The Effects of COVID-19 on Goodwill Impairment Testing

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For many companies there is a strong chance that one of the effects of the COVID-19 virus will be considering it as a triggering event requiring the performance of goodwill impairment testing.   The current guidance for goodwill is found in Accounting Standards Codification (ASC) Topic 350, Intangibles - Goodwill and Other.  Management is required to assess goodwill for impairment on an at-least annual basis as well as when there is an occurrence of a triggering event.  Fortunately, ASC 350-20 Goodwill provides a list of indications for assessing if a triggering event has occurred and accordingly an interim impairment test is needed.  

Triggering Event Indicators

According to ASC 350-20, the following events are good indicators for the need to perform interim impairment testing:

  • Macroeconomic conditions include the deterioration of general economic conditions, limitations of assessing capital, fluctuations in foreign exchange rates, or other developments in the equity and credit markets.

  • Industry and market considerations such as deterioration of the environment in which the entity operates, an increased competitive environment, a decline in market-dependent multiples or metrics, 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 flow.

  • Overall financial performance such as negative or declining cash flows or a decline in actual or planned earnings or revenue compared with actual and projected results of specific prior periods.

  • Entity-specific events such as contemplation of bankruptcy, involvement in litigation or a change in key personnel, management, customer base or strategy.

  • 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 all or a portion of the unit, the testing for recoverability of a certain 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

  • A sustained decrease in share price (in relation to peers and in absolute terms)

The effects of the COVID-19 virus could meet one or many of the above indicators.

Triggering Event Testing

If, during the analysis of a triggering event, management determines that it is more likely than not (greater than 50 percent chance) that the fair value of a reporting unit is less than the carrying value, management will need to perform a quantitative impairment test (‘step one’ test).  Both the carrying value and the fair value must be calculated and if the carrying value is greater than the fair value then the goodwill impairment charge is recorded in the amount of the difference.  In comparison to annual goodwill impairment testing, interim testing for a triggering event allows a company to skip any qualitative testing (‘step zero’ test) and go straight to quantitative testing.  For annual testing there is the option to perform qualitative tests first to determine if quantitative testing is needed and then move to the calculations involved in quantitative testing as necessary.  In the case of the COVID-19 virus, it is likely that management would elect to skip the qualitative step and test quantitatively.