Estimation Uncertainty: The High Stakes of Impairment Reporting

For years, revenue recognition was the primary issue cited in allegations of accounting fraud, whether in enforcement investigations or securities litigation. For the second year in a row, impairment and asset valuations have become the new frontier for GAAP violations alleged in securities litigation cases filed in the US. International regulators have also homed in on the risks associated with this area of accounting.  

Unlike historical cost, impairment and asset valuations rely on management’s estimates of fair value and future cash flows. Given the absence of a crystal ball, these estimates will inevitably prove not to be entirely accurate, with the passage of time increasing the risk that management judgments will be challenged, with the benefit of hindsight, by auditors, plaintiffs and/or regulators.  

Accounting for Impairment Losses

Accounting under US Generally Accepted Accounting Principles (“US GAAP”) differ slightly from that under International Financial Reporting Standards (“IFRS”) however both typically rely on predicting future cash flows. US GAAP uses a two-step test where impairment is triggered if undiscounted cash flows are less than the carrying amount (amount recorded in the financial statements), with impairment measured as the difference between fair value and carrying value. IFRS requires an impairment charge if recoverable amount (the higher of fair value less cost of disposal or value in use) is lower than carrying amount.  

Once an impairment charge is recorded, US GAAP prohibits any future reversals whereas IFRS will permit impairment losses to be reversed (except goodwill) if recoverable value increases.

The Business Perspective

Impairment charges can be viewed by investors, shareholders and other stakeholders as indicators of financial and operational concerns within a business or an operating segment. Recording impairment charges can, therefore, significantly impact a company’s stock price, financing costs and other business relationships. In addition, business owners and senior management are inherently optimistic about the prospects of their business, taking pride in what has been accomplished historically and remain bullish about future performance.  

These factors can lead to the development of cash flow forecasts that are based on unrealistic assumptions that may not be supported by external, or other internal, data or indicators. When such assumptions are called into question during litigation or investigations – with the added benefit of hindsight – companies may find it difficult to justify prior positions if the impairment assessment was not well executed or documented.  

Plaintiff Attorneys scrutinize impairment related disclosures

Securities litigation involving impairment charges typically centers on claims that a company failed to disclose or delayed disclosing asset write-downs, misleading investors about its financial health. A sudden, significant impairment charge that causes a stock price drop often triggers an investigation and subsequent lawsuit.

In 2025, 44% of accounting related cases cited allegations of inappropriate asset valuation and impairment. This compared to 33% in 2024. In both years, this represented the most significant category of accounting related cases, knocking revenue recognition from its historical perch.  

Some of the most significant impairments that resulted in securities litigation in 2025 included:

• Beyond Meat, Inc. announced a $77.4 million impairment charge in Q3, 2025 to its plant property & equipment (PP&E) and certain operating lease assets.  The impairment arose from weak demand for plant-based ‘meat’ products and a decision to “suspend and substantially cease” operations in China as part of a cost-cutting exercise.  
• Grocery Outlet Holding Corp. In Q4, 2025, the company recognized $110 million in impairment charges in long-lived assets (and $149 million in goodwill) related to a decision to close 36 stores, attributed to the chain expanding too quickly, increased operating costs and disruptions to federal benefits.  
• J.M. Smucker Company announced three separate impairment charges during 2025 and early 2026 totaling nearly $2 billion in its Sweet Baked Snacks segment.  The charges were attributed to lower than expected performance, a consequence of “inflation-driven consumer behavior shifts”.

SEC related cases

Despite the decline in enforcement actions by the SEC since the Trump Administration assumed office, public statements have indicated that the SEC will continue to pursue violations that undermine market integrity, including accounting fraud, insider trading, wash trading, and market manipulation schemes. To date, this has not materialized with significant new enforcement actions against public companies, totalling only 56 new cases in FY 2025, demonstrating a marked shift toward "bread-and-butter" cases like investment adviser fraud and insider trading.

