Goodwill impairments are rising on corporate balance sheets, and they will get even bigger before they get smaller, according to the latest analysis, suggesting impairment will be a source of heartburn in year-end reporting.

In its tenth annual study of goodwill impairment reporting by U.S. publicly traded companies, advisory firm Duff & Phelps says impairment levels rose 23 percent in 2017 to $35.1 billion. Fueled by mega-impairments like GE’s $2.6 billion markdown and Frontier Communications’ $2.7 billion event, the average goodwill impairment rose by 21 percent to $120 million. The study also identifies indicators that impairment levels will be even greater with 2018 year-end reports.

Goodwill is an intangible asset that arises on corporate balance sheets as a result of mergers or acquisitions. Companies assign fair values to the individual assets and liabilities they acquire in a transaction and then assign any additional amount to goodwill. It represents the synergy of the acquired business, and investors like to track it as an indicator of how well a business combination is working out after it is integrated.

Under accounting rules, companies are required to test the value of goodwill sitting on the balance sheet to see how it is holding up over time. When companies see indicators that the fair value of the business exceeds the carrying value, they are required to mark it down, or reflect the impairment. The accounting and auditing around goodwill impairment have been a source of tension for several years.

The Financial Accounting Standards Board took measures in 2017 to simplify impairment testing, eliminating the costly and extensive fair-value measurement activity associated with “step two” of the impairment test. Companies were allowed to adopt the simplified testing in 2017, and Duff & Phelps analysis suggests many companies opted for the simplified method. Of the companies reporting the 10 largest goodwill impairments, eight elected early adoption of the simpler test.

Goodwill impairments are likely to rise in coming reporting periods as the Duff & Phelps study identifies indicators that impairment levels will be even higher with 2018 year-end reports. The study finds aggregate goodwill in 2018 is on pace to exceed the level reported in 2017, with three disclosed events alone already approaching $30 billion. The study also identified a record $319 billion amount of goodwill added to corporate balance sheets in 2017.

The aggregate increase in goodwill impairment occurred despite relative strength in both the global economy and U.S. equity markets, says Greg Franceschi, managing director and global leader of the financial reporting valuation practice at Duff & Phelps. The high level of goodwill added to balance sheets in 2017 is a reflection of a robust M&A market, he says. “This is the highest level of aggregate goodwill added since Duff & Phelps began compiling this data in 2008,” he says.

The combination of indicators suggests goodwill will rise in 2018 compared with the levels reported in 2017, says Franceschi. “Looking at 2018, the top three goodwill impairment events disclosed thus far have neared $30 billion, with several other material impairments already being reported,” he says. “This trend points to yet another significant increase in the overall goodwill impairment amount.”