Recession, Market Meltdown Put Spotlight on Goodwill Impairment
The sharp decline in stock market indices through the first eleven months of 2008 has shaved over $5.0 trillion off the equity market capitalization of companies in the S&P 500. The falling market valuations reflect both a reduced appetite for risk and an expectation that corporate cash flows will be pressured as the global economy enters a recession of unknown depth and duration.
For auditors and financial statement preparers, the bear market suggests that the goodwill reported on many corporate balance sheets may be impaired. The accounting for goodwill, the amount paid in excess of net identifiable assets in previous acquisitions, is set forth in SFAS 142, Goodwill and Intangible Assets. SFAS 142 provides for an annual impairment test for goodwill, rather than systematic amortization as under prior guidance. The two-step impairment test starts with a comparison of the reporting unit’s fair value to carrying value. Impairment is indicated if the fair value of the reporting unit is less than carrying value. Step 2 of the impairment test involves quantifying the amount of impairment by determining the implied fair value of the reporting unit’s goodwill.
A broad look at the S&P 500 provides some clues regarding the magnitude of potential impairment for companies throughout the economy. In the following table we compare the market capitalization of companies in the index to their respective book values. While the actual analysis for an individual company depends on reporting unit structure and a host of other unique facts and circumstances, consideration of the price/book multiple is often viewed as a reasonable proxy for assessing where goodwill impairment is likely to exist.
While financial stocks have been hardest hit, no sector has been immune. Over 25% of the companies in the S&P 500 are valued by the market at a discount to accounting book value. We would expect a sampling of smaller companies throughout the economy to reveal similar results.
Regardless of a company’s regular annual testing date, SFAS 142 prescribes an interim test upon occurrence of an event or change in circumstances that would more likely than not reduce the fair value of the reporting unit below its carrying amount. In our practice, we are observing many audit firms that regard the sharp decline in stock prices and the general economic uncertainty to be triggering events for an interim impairment test.
When it comes to financial statement reporting, dependable valuation advice is more important than ever. In our experience, audit firms are increasingly uncomfortable with do-it-yourself goodwill impairment analysis. At Mercer Capital, we have been helping clients navigate fair value reporting requirements since the FASB revised the purchase accounting rules in 2001. Call one of our professionals to discuss your unique situation in confidence.
For auditors and financial statement preparers, the bear market suggests that the goodwill reported on many corporate balance sheets may be impaired. The accounting for goodwill, the amount paid in excess of net identifiable assets in previous acquisitions, is set forth in SFAS 142, Goodwill and Intangible Assets. SFAS 142 provides for an annual impairment test for goodwill, rather than