Module I· Three-Statement Mechanics & LinkagesAdvanced
Question
Goodwill impairment of 100 — 3-statement impact (with the tax nuance)?
Answer
Key nuance
A goodwill impairment is usually NOT tax-deductible (tax goodwill and book goodwill differ). Assumption here: not deductible.
Income statement
| Item | Δ |
|---|---|
| Impairment (other operating exp.) | +100 |
| EBIT | −100 |
| Taxes (no tax shield) | 0 |
| Net income | −100 |
Cash flow
| Item | Δ |
|---|---|
| Net income | −100 |
| + Impairment (non-cash) | +100 |
| = OCF | 0 |
Balance sheet
| Account | Δ |
|---|---|
| Goodwill | −100 |
| Cash | 0 |
| Retained earnings | −100 |
Sanity check
The change in assets −100 equals the change in equity −100 — the balance sheet balances with no cash movement.
Deep diveShow more details
Comparison to D&A (#619)
With ordinary D&A you get the tax shield, so cash rises by the tax effect. With a goodwill impairment there is no tax shield (not deductible), so cash is unchanged — the impairment is a pure book-value hit with no cash movement.
Pitch tip
Bayer's 2020 write-down of its Monsanto acquisition impaired roughly $9bn of goodwill — no cash effect, but a massive equity hit and covenant pressure. This exact mechanism is why goodwill-impairment risk is presented as a valuation downside in M&A pitches.