price-to-sales ratios of 1.35 versus 4.46 in 2023. The researchers also found that approximately one-third of shareholder lawsuits filed in 2024 alleging accounting errors cited asset valuation and impairment issues—a finding that suggests the litigation market, if not the accounting market, is beginning to respond.
The high-profile impairments of recent years illustrate what happens when the cushion eventually erodes—and how much value destruction the accounting had been concealing.
General Electric’s $22 billion goodwill write-down in 2018, tied primarily to its 2015 acquisition of Alstom’s power business, triggered SEC and DOJ investigations into the company’s accounting practices.¹⁷ The acquisition’s failure had been evident to the market for years before the impairment was recorded.
British American Tobacco’s combined impairment of approximately $31.5 billion (£27.3 billion) in 2023 illustrates both the scale of potential mispricing and the importance of reading past headlines. Only £4.3 billion of the total was goodwill. The remaining £23.0 billion was an impairment of acquired U.S. combustible cigarette brand trademarks—Newport, Camel, Pall Mall, and Natural American Spirit — which were reclassified from indefinite-lived to a 30-year finite life.¹⁸ The timing was notable: the write-down came roughly seven months into new CEO Tadeu Marroco’s tenure, consistent with the well-documented “big bath” pattern in which incoming executives take large impairments early to reset expectations and distance themselves from their predecessors’ decisions.
Walgreens Boots Alliance reported a $12.4 billion pretax goodwill impairment in its fiscal second quarter of 2024, driven in part by its acquisition of VillageMD—a deal that was supposed to anchor the company’s primary care strategy.¹⁹
In each case, the market had priced in the deterioration well before the accounting acknowledged it. The impairment, when it finally appeared, was confirmation—not information.
None of this is unknown to the bodies responsible for setting accounting standards. They have spent years studying the problem. They have not fixed it.
The FASB devoted four years—2018 through 2022—to researching whether to replace the impairment-only model with an amortization approach. In June 2022, the Board voted unanimously to remove the project from its agenda. Chair Richard Jones said at the time that the case for change “doesn’t assemble.”²⁰
The issue resurfaced at a FASB Board meeting in February 2026. Kroll’s 2025 data was discussed. VRC’s $5.6 trillion estimate was cited. Multiple Board members expressed dissatisfaction with the current model. Jones himself conceded that he finds the current accounting for goodwill not “very relevant.”²¹ Board member Christine Ann Botosan captured the institutional exhaustion, noting that the Board had just abandoned a goodwill project, had received no new information since, and had no “new tricks” available. She added that investors had not supported the amortization outcome because it was “unrelated to the economics of transactions” and “destroys what little information they currently get from observing an impairment charge.”²²
No formal vote was taken. Staff were directed to continue researching.
The IASB voted unanimously in February 2025 against revisiting the impairment-only model under IFRS.²³ In December 2024, the FASB issued an invitation to comment on the recognition of intangible assets—a broader project that some Board members, including Joyce Joseph, suggested could subsume goodwill-related issues within a wider overhaul of business combinations accounting under ASC 805.²⁴ The intellectual argument may have merit. The practical effect is to defer action by years.
The SEC’s enforcement division has shown more willingness to act, but selectively. A 2019 Gibson Dunn analysis documented an “accompanying uptick” in SEC scrutiny of goodwill impairments as balances grew relative to total assets.²⁵ Sequential Brands remains the most prominent enforcement action—and the most instructive, not just for what the company did, but for what it reveals about how far the standard’s permissive framework extends. The qualitative assessment that the SEC challenged as fraudulent differed from countless others conducted every year under the same standard not in kind, but in degree. A slightly more sophisticated version of the same analysis—one that acknowledged some negative factors while still concluding impairment was unlikely—would have been difficult to distinguish from ordinary compliance.
For institutional investors deploying capital into companies carrying material goodwill, the impairment test as currently structured provides almost no independent assurance that the asset retains economic value. It confirms only that management—using models they control, assumptions they select, and discount rates they choose—has concluded that the number on the balance sheet should remain unchanged. Treating the absence of an impairment charge as evidence that goodwill is intact is a category error, and one that the standard’s structural limitations make inevitable.
The more productive approach begins with the acquisition itself. Every dollar of goodwill traces to a specific transaction with a specific set of projections that management used to justify the price. The original 8-K and purchase price allocation disclose those projections. Comparing them against actual post-acquisition performance remains the single most reliable indicator of whether goodwill is overstated—far more reliable than the impairment test, which can absorb a complete acquisition failure if the reporting unit’s organic business generates enough offsetting value.
Market-value cushions deserve close attention when reporting unit carrying amounts are disclosed. Comparing those carrying amounts against implied fair values—derived from comparable company multiples, discounted cash flow estimates, or segment-level market capitalizations—reveals how much headroom management has before impairment becomes unavoidable. A shrinking cushion is a leading indicator; by the time the write-down is recorded, the information value is gone.