The most significant recent accounting case involving impairment was brought against United Parcel Service Inc in November 2024. The SEC found that UPS failed to adhere to the basic accounting principle that the “fair value” of an asset is the price that would be received to sell that asset in an orderly transaction between market participants.  

Back in 2019, UPS’s corporate strategy group concluded as a result of its own analysis its Freight business unit (“Freight”) was likely to sell for no more than $650 million, which would mean that nearly $500 million of goodwill associated with Freight was impaired. The SEC found, however, that UPS had ignored its own internal assessment of Freight’s fair value and instead relied on a valuation estimate of $2 billion prepared by an external consultant using incomplete information not furnished by UPS.  

In Q4, 2020, UPS wrote off the goodwill after reaching an agreement to sell Freight for a net price of about $650 million. The SEC ordered a civil penalty of $45 million that was distributed to harmed investors through a “Fair Fund” pursuant to Section 308(a) of the Sarbanes-Oxley Act of 2002.

UK Related Concerns

Other international agencies are also concerned about public company accounting for impairment and asset valuations. The UK’s Financial Reporting Council (FRC), in its Annual Review of Corporate Reporting released in September 2025, continued to flag impairment of non-financial assets as a top concern, highlighting that it is the most frequently challenged area in corporate reporting. The FRC insists on improved disclosures regarding key assumptions used in cash flow projections, listing the following as areas of focus:

• Consistency: Assumptions in impairment models must align with internal and public data e.g., business plans, strategic reports etc.
• Sensitivity Analysis: FRC noted a consistent theme of deficient, missing, or unclear sensitivity disclosures regarding key assumptions (e.g., discount rates, growth rates).
• Key Inputs: Companies were found to be inconsistent in the application of key model inputs including discount rates, commodity prices and other external data sources.

The FRC urges companies to ensure that impairment disclosures are specific to their own circumstances, rather than generic, particularly in light of increased “economic and geopolitical uncertainty.”  

Increased risks in the current environment

As noted in the FRC’s Annual Review report, current impairment assessments performed by public companies, and the assumptions and inputs that underly the cash flows and valuations used in such assessments, require considerable management judgment in an environment fraught with macroeconomic uncertainty and triggers. How does corporate management differentiate between temporary dips and permanent value declines? Key factors influencing these decisions include:

• Higher interest rates – how long will high rates remain, how does this impact business operations and performance, and the discount rates used?
• Inflation rates – what will inflation be going forward especially given global events and the slow rate of economic growth in certain global economies? How will this impact future pricing, revenue volumes and/or costs?
• International Tariffs – how are increased costs factored into revenue/cost projections? Can tariff expenses be passed to consumers and if so, partially or fully? Will the tariffs continue and, if so, for how long and at what rates? How will rates change for each country in which the company conduct business? Will changes in international trade evolve how and where the company does business e.g. manufacturing?
• Evolving business practices - What impact will evolving business models have on the company e.g., increased use of AI and associated hiring changes?
• Other factors – What impact will climate change, including new legislation and evolving customer sentiment, have on the business? What impact does increased wages, taxation or other expenses have on future cash flows?

Conclusions

In today’s environment of heightened regulatory focus, macroeconomic volatility, and increased scrutiny from investors and plaintiff attorneys alike, impairment assessments have become one of the most consequential areas of financial reporting. As the examples across U.S. and international markets show, companies that rely on overly optimistic assumptions or fail to align their valuation inputs with internal and external evidence face significant litigation, enforcement, and reputational risks.  

Robust processes — grounded in well‑supported forecasts, consistent discount and growth rate assumptions, comprehensive sensitivity analyses, and clear, company‑specific disclosures — are essential to withstand hindsight challenges. Ultimately, transparent and well‑documented impairment evaluations not only enhance compliance but also strengthen stakeholder confidence, particularly in periods of economic and geopolitical uncertainty.