Goodwill Impairment Amid COVID-19

FEI Daily spoke with Adam Brown, National Assurance Managing Partner of Accounting at BDO, following a December 16 FASB Board meeting to discuss identifiable intangible assets and subsequent accounting for goodwill.

FEI Daily: How has the coronavirus impacted how the finance function is tackling goodwill impairment?

Adam Brown: Due to the impacts from the pandemic, many companies had to take a hard, fresh look at how they were tackling goodwill impairment. For companies that have historically had plenty of value or “cushion,” the amount of rigor went up this year. It wasn’t just “same as last year” – a company with a lot of cushion in the past may have been required to go back to the drawing board and build a fresh set of projections. In some cases, this led the finance team to connect at a deeper level with other parts of the business, like the sales team or procurement department, to capture the data needed to refine their models.

Also, in some cases, geography played a role. Management teams based in the U.S. understandably didn’t know the severity of the issue back in January as it was developing in Asia. Therefore, if your organization had operations in Asia or Europe, the risk of impairment occurring there may not have been obvious in the early days, which could have slowed down the “triggering event” analysis required under the rules.

Industry was also relevant. For example, technology and fintech may not have been as negatively impacted as others, like retail. The large technology companies saw upticks in demand for their offerings as people shopped online and worked remotely. On the flip side, some retail stores and fitness clubs experienced significant drops in demand. Across the spectrum, evaluating potential impairment indicators may not have been as obvious in some industries as it was in others.

Lastly, we saw the importance of fast and frequent communication between management and the audit committee.  For companies that had to complete an interim impairment exercise, making sure the committee had current information with the benefit of management’s analysis in real time was key. It wasn’t an option to wait for the next regularly scheduled call, which could have been weeks down the road.

FEI Daily: If there is a goodwill impairment, what are the things that finance teams need to consider in their disclosures and communications with shareholders and other stakeholders?

Brown: Ongoing conversations with stakeholders should focus on how the underlying business has been impacted and performance expectations going forward.

There were also important judgments required in March and April to quantify and book the impairment for the 10-Q, despite an understandably strong desire to see how the next 60 or 90 days would play out. Having a process in place to support judgments like those is important.

FEI Daily: What are some of the ways that finance teams can tackle the uncertainty and volatility surrounding forecasting and valuation in goodwill impairment evaluations?

Brown: Company-specific risk premia must be scrutinized, since history isn’t necessarily an accurate guide. As a result, quantifying the amount of risk in forecasts has been challenging. Finance teams should double-check to make sure the assumptions are consistent with other areas of the business, such as projections given to lenders and earnings guidance provided to the public.

FEI Daily: What are the most important things for people to look out for with new developments for intangible assets and subsequent accounting for goodwill?

Brown: The FASB’s main project on goodwill might reinstate amortization, although there’s no guarantee the details will be the same as they were historically. Leaders should let the FASB know what their views are on that project – they work very hard to capture a cross section of perspectives from their constituents.

Private companies should keep an eye out for a new standard right after the New Year that will allow companies to skip concerns about potential impairments that occurred during 2020, including any caused by the pandemic. Instead, they will be able to focus only on whether impairment exists on December 31^st. Therefore, if you had indications of impairment earlier in 2020 but things recovered by year-end, you may be able to save yourself the time and effort of worrying about a temporary dip that occurred during the spring or summer. My guess is that this new guidance will be out sometime in February to accommodate the private company reporting season in March through June.