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How COVID-19 Is Impacting Goodwill Fair Values

04.14.20

ManAs the economic uncertainty related to the COVID-19 crisis continues to deepen, businesses acquired before the pandemic may be dealing with impaired goodwill valuations. Here is what a decline in an acquired asset’s carrying value could mean for your company’s financial statements.

Business combination fair values for transactions completed during the decade-plus since the Great Recession may be coming under increased scrutiny given the challenges related to COVID-19.

While certain identifiable intangible assets are amortized based on the estimated life of the acquired asset, the less tangible “goodwill” remains on the balance sheet at its initial value under generally accepted accounting principles (GAAP) unless/until an impairment is indicated. This is the GAAP guidance codified in Financial Accounting Standards Board (FASB) Accounting Standards Codification (ASC) 350 Impairment Testing.

With the challenges being so widespread, financial auditors will be more closely scrutinizing carrying values and their related valuation defenses in the coming year.

Why COVID-19 May Trigger an Impairment of Goodwill

Many businesses and reporting units are seeing the market value and fair value of their business sink as the economic challenges in the wake of COVID-19 broaden and deepen. Many reporting units from the last 10 years will be facing potentially impaired business circumstances.

Under GAAP, businesses are required to test on a regular basis whether assets associated with any goodwill on the company’s books has been impaired, i.e., its value to the acquiring company has decreased. They must also test for impairment, whenever events such as physical damage to the asset or a change in the economy. And it is unfortunately likely, given the turn in the markets of late, the financial performance expected from the acquired company at the time of purchase may be impaired.

How to Test for Impairment

There are two steps to impairment testing under GAAP:

  1. The company compares the current cash flow of the business unit corresponding to the acquired company with its carrying value. If the carrying value is found to be lower than the sum of cash flow, it indicates the asset has been impaired.
  2. If there is an impairment, then the business books the impairment, which is the difference between the carrying value of the asset and its current fair value, as an expense on its balance sheet.

Since it is unlikely the business will be able to rely on a recent appraisal of the fair market value of the business unit to conduct the comparison in step one, specialists will typically use advanced financial modeling to determine the current market value. This can be a complex calculation that also requires extensive support and experienced judgement. As always, make sure you have an accountant on your team, or go-to specialist, who has experience with impairment testing to ensure you are complying with GAAP.

ASC 350 will certainly be a hot button issue for financial audits taking place in 2020. While the impacts of COVID-19 continue to make their way through the economy in general, and specific industries, in particular, the awareness of the potential impact is already widespread. To efficiently execute the audit process, it may pay off in time and expense to get out ahead of the impairment testing process.

For help assessing the value of your business’s acquisitions in today’s rapidly changing economic climate, contact BPM.

The experienced professionals on BPM’s Valuations and Appraisals team are eager to assist clients with all their impairment testing and other valuation needs. Our team is fully equipped to provide independent and objective assessments of value to companies in any stage of the business lifecycle. Leveraging deep experience and up-to-the-minute understanding, we provide thorough valuations that your business can count on to execute the financial reporting process efficiently. To learn more about how BPM can assist you with your impairment testing and other valuation needs, contact Kemp Moyer or Mike Ruane.