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How COVID-19 impacts private equity funds’ goodwill impairment

Jul 17, 2020

The COVID-19 pandemic has had a wide-reaching impact on private equity funds. Part of that impact may be a triggering event for testing goodwill impairment. Triggering events include things like changing market conditions, increasing costs, and changes in cash flow and revenue.

For your private equity fund, goodwill impairment testing is probably a familiar concept. The Financial Accounting Standards Board (FASB) and generally accepted accounting principles (GAAP) require you to perform goodwill impairment testing annually or when there is a triggering event. What’s more, your investors are very interested in goodwill impairment, so testing is just as much about meeting investor needs as it is about meeting regulatory requirements.

Because the pandemic may have caused one or more triggering events for your private equity fund, you should begin the process of analyzing your goodwill balance and going through a formal goodwill impairment testing. If you are concerned about what is involved in impairment testing, consider contracting with an independent third party.

How does the goodwill impairment testing process work?

Testing goodwill impairment used to be a lot more complicated.

With the release of ASU 2017-04, the FASB simplified the test. This was mostly due to the test’s cost and complexity — two big concerns expressed by private companies and their stakeholders.

Early adoption is allowed, but the simplified test is effective at different dates, depending on the type of entity you are:

  • A public business entity that is a U.S. Securities and Exchange Commission (SEC) filer should adopt the amendments for its annual or any interim goodwill impairment tests in fiscal years beginning after December 15, 2019.
  • All other entities that are adopting the amendments should do so for their annual or any interim goodwill impairment tests in fiscal years beginning after December 15, 2022.

Based on the FASB’s changes, we’ve created a simple flow-chart to help you determine whether you need to perform an interim goodwill impairment test due to a potential COVID-19-related triggering event.

Private equity goodwill balance analysis flowchart

Note that your fund shouldn’t use just one indicator as evidence goodwill is “more likely than not” impaired. Instead, you should take a holistic approach and evaluate both the positive and negative factors. Make sure to thoroughly consider and document this process.

You should also consider whether the goodwill impairment is permanent or temporary. Revise management’s projections to account for the impact of COVID-19 in both the near term and long term. And make sure to consider whether declines in other asset values contributed to the overall decline in the entity’s fair value, as writing down these assets lowers the amount of goodwill impairment.

How Wipfli can help

Our valuation team is highly experienced in goodwill impairment analysis and fair-value issues, as well deeply familiar with the private equity space. We perform quick, efficient valuation work. Plus, as an independent third party, we bring the required objectivity to determine whether or not your goodwill is impaired.

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COVID-19 and goodwill impairment

How to factor COVID-19 into your goodwill balance analysis

Author(s)

Paul D. Ouweneel, CFA, CPA, CFP
Partner, Valuation, Forensic and Litigation Services
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