Trends in Goodwill Impairment - Part 2

This writing is a follow-up to the previously issued “Trends in Goodwill Impairment” and discusses the 2014 goodwill survey of FEI members.  The survey results were included in the 2014 U.S. Goodwill Impairment Study, prepared by Duff & Phelps and the Financial Executives Research Foundation (FERF). Survey respondents represented both public and private companies.

The survey indicated a more widespread use of the optional qualitative impairment analysis introduced in 2011 and often referred to as Step 0. Public company use of Step 0 increased from 29% in the 2013 survey to 43% in the 2014 survey.  Private company use of Step 0 increased from 22% to 29% over the same time period. 

Moreover, 78% of the companies applying Step 0 to some or all of their reporting units believe that Step 0 reduces costs, as intended. 

Other highlights of the survey include:

  • 30% of public company respondents and 15% of private company respondents recognized goodwill impairments during the most recent annual reporting period.
  • Only 5% of public companies and 8% of private companies anticipated additional goodwill impairments during an upcoming interim or annual test.
  • 52% of public company respondents and 32% of private company respondents use a valuation consultant.
  • Step 0 use will likely increase further, since according to the survey, for those respondents who have never applied Step 0 to any reporting units, 39% will be considering its use in future periods.
  • A majority of private company respondents plan to adopt one or more of the Private Company Council’s goodwill accounting alternatives (61%).
  • Small private companies were far more likely to perform the Step 0 analysis in-house than large public companies (71% vs. 43%).
  • Small private companies were more than twice as likely to disregard control premiums in their goodwill impairment analysis, compared to large public companies (82% vs. 35%).

In addition to the evaluation of Step 0 usage in the FEI survey, a special feature in the 2014 U.S. Goodwill Impairment Study is a summary of a Duff & Phelps independent study on Step 0.  The study evaluated the disclosures of a random selection of 355 U.S. public companies reporting under U.S. GAAP that carry goodwill on their balance sheets.  (This sample size was determined in order to achieve statistical significance.)  The Duff & Phelps analysis indicates that Step 0 users have increased from 33% in 2012 to 41% in 2013.  The study also found that companies with a market-to-book ratio of 2.0 or greater were almost twice as likely to apply Step 0. 

Notably, while the Duff & Phelps Step 0 Study was more expansive than the FEI surveys, the conclusions drawn about Step 0 usage from both sources are comparable.

Please contact Joel Rosenthal at 412-697-5387 or [email protected] or Tom Claassen at 412-697-5330 or [email protected] 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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