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Bringing Goodwill & Asset Impairment Testing Into Focus

by Kevin Cannon

Public and private energy companies should address year-end 2019 goodwill and long-lived asset impairment testing procedures so quarterly and financial audits and reviews can go smoothly and allow for greater transparency.

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Market equity prices and indices continued to decrease for many energy companies during 2019. For instance, between April 30, 2019 and December 31, 2019, the S&P Oil & Gas Equipment and Services Index decreased by approximately 27%, inclusive of a rebound in the fourth quarter. Likewise, the S&P Oil & Gas Exploration and Production Index decreased by 23% during this same timeframe, also inclusive of a slight rebound in the fourth quarter. 

With the continued decrease in market capitalizations, coupled with commodity price declines in recent years, auditors and regulators will continue to have a renewed focus on impairment testing for goodwill and long-lived assets on the balance sheets of energy-focused companies. 

Under Accounting Standards Codification Topic 350, Intangibles: Goodwill and Other (ASC 350), goodwill is tested for impairment at least annually or when a triggering event dictates.

Under Accounting Standards Codification Topic 360, Property, Plant and Equipment (ASC 360), long-lived assets are tested for impairment when a triggering event dictates. Continued declines in market prices such as those that occurred during most of 2019, along with associated changes in industry fundamentals (e.g., changes in drilling plans for E&P companies and changes in customer buying patterns for oilfield services companies), may qualify as a triggering event. 

Publicly- and privately-held companies need to adequately address their year-end 2019 goodwill and long-lived asset impairment testing procedures. Doing so in a timely manner will ensure that year-end and quarterly financial statement audits and reviews will proceed as smoothly as possible, as well as allow for greater shareholder and stakeholder transparency.

Kevin Cannon is a Director in Opportune’s Valuation practice.