Pandemic Effects on Goodwill Impairment
The COVID-19 pandemic has drastically impacted the macroeconomic environment. As equity markets have crashed and a recession looms, it’s important for CFOs and Controllers to stay ahead of the changing landscape. For companies that have been acquisitive and carry significant goodwill (or other intangible assets) on their books, it may be time to assess the need to perform an interim goodwill impairment test.
As noted in Account Standards Update (ASU) 350, goodwill of a reporting unit should be tested between annual tests “if an event occurs, or circumstances change, that would more likely than not reduce the fair value of a reporting unit below its carrying amount”. Examples of such events and circumstances from ASU 350 include the following:
- Macroeconomic conditions such as a deterioration in general economic conditions, limitations on accessing capital, fluctuations in foreign exchange rates, or other developments in equity and credit markets
- Industry and market considerations such as a deterioration in the environment in which an entity operates, an increased competitive environment, a decline in market-dependent multiples or metrics (consider in both absolute terms and relative to peers), a change in the market for an entity’s products or services, or a regulatory or political development
- Cost factors such as increases in raw materials, labor, or other costs that have a negative effect on earnings and cash flows
- Overall financial performance such as negative or declining cash flows or a decline in actual or planned revenue or earnings compared with actual and projected results of relevant prior periods
- Other relevant entity-specific events such as changes in management, key personnel, strategy, or customers; contemplation of bankruptcy; or litigation
- Events affecting a reporting unit such as a change in the composition or carrying amount of its net assets, a more-likely-than-not expectation of selling or disposing all, or a portion, of a reporting unit, the testing for recoverability of a significant asset group within a reporting unit, or recognition of a goodwill impairment loss in the financial statements of a subsidiary that is a component of a reporting unit
- If applicable, a sustained decrease in share price (consider in both absolute terms and relative to peers).
During this time of uncertainty and COVID-19’s implications on financial reporting and valuation, we are available to discuss and answer any questions you may have to help be better prepared.
ABOUT THE MCLEAN GROUP
The McLean Group’s Valuation Services team specializes in valuations for financial reporting purposes. In addition to goodwill impairment testing, the team routinely performs valuations for purchase price allocations (ASC 805), long-lived asset impairment testing (ASC 360), stock-based compensation (ASC 718), and derivatives and hedging (ASC 815). Please reach out to the team leaders below for any valuation-related support for your financial reporting purposes.
703-827-0091 direct firstname.lastname@example.org
703.827.0233 direct email@example.com
512.687.3485 direct firstname.lastname@example.org