The COVID-19 pandemic is causing unprecedented disruptions in business processes and productivity along with a dramatic reduction in consumer spending, which has negatively impacted companies’ financial performance. What does this downturn in current and forecasted performance mean for your business? It could very well mean that you have to record an expense for the impairment of goodwill, indefinite-lived intangible assets or other long-lived assets.
Some background
Goodwill is tested for impairment on an annual basis; however, goodwill must be tested on an interim basis if events occur or circumstances change to indicate that it is more likely than not that an impairment loss has been incurred. This is referred to as a triggering event.
Prior to testing for goodwill impairment, long-lived assets and indefinite-lived intangible assets (trade names can be an example of an indefinite-lived intangible) are tested for impairment. Similar to goodwill, indefinite-lived intangibles are tested for impairment on an annual basis but more frequently if a triggering event occurs. Long-lived assets (such as property, plant and equipment or finite-lived intangibles) are tested for impairment when one or more events or circumstances indicate that their carrying amounts may not be recoverable.
How do I know if I have a triggering event?
ASC 350 addresses goodwill and indefinite-lived intangible asset impairment testing. Testing is required when financial performance, including estimates of future cash flows and earnings, may be significantly affected by the direct or indirect impacts of current events.
ASC 360 governs the testing of long-lived assets. Testing should be performed when there is a significant decrease in the market price of a long-lived asset, when there is a significant adverse change in the extent or manner in which a long-lived asset is being used or in its physical condition, or when there is a significant adverse change in the business climate that could affect the value of the long-lived asset.
Some questions you might want to consider include:
- Have we lost a significant customer or supplier whose own operations might have been impacted by recent events?
- Have workforce limitations impacted our ability to service our customers or manufacture our products?
- Are our customers struggling to pay our invoices or to even keep their lights on?
- Have our supply chains been disrupted to the point where we are struggling to secure needed materials or components?
- Has our stock price significantly decreased?
- Have we been forced to give our customers price concessions to the point where it has impacted our business model?
- Will our reduced profits stemming from COVID-19 be short-term or might they extend into the foreseeable future?
What are the impairment tests?
FASB Accounting Standards Update (ASU) 2017-04, Intangibles—Goodwill and Other (Topic 350): Simplifying the Test for Goodwill Impairment simplified the old two-step process and allowed companies to record an impairment charge based on the excess of a reporting unit’s carrying amount of goodwill over its fair value.
To test long-lived assets for recoverability, estimated undiscounted cash flows for the long-lived asset or asset group are compared with the carrying amount of that asset or asset group. If the carrying amount of the long-lived asset or asset group exceeds the estimated undiscounted cash flows, companies must then determine the fair value of the long-lived asset or asset group and recognize an impairment loss if the carrying amount of the long-lived asset or asset group exceeds its fair value.
How can CFGI help?
As a result of the impacts of COVID-19, many companies will need to perform impairment testing for goodwill, indefinite-lived intangible assets and long-lived assets. Our team of Valuation professionals possesses decades of experience in performing impairment testing for a broad array of publicly traded and privately held companies. Please reach out to Sean O’Reilly (610-348-9519, soreilly@cfgi.com), Lidia Napier (857-294-8332, lnapier@cfgi.com) or Peter Wollmeringer (646-283-5046, pwollmeringer@cfgi.com) if you have any questions.