Goodwill Impairment Skyrocketed in 2015, Study Finds

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Terry Sheridan
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US public companies more than doubled their goodwill impairment in 2015 to a recorded $57 billion over 2014’s $26 billion, according to a new study by corporate advisor Duff & Phelps.

The total goodwill impairment reported by public companies in 2015 was the highest since the global financial crisis of 2007-09. The study says 2015 was a “robust year for M&A activity,” with deal value increasing by two-thirds compared to 2014. This resulted in US companies adding $458 billion of goodwill to their balance sheets.

But impairment events barely nudged upward, from 341 in 2014 to 350 in 2015 – though the average goodwill impairment per event more than doubled to $163 million.

The top three events accounted for 20 percent of the total goodwill impairment amount. Like last year, the energy industry was hit the hardest, with goodwill impairment of $18.2 billion – about triple 2014’s $5.8 billion. More than half (56 percent) of energy companies that carry goodwill recorded an impairment.

IT companies had the second-largest amount of impairment, with $12.9 billion recorded. Consumer discretionary and industrials more than doubled impairment levels. However, the financials and consumer staples industries reported impairment declines of 55 percent and 29 percent, respectively.

Abundant M&A and a marked increase in recorded goodwill – offset by weakness in energy prices and events in the technology sector – are examples of the “interplay between macroeconomic and industry trends,” Greg Franceschi, Duff & Phelps managing director and co-chairman of the American Institute of CPAs’ Goodwill Impairment Task Force, said in a prepared statement.

“Looking ahead, goodwill resulting from acquisitions will continue to be an important metric to monitor,” he added.

According to Investopedia.com, goodwill is an intangible asset that arises as a result of the acquisition of one company by another for a premium value. Goodwill impairment is a charge that companies record when goodwill’s carrying value on financial statements exceeds its fair value. An impairment arises when there is deterioration in the capabilities of acquired assets to generate cash flows, and the fair value of the goodwill dips below its book value.

The Duff & Phelps study examined general and industry goodwill impairment trends through December 2015 for more than 8,500 US public companies. It also includes a look at the current status of proposals by the Financial Accounting Standards Board (FASB) to change the goodwill accounting model under GAAP.

“Determining whether to impair goodwill was considered to be challenging and costly for some organizations, which is why the FASB is proposing changes designed to help reduce that burden,” states Eric Bradbury, Professional Accounting Fellow with Financial Executives International and the Financial Executives Research Foundation, in an article included in the study.

In October, the FASB made a tentative decision to affirm proposals outlined in its May exposure draft of a proposed Accounting Standard Update (ASU) on goodwill impairment, Intangibles—Goodwill and Other (Topic 350): Simplifying the Accounting for Goodwill Impairment.

The proposed ASU’s measures include eliminating Step 2 (calculating and comparing the implied fair value of reporting-unit goodwill with its carrying amount) from the goodwill impairment calculation. That means financial statement preparers wouldn’t have to conduct a hypothetical purchase price allocation to measure any goodwill impairment loss, Bradbury states.

If a final vote upholds that proposal, there would no longer be an option to apply Step 2, and all companies would have to record impairments based on the Step 1 test (calculating the fair value of the reporting unit and comparing it with its carrying amount, including goodwill).

Related articles:

Energy Industry Drove Rise in Goodwill Impairments in 2014
FASB Proposal Would Simplify Goodwill Impairment Test

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