Qualitative assessment disclosures are underexploited by most investors. Companies relying on Step 0 must disclose that they performed a qualitative assessment. When a company has used Step 0 for multiple consecutive years during a period of declining operational performance, the relevant question is not whether management had a basis for its conclusion—the standard is permissive enough to support almost any conclusion—but whether a quantitative test would have produced a different answer. The factors enumerated in ASC 350-20-35-3C (macroeconomic conditions, industry trends, cost factors, financial performance, and share price) provide a framework for the investor’s own independent assessment.
The discount rate embedded in quantitative impairment tests is among the most consequential and least scrutinized assumptions in financial reporting. A 100-basis-point change in the weighted average cost of capital can move a reporting unit’s fair value by 10–15%. These rates are disclosed in the goodwill footnotes. Comparing them against current market conditions and the rates an independent analyst would apply to comparable risk profiles exposes whether the company is relying on aggressive assumptions to preserve headroom that would not survive independent scrutiny.
Leadership transitions, finally, are a reliable predictor. Incoming CEOs and CFOs frequently take impairment charges in their first year—the “big bath”—to reset expectations and attribute losses to predecessors. British American Tobacco’s combined $31.5 billion impairment, seven months into Marroco’s tenure, followed this pattern precisely. Any company carrying significant goodwill that has recently changed senior leadership should be expected to announce a write-down within 12 to 18 months.
Goodwill represents real economic value when acquisitions are executed at fair prices and the acquired businesses perform as projected. The problem is not the asset. The problem is that the regime charged with testing its continued validity has been compromised—by management discretion that academic research shows is exercised strategically, by structural features of the impairment test that systematically shield failed acquisitions from timely write-downs, and by a standard-setting process that has spent years deliberating without producing reform.
What remains is $5.6 trillion on American balance sheets whose carrying values are, in the aggregate, a function of management judgment operating under minimal external constraint. For institutional investors, the operative assumption should not be that these values are reliable until proven otherwise. It should be the reverse.
Get the latest insights delivered to your inbox.
Referenced Sources
[1] SEC v. Sequential Brands Group, Inc., Civil Action No. 1:20-cv-10471 (S.D.N.Y., filed Dec. 11, 2020). SEC Press Release No. 2020-315 (Dec. 11, 2020). Goodwill as of December 31, 2016, was $307.7 million (21.4% of total assets). The company belatedly impaired all of its goodwill — totaling $304 million — in Q4 2017. The SEC described the qualitative analysis as “strained, biased, and outcome-driven.”
[2] Calcbench data as presented by Pranav Ghai, CEO of Calcbench, at the VRC/Calcbench goodwill panel (October 2021): S&P 500 goodwill “nearly topped $3.6 trillion.” Valuation Research Corporation estimate for all U.S. public companies, approximately $5.6 trillion. (Note: the subsequent Calcbench annual goodwill study using year-end 2021 data, released September 2022, reported S&P 500 goodwill at $3.77 trillion.) The $5.6 trillion figure was cited again in CFO Brew, “Goodwill accounting might not be the problem after all” (Feb. 13, 2026).
[3] Calcbench data as presented by Pranav Ghai: 459 S&P 500 companies carry goodwill; average constituent holds approximately $7.8 billion; 88 companies would flip to negative book value if goodwill were stripped from their balance sheets. Reported at VRC/Calcbench panel (2021).
[4] ASC 350-20-35-1 through 35-19. Following ASU 2017-04, Intangibles — Goodwill and Other (Topic 350): Simplifying the Test for Goodwill Impairment (January 2017), the former two-step process was simplified. Impairment is now measured as the excess of the reporting unit’s carrying amount over its fair value, limited to the total goodwill allocated to that reporting unit.
[5] FASB Accounting Standards Update No. 2011-08, Intangibles — Goodwill and Other (Topic 350): Testing Goodwill for Impairment (September 2011). Codified at ASC 350-20-35-3A through 35-3G.
[6] Katharine Adame, Katie Lem & Simmi Mookerjee, “Step Zero: Reliance on the Qualitative Goodwill Impairment Assessment,” working paper (July 2025; first posted on SSRN May 2019, last revised April 2024). Lem is faculty at Ohio State University’s Fisher College of Business. The paper finds that within the 17% of firm-years with no market-value cushion where managers relied on the qualitative assessment, approximately 6% reflected firms with both incentive and opportunity to delay impairment. Strategic reliance was observed only in the absence of strong monitoring.
[7] Karthik Ramanna & Ross L. Watts, “Evidence on the Use of Unverifiable Estimates in Required Goodwill Impairment,” 17 Rev. Acct. Stud. 749-780 (2012). The study examined firms with book-to-market ratios exceeding 1.0 for a full year and found that 71% of such firms recognized no goodwill impairment. Evidence was consistent with agency-theory predictions regarding CEO compensation, debt contracting, and managerial discretion.
[8] ASC 350-20-35-1 through 35-19.
[9] The “shielding effect” has been extensively analyzed in IASB deliberations. See IASB Agenda Paper 18C, “Improving the effectiveness of the impairment testing model” (May 2017); IVSC Perspectives Paper, “Information Value of the Current Impairment Test” (2021). The Footnotes Analyst (Feb. 2024) summarizes the practical consequence: “an acquisition can fail and goodwill is lost, but no actual goodwill impairment is recognised.”
