Trends in Goodwill Impairment

Business Advisors|Business Valuation

By Jennifer Doering

The 2014 U.S. Goodwill Impairment Study was recently released by Duff & Phelps and the Financial Executives Research Foundation (FERF).

The study was prepared for two purposes:

  1. To convey trends in goodwill and goodwill impairment of U.S. companies; and
  2. To publish the 2014 results of the annual goodwill survey of FEI members, which will be covered in a future Insight.

The study used financial information for calendar year ended December 31, 2013 and included more than 5,100 companies, representing more than 92% of market capitalization for U.S.-based, U.S.-traded companies. Some of the more interesting results from the study are as follows:

Goodwill impairment ranged from $26 billion to $30 billion in calendar years 2009 through 2011.

U.S. companies recorded $51 billion of goodwill impairment in calendar year 2012, a 76% increase over the $29 billion recorded in the previous year. However, nearly half of the goodwill impairment recorded in 2012 was attributable to just three impairment events.

Goodwill impairment dropped to a five-year low of $21 billion in calendar year 2013, amounting to a 59% decline from the goodwill impairment reported in calendar year 2012.  In 2013, the top-three goodwill impairment events accounted for 22% of total goodwill impairment.

The reduced level of goodwill impairment in 2013 was coupled with generally improving macroeconomic conditions, including a remarkable performance by U.S. stock markets.  The S&P 500 Index, for example, increased by 30% in 2013, the largest percentage increase since 1997. 

In 2013, an additional $147 billion of goodwill was recorded on balance sheets as a result of mergers and acquisitions (involving a controlling interest of 50% or more, acquired by U.S. incorporated publicly traded companies). In comparison, an additional $211 billion of goodwill was recorded in 2012.  Based on the study criteria, fewer deals were transacted in 2013 and deal value declined.  In 2012, 1,525 deals were closed, for a total deal value of $540 billion. In 2013, 1,391 deals were closed, for a total deal value of $285 billion.  (Conversely, deal value in the overall U.S. M&A market increased in 2013 if the parameters are widened to include deals announced—rather than closed, transactions involving minority ownership interests and private company acquirers, as is often used in the financial press.) 

In terms of industry trends, the materials industry moved from fifth place in 2012 to first place in 2013 as the industry with the highest amount of goodwill impairment.  Goodwill impairment in the materials industry amounted to $4.5 billion, or 22% of 2013’s aggregate impairment in only eight impairment events. 

Industries with the largest percentage of companies that impaired goodwill included industrials (7%), consumer discretionary (6%) and information technology (6%). 

The study noted that the total goodwill impairment in 2012 does not include a $27 billion goodwill impairment recorded by General Motors (GM) because it did not meet the study criteria. Goodwill impairment included in the study must be initially recorded with economic substance and result from deterioration in economic conditions or operating performance. (GM performed its annual goodwill impairment testing with no indication of impairment. The $27 billion impairment recorded was initiated by an event-driven impairment test in the fourth quarter, triggered by GM’s reversal of a deferred tax asset valuation allowance.)

Please contact Joel Rosenthal at 412-697-5387 or or Tom Claassen at 412-697-5330 of the Schneider Downs Business Advisory Group to further discuss how we can assist you with your goodwill analysis needs.

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This advice is not intended or written to be used for, and it cannot be used for, the purpose of avoiding any federal tax penalties that may be imposed, or for promoting, marketing or recommending to another person, any tax related matter.

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