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.
The McLean Group is a leading investment bank that provides objective strategic and financial advice on mergers and acquisitions, debt and equity recapitalizations, ESOPs, and business valuations. The M&A Group is organized around four verticals: Defense, Government & Intelligence, Critical Infrastructure, Physical & Cyber Security, and Maritime Transport & Facilities. The McLean Group applies comprehensive industry knowledge, extensive transactional expertise, a real-time understanding of industry-specific valuation drivers, and senior-level attention to every client engagement it undertakes.
