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COVID-19 and goodwill impairment

Jun 18, 2020

According to WebMD, COVID-19 has many terrible symptoms, including: fever, coughing, body aches, loss of smell and “COVID toes.” Do yourself a favor and don’t google any pictures of COVID toes if you are unfamiliar with this phenomenon.

As we all know, COVID-19 has had and will likely continue to have effects on the U.S. economy and individual businesses. In late March of 2020, the S&P 500 was down approximately 30% from highs just a month prior. The market has since gained much of this back, but certain industries like airlines, restaurants and hotels may be changed forever. Individual firms that prepare financial statements will need to consider whether or not the effects of COVID-19 cause a triggering event for goodwill impairment testing.

The AICPA defines goodwill as follows: “Goodwill is considered a residual amount that represents the future economic benefits arising from the other assets acquired in a business combination that have not met the criteria for being individually identified and separately recognized.” In other words, goodwill is an asset that is booked by the acquirer after all of the other assets and liabilities from the transaction have been added to the acquirer’s balance sheet at fair value.

In most transactions, goodwill is required in order to make the post transaction balance sheet balance. Annual goodwill impairment testing is required for most transactions under generally accepted accounting principles (GAAP) in the U.S.

The Financial Accounting Standards Board (FASB) provides guidance for goodwill impairment testing under ASC 350 – Goodwill and Other. Under this codification, when goodwill is not being amortized, goodwill is to be tested annually or in the event of a “triggering event.” Triggering events include changes in industry and market conditions, increasing costs and negative changes in cash flows or revenue, among others.

COVID-19 has certainly impacted the global economy. Many businesses remain shuttered by local governments. Additionally, COVID-19 has caused hiccups in the supply chain. The stock market has experienced periods of significant volatility. Triggers in certain industries like the airlines and hospitality firms may be somewhat obvious, but in these uncertain times, many firms should consider impairment testing prior to the annual test required under ASC 350.

Companies also need to consider whether the goodwill impairment is permanent or temporary. Projections from management need to be realistically revised to account for the impacts of COVID-19 on the business in the near term and the long term. Additionally, firms should consider whether or not declines in other asset values contributed to the overall decline in the firm’s fair value. The write down of these assets would lower the amount of the goodwill impairment.

Now more than ever, reporting companies need to assess the fair value of the assets on its balance sheet to be able to properly plan for the future and to be nimble going forward. Wipfli’s valuation team is well versed in goodwill impairment analyses and in fair value issues. Please reach out if you have any questions or concerns.

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Author(s)

Egan_Fran
Francis P. Egan, CFA, ASA
Senior Manager, Valuation Litigation and Transaction Services
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