Important to an analysis of your company’s goodwill is an understanding of what effect the COVID-19 pandemic and resultant economic fallout has had on financial performance. Generally, FASB ASC 350 requires goodwill to be tested at least annually for impairment or more frequently if an event occurs or circumstances change that would more likely than not reduce the fair value of a reporting unit below its carrying amount. Such an event or change in circumstances is known as a triggering event.
So then, what constitutes a triggering event? Examples include, but are not limited to:
- Deterioration in macroeconomic, industry, and/or market conditions
- Increased competitive environment
- Change in the market for an entity’s products/services
- Changes in management, key personnel, strategy, or customers
- Negative or declining cash flows/earnings
All these scenarios are a possibility in the current (COVID-19) environment for many companies. COVID-19 has impacted global macroeconomic conditions and markets have experienced significant volatility. While the U.S. government has intervened in an attempt to prevent a prolonged recession, it is uncertain whether these measures will be successful and there continues to be uncertainty as to when many businesses can resume typical operations. Further, while most companies have been affected by the pandemic, some industries have experienced more adverse effects than others. The airline, cruise line, and hospitality industries are all examples of those currently experiencing considerable fallout from the pandemic.
While market volatility may indicate a triggering event has occurred, the guidance we can provide during this uncertain time is to consider the impact to the business and how the forecast or business expectations have changed compared to those used in the annual goodwill impairment analysis. If there are significant differences (i.e., such that business plans are severely or indefinitely delayed), then there is likely a need to pursue an updated goodwill impairment analysis. Generally, if you view the impact of the pandemic on the business to be minimal or temporary, then there may not be an indication that a triggering event has occurred.
Lastly, the COVID-19 crisis is unique to modern history. We encourage you to consider the long-term impact to the business rather than the short-term disruption. We are able to assist with a qualitative assessment (known as Step 0), and if it is judged that a triggering event has more likely than not reduced the fair value of a reporting unit below its carrying amount, we can assist with the quantitative assessment (known as Step 1). The severity of the triggering event will help to determine if a financial performance rebound in the near-term is likely or if it will take longer to recover, if at all. The quicker the recovery, the less likely it is a goodwill impairment test will be failed, and vice versa.