Has Your Goodwill Gone Bad?

Each year, a question from your auditor will inevitably pop up, “Have you tested your goodwill for impairment yet?” In 2015, that question might have sparked more grimace than in prior years; try DOUBLE the grimace.

A recently released survey of more than 8,500 publicly-traded companies in the U.S. found that total goodwill impairment increased from $26 billion in 2014 to $57 billion in 2015. Ironically, this occurred in a year characterized by exceptionally high merger and acquisition activity. The increased M&A activity last year seems to promise more write-offs in the future and even more reasons to be concerned about getting it right.The industries with the greatest increases include energy, information technology and consumer discretionary. In just the past few weeks, for example, Nordstrom, Priceline.com and Whiting Petroleum have all announced massive goodwill write-downs.

This news comes on the heels of a four-to-three vote by the Financial Accounting Standards Board in October to eliminate the second step of the two-step goodwill-impairment test for public companies and certain private companies. Previously under Step 2, a company compared the implied fair value of goodwill to its carrying value.

With the elimination of Step 2, however, companies can now simply perform Step 1 by comparing the fair value of a reporting unit to its carrying amount. If the carrying value is greater than the fair value, the impairment amount is solely based on this deficiency.  This elimination was proposed in an effort to provide companies with an easier method and a cheaper alternative to the old rules. “Step Zero” which permits companies to perform a qualitative assessment of goodwill prior to performing a fair-value measurement still stands.

So what could go wrong? In short, accurate evaluation.

With the elimination of the second step, companies run a greater risk that the precision of the impairment calculation will be reduced. Step 2 required companies to determine the fair value of their assets and the liabilities, a process that often led to hiring outside parties to assist. Although hiring outside consultants was costly, it gave companies additional comfort that they were writing off a materially accurate amount.

Under the new rule, however, there is a chance impairment will be recognized where none actually exists. Or a company may fail to recognize impairment when it does exist. If that happens, the company might see a massive single write-off in the future, rather than a gradual write-off over time.

So your auditor will still ask you, “Have you tested your goodwill for impairment yet?” You, however, should ask the more important question which is, “Did we do it right?”

Regardless of whether your company is public or private, wading through standards updates, new pronouncements, opinion letters and other information can be challenging and time consuming.  Part of HORNE’s vision is to guide and serve our people, clients and communities proactively to realize their full potential. Let us help you realize yours.

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