Goodwill impairment top of mind for year-end
December 3rd, 2008 by Bill Duratti
As we head for the New Year, identifying goodwill impairment is fast becoming a crucial activity for year-end filers and, indeed, for public and private companies at all stages of reporting.
The recent economic avalanche has brought about a great many challenges, and we can add one more to the mix: businesses that have made acquisitions in the last few years and are carrying significant amounts of intangibles and goodwill on their books may suddenly find that the fair value of their reporting units have declined significantly, resulting in a potential write-down.
While it may be difficult to swallow such a hit (which could occur despite strong sales and effective operations management), avoiding the issue can worsen the situation significantly.
As auditors begin their field work in late 2008 and early 2009, they will likely encounter or anticipate detailed analysis of impairment testing for identifiable intangibles and goodwill. A half-hearted effort performed to support these complex areas may do more harm than good and could impact the integrity of the financial reporting and significantly delay the completion of the audit and issuance of financial statements.
Digging into goodwill impairment begins with a high level assessment that determines the potential of a write-down. If a company does not pass that first test, more rigorous testing is performed in order to measure the amount of the impairment loss and the adjusted carrying amount of the goodwill.
Under FAS142 [PDF], FASB offers a few guidelines for when to test for impairment beyond the normal annual review. For example:
- a significant adverse change in legal factors or in the business climate
- an adverse action or assessment by a regulator
- unanticipated competition
- a loss of key personnel
- a more-likely-than-not expectation that a reporting unit or a significant portion of a reporting unit will be sold or otherwise disposed of
- the testing for recoverability under Statement 144 of a significant asset group within a reporting unit
- recognition of a goodwill impairment loss in the financial statements of a subsidiary that is a component of a reporting unit.
Goodwill impairment is also becoming a global concern. The Wall Street Journal recently reported in “IFRS Spells Write-Downs as Goodwill Withers Away” [subscription required] that just as FASB demands write-downs for goodwill impairment, International Financial Reporting Standards (IFRS) call for similar measures. Nicolas Veron, an economist at Brussels-based think tank Bruegel, puts it bluntly in the article: “We will see how the IFRS rules on goodwill impairment are applied in the current stock-market reversal. The results could be ugly.”
Some corporate leaders show resistance to going through the trouble when operations are strong, believing that their healthy business will bounce back and negate any potential impairment of intangibles and goodwill. Auditors, however, will be less optimistic and more risk averse; when they review the situation they will require a full understanding of the immediate picture. Tackling the issue as the year closes ensures that companies stay ahead of auditors and grant shareholders full transparency at a time when trust is imperative to continued investor support.
