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 is a 25-year-old boutique investment bank and financial services firm focused on the Defense, Government & Intelligence (DGI), Security, Critical Infrastructure and Maritime markets. Our 60+ professionals bring deep industry experience and relentless execution to every client engagement. We provide solutions that blend financial creativity with operational expertise. Whether we are providing transaction advisory, valuation opinions or growth capital, our services are unmatched in these core markets.
The McLean Group recently published its “2021 M&A Year In Review,” where the team examines the 2021 M&A market which saw record high volumes and strong valuations, with private and public valuations near all-time highs. Specifically, the defense and government services market has proven to be extremely resilient during the pandemic. […]
The McLean Group advises Nusura on its sale to Juvare to Create Comprehensive Defense and Federal Emergency Management Platform. The acquisition expands Juvare’s strategic, operational, and tactical capabilities to better serve its national defense and federal emergency management partner organizations.[…]
The McLean Group Advises Cerilian on its sale to KACE, a leading provider of cloud engineering and big data solutions, cybersecurity, and software development services for the U.S. government. The acquisition expands KACE’s mission-focused technology capabilities and supports the organization’s continued growth in the national security market.