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How to factor COVID-19 into your goodwill balance analysis

Apr 02, 2020

As we continue to hope the social and economic impact of COVID-19 will be as minimal as possible, the ultimate effects are uncertain. At a time when many are working to meet their 2019 annual reporting requirements and move fully into 2020, it is important to consider the necessary accounting and disclosure requirements COVID-19 may cause.

Economic growth of the last several years included significant M&A activity that resulted in many companies adding more goodwill and intangibles to their balance sheets.

COVID-19 has created significant market volatility, economic uncertainty and disruption of normal operating conditions. Such circumstances may signal the existence of impairment indicators and the need to perform a goodwill impairment analysis to determine whether the fair value of the intangible asset is less than its carrying amount.

ASC 350-20 outlines circumstances companies should consider when determining when an interim test may be necessary. The following are examples of possible impairment indicators from ASC 350-20:

  1. Deterioration in general economic conditions
  2. Industry and market considerations such as a deterioration in the environment an entity operates in, an increased competitive environment or a decline in market-dependent multiples or metrics
  3. 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
  4. If applicable, a sustained decrease in share price (considered in both absolute terms and relative to peers)

No one indicator alone should be considered evidence that goodwill is more likely than not impaired. Companies should take a holistic approach and evaluate both the positive and negative factors. This process involves significant judgment and should be appropriately and thoroughly considered and documented. 

If companies conclude that goodwill is more likely than not impaired, they should carefully consider ASU 2017-04, which simplifies testing for goodwill impairment by eliminating step two of the impairment test. Although not yet effective for all companies, early adoption of the update is permissible. In addition, companies with other long-lived assets held for use and other indefinite-lived intangible assets will need to consider those assets for possible impairment because they will be critical in measuring goodwill impairment.

Author(s)

John Erwin, CPA
Senior Manager
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