[10] IVSC Perspectives Paper, “Information Value of the Current Impairment Test” (2021), identifying four limitations: (1) impairment shielding from internally generated headroom, (2) artificial headroom from amortization of acquired intangible assets, (3) overly broad and outward-looking triggering event criteria, and (4) behavioral reluctance to take impairment.
[11] IASB Post-Implementation Review of IFRS 3, Business Combinations (2020). The Board explored a “pre-acquisition headroom approach” but ultimately concluded it would reduce but not eliminate shielding, and that the added cost and complexity were not justified. See IASB Agenda Paper 18B (June 2019).
[12] Henning, Shaw, & Stock (2000) estimated that approximately one-third of goodwill may represent overpayment. Cited in multiple subsequent studies including Long Range Planning, Vol. 58, Issue 3 (2025).
[13] Kroll (formerly Duff & Phelps), 2021 U.S. Goodwill Impairment Study (March 2022): 2008 impairment = $188.4 billion; 2020 impairment = $142.5 billion, more than doubling from $71.0 billion in 2019.
[14] Kroll, 2025 U.S. Goodwill Impairment Study (September 2025): 2024 impairment = approximately $96 billion across 8,134 companies, a 16% increase from approximately $83 billion in 2023. Top 10 impairments totaled approximately $51 billion (53% of total). Communication Services, Consumer Staples, and Healthcare represented approximately 67% of total goodwill impaired.
[15] Kroll, 2021 U.S. Goodwill Impairment Study: 2019 impairment = $71.0 billion.
[16] Darrol Stanley & Michael Kinsman, “Excessive Valuation of Goodwill and Other Intangible Assets” (October 2025). Analyzed 399 S&P 500 companies from 2018-2023, isolating 49 high-GWI companies. Found lower gross margins in all six years, EBIT margins of 5.7% vs. 20.2% in 2023, and price-to-sales ratios of 1.35 vs. 4.46 in 2023. Approximately one-third of shareholder lawsuits in 2024 alleging accounting errors cited asset valuation and impairment issues.
[17] General Electric recorded a $22 billion goodwill impairment in 2018 tied primarily to its 2015 acquisition of Alstom’s power business. The write-down triggered SEC and DOJ investigations into GE’s accounting practices.
[18] British American Tobacco recorded a combined impairment of approximately $31.5 billion (£27.3 billion) in 2023, following a leadership transition. Of this total, £4.3 billion related to goodwill and £23.0 billion related to acquired U.S. combustible cigarette brand trademarks (Newport, Camel, Pall Mall, Natural American Spirit), which were reclassified from indefinite-lived to a 30-year finite life. See BAT 2023 Annual Report; Brand Finance, “Strategic Impairment at British American Tobacco” (Feb. 2024).
[19] Walgreens Boots Alliance reported a $12.4 billion pretax goodwill impairment in its fiscal second quarter of 2024 (quarter ended February 29, 2024), related in part to its acquisition of VillageMD. See Kroll, 2025 U.S. Goodwill Impairment Study; Walgreens Boots Alliance fiscal 2024 earnings release (October 15, 2024).
[20] FASB Board Meeting (June 15, 2022). Unanimous vote to remove goodwill project from technical agenda. Chair Richard Jones stated the case for change “doesn’t assemble.” See CFO Dive, “FASB drops four-year project changing goodwill accounting” (June 16, 2022).
[21] FASB Board Meeting (February 2026). Jones stated he finds the current accounting for goodwill not “very relevant.” See CFO Brew, “Goodwill accounting might not be the problem after all” (Feb. 13, 2026).
[22] FASB Board member Christine Ann Botosan, remarks at February 2026 Board meeting. She stated that investors did not support the amortization outcome because it was “unrelated to the economics of transactions” and “destroys what little information they currently get from observing an impairment charge.” See CFO Brew (Feb. 13, 2026).
[23] IASB voted unanimously in February 2025 against revisiting the impairment-only goodwill accounting model. See Kroll, 2025 U.S. Goodwill Impairment Study.
[24] FASB issued an invitation to comment (December 2024) on accounting and reporting associated with recognition of intangible assets, including acquired and internally developed intangibles. See Deloitte, On the Radar — Goodwill and Intangible Assets (September 2025). FASB Board member Joyce Joseph stated at the February 2026 meeting that disclosure enhancements “would be better addressed in the context of a broad look at the transparency in the business combinations disclosures.” See CFO Brew (Feb. 13, 2026).
[25] Jeffrey T. Smith, Gibson Dunn & Crutcher LLP, “Goodwill Under Scrutiny: How the SEC Is Increasingly Targeting Goodwill Impairments and Ways to Reduce Risk” (October 2019). Published in Corporate Securities & Finance Law Report, Vol. 21, No. 20.
This article is published by Buxton Helmsley USA, Inc. for informational and educational purposes only. It does not constitute investment advice, a solicitation, or a recommendation to buy or sell any security. The views expressed are those of Buxton Helmsley and are based on publicly available information as of the date of publication. Investors should conduct their own due diligence and consult with qualified professionals before making investment decisions.
Insights and updates delivered directly to your inbox.