Impairment Considerations in a Turbulent Market

On February 12, 2020, the Dow Jones closed at 29,551. As of the time I’m writing this – March 19, 2020 at 10:08 a.m. (minutes seem to matter these days) – the Dow sits at 19,695, a 33.3% decline in just over a month. While this drop brings up a lot of issues, one thing companies are likely going to have to consider is the potential for an interim impairment of goodwill and/or other intangible assets.

Accounting Standards Codification (ASC) 350-20-35-30 outlines when goodwill should be tested for impairment, as follows:

“Goodwill of a reporting unit shall be tested for impairment 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.”

ASC 350-20-35-3C discusses potential “triggering events” as follows:

“In evaluating whether it is more likely than not that the fair value of a reporting unit is less than its carrying amount, an entity shall assess relevant events and circumstances. Examples of such events and circumstances include the following:

a. 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.

b. Industry and market considerations, such as a deterioration in the environment in which an entity or its customer 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.

c. Cost factors, such as increases in raw materials, labor or other costs that have a negative effect on earnings and cash flows.

d. 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.

e. Other relevant entity-specific events, such as changes in management, key personnel, strategy or customers, contemplation of bankruptcy or litigation.

f. 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 of 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.

g. If applicable, a sustained decrease in share price (consider in both absolute terms and relative to peers).”

Points (a) and (b) indicate that many companies will have to consider whether it is more likely than not that its goodwill has been impaired at an interim date. In doing this, here are a few things to be cognizant of:

• Reporting Unit – The test for goodwill impairment should be done at the reporting unit level, not the entire company. Be aware if each reporting unit is impacted differently by the latest market downturn and macroeconomic conditions.
• Prior Impairment Tests – What were the results of your company’s latest impairment tests, and when was it? If you conducted an impairment test as of December 31, 2019 and determined that the fair value of a reporting unit was $100 million, compared to a book value of $10 million, this may indicate that, even with the recent downturn, it is more likely than not that fair value exceeds carrying value.
• Forecasts and Recent Performance – How much has recent performance declined? How have future cash flow forecasts been impacted? What’s the expected duration and severity of any decline in future cash flows? All of these factors could impact your evaluation.

Unfortunately, considerations of interim goodwill impairment are just another thing to address in these trying times. If you need assistance with this analysis, Schneider Downs has significant experience in both evaluating whether it is more likely than not that fair value exceeds carrying value and quantifying the amount of any potential impairment, if necessary. Please reach out to Joel Rosenthal ([email protected]), Tom Pratt ([email protected]) or me at [email protected].