Lesson 4 of 11
Writing an asset down
Kraft Heinz took $15,936 million of impairments in fiscal 2018 and turned a profit into a $10,192 million loss. The write-down recognised a price paid in 2015.
By Javier Sanz
Founder of ValueScreener. Built Ninety Nine, a securities services provider, and sold it to a tier-one global bank; ran operations and internationalization at Alpaca, the brokerage API.
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In one minute
- An impairment writes an asset down to what it is now judged to be worth, and charges the reduction to profit.
- It is a non-cash charge about a payment made in the past, so it changes book value and reported profit while changing nothing about this year's operations.
- The test uses the company's own forecasts, so a write-down arrives when management's expectations fall, which is usually after the evidence.
An asset sits on the balance sheet at what was paid for it, less what has been written off so far. Sometimes that figure stops being defensible.
The rules require a test, and when the test fails the asset is reduced and the reduction goes through the income statement. It is one of the few charges that can turn a profitable year into a large loss with no change in trading.
Kraft Heinz, fiscal 2018
- Asset impairment charges for the year$15,936m
- Of which goodwill$7,008m
- Net loss for the year−$10,192m
What the filing reports
Kraft Heinz's fiscal 2018 10-K, filed on 7 June 2019, reports asset impairment charges of $15,936 million (The Kraft Heinz Company FY2018 10-K, accession 0001637459-19-000049) for the 52 weeks ended 29 December 2018, of which $7,008 million (The Kraft Heinz Company FY2018 10-K, accession 0001637459-19-000049) was goodwill and the rest was indefinite-lived intangible assets, mostly brands.
The year's result was a net loss of $10,192 million (The Kraft Heinz Company FY2018 10-K, accession 0001637459-19-000049). Total assets fell from $120,092 million at 30 December 2017 to $103,461 million a year later, and equity from $65,863 million to $51,657 million.
No cash left the business because of any of it. The money had gone in 2015, when the merger that created the company put those brands and that goodwill on the balance sheet at the price paid for them.
How the test works, in outline
Goodwill is not amortised. It is tested at least annually, by comparing the fair value of the reporting unit that holds it with that unit's carrying amount. If the carrying amount is higher, the difference is written off up to the amount of goodwill.
Indefinite-lived intangibles, such as a brand expected to last indefinitely, are tested the same way at the individual asset level.
Long-lived assets like plant and equipment follow a different route. They are tested only when events suggest a problem, and then against undiscounted future cash flows, which is a deliberately harder test to fail.
Why the write-down is late
The fair value in that test comes from the company's own projections of what the business will earn. Those projections fall when management's view falls, and management's view falls after the evidence accumulates.
That sequence is the honest answer to "is an impairment a surprise". It is almost never a single revelation. It is a long correction of a price, taken in instalments as forecasts are lowered.
What a reader should do with one
Three things, and none of them is to add the charge back and move on.
Ask what the asset was. Goodwill and brands were paid for, so the write-down is a statement that the payment will not be earned back.
Ask what the same filing says about the forecasts. The impairment note names the assumptions, usually a discount rate and a long-term growth rate, and a small change in either moves the answer a long way.
And read the prior years' book value as a number that was always conditional. Return on equity computed on a balance sheet carrying an asset that is about to be written down was measuring the wrong denominator all along.
Check yourself
A company reports a $7 billion goodwill impairment. What left the business that year?
- $7 billion of cash
- No cash at all. The money was spent when the acquisition was made
- $7 billion of inventory
Show the answer
Answer: B.
An impairment is a revision of a past payment's carrying value. It changes book value and reported profit and has no cash effect in the year it is taken.Why do impairments tend to arrive later than the deterioration they record?
- Auditors delay them
- The test compares carrying value with fair value built from management's own forecasts, which fall after the evidence accumulates
- The rules prohibit early recognition
Show the answer
Answer: B.
The input to the test is an expectation. Expectations are revised gradually, which is why Kraft Heinz recorded goodwill impairments in eight consecutive years rather than one.How is goodwill treated between impairment tests?
- Amortised over forty years
- Not amortised at all, and tested at least annually
- Revalued upward when the business improves
Show the answer
Answer: B.
US rules stopped goodwill amortisation and replaced it with an impairment test. Write-ups are not permitted, so the asset can only fall.Sources
- The Kraft Heinz Company, FY2018 Form 10-K, filed 7 June 2019, accession 0001637459-19-000049, for asset impairment charges and goodwill impairment for fiscal 2018, the net loss, and total assets, goodwill, indefinite-lived intangibles and equity at 29 December 2018 and 30 December 2017.
- The Kraft Heinz Company, FY2025 Form 10-K, filed 12 February 2026, accession 0001637459-26-000009, for goodwill impairment in fiscal 2023, 2024 and 2025 and goodwill at 27 December 2025. Fiscal 2019 to 2022 goodwill impairment figures are from the FY2021, FY2022, FY2023 and FY2024 10-Ks.
- ASC 350, Intangibles, Goodwill and Other, on the annual goodwill and indefinite-lived intangible impairment tests.
- ASC 360, Property, Plant and Equipment, on the recoverability test for long-lived assets held and used.
What this leaves out
- Every figure here is history, read from the filings named. Nothing is a statement about Kraft Heinz today and nothing is a view on any security.
- The goodwill impairment series is drawn from several filings, each carrying the years it covered. A figure restated later would differ from the one first reported.
- The description of the impairment tests is an outline. The current goodwill test, the earlier two-step version and the rules for reporting units all have detail this lesson does not carry.
- An impairment says a past price will not be recovered on the current forecast. It is not a prediction about the business and not a view on the security.