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Energy Industry Drove Rise in Goodwill Impairments in 2014

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Dec 17th 2015
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Goodwill impairment at US companies in 2014 rose 18 percent over the prior year to $26 billion and events jumped 24 percent, increases driven largely by the energy industry, according to the latest goodwill impairment study from corporate advisor Duff & Phelps.

Two of the top five largest impairment events of 2014 were in energy, and the industry's $5.8 billion in impairment – up from $2.1 billion the prior year – was the highest impairment amount for the year, the study indicates. The exploration and production sector recorded two-thirds of the reported impairment in energy.

“If energy were excluded from 2013 pro forma and 2014, the aggregate goodwill impairment trend would have been flat,” the study states.

The 2015 study considered goodwill impairment trends for more than 8,700 companies through December 2014. It also includes results of a survey of Financial Executive International members who represent public and private companies. The seventh consecutive study was done with partner Financial Executives Research Foundation.

“The increased 2014 aggregate impairment amount was consistent with macroeconomic trends,” Greg Franceschi, Duff & Phelps managing director and co-chairman of the American Institute of CPAs Impairment Task Force, said in a prepared statement. “While the US economy continued to improve in 2014, plunging commodity prices in the latter half of the year affected certain industries disproportionately.”

With 2015 merger and acquisition activity the highest since 2007, goodwill as a result of acquisitions will remain an important asset class for investors to monitor, he added.

Here are key takeaways from the study's findings:

  • The average impairment amount was $75 million in 2014, a 5 percent decline from 2013. The majority (86 percent) of respondents didn't recognize impairment in 2014, the lowest level of recognition in the past three years.
  • Consumer staples, financials, IT, and industrials recorded increases in goodwill impairment.
  • Health care, consumer discretionary, telecommunications, materials, and utilities recorded decreases.
  • Closed deals increased 9 percent and the deal value rose 62 percent. That led to an increase in goodwill added to balance sheets from $152 billion in 2013 pro forma to $157 billion in 2014.
  • Use of the qualitative goodwill impairment test, known as Step 0, by public company survey respondents shows record use since the option was first available. About a third (29 percent) of public companies chose to use it, according to the 2013 survey, and that increased to 43 percent in 2014. More than half (54 percent) of public company respondents in the 2015 survey now use Step 0. Among private companies, 40 percent use it, compared to 22 percent in 2013.
  • About a third (28 percent) of all respondents prefer the quantitative test, a decrease from 2013's 45 percent. Two-thirds believe Step 0 meets the objective of reduced costs, up from 50 percent in the 2014 survey. Almost half of those who never applied Step 0 now will consider using it.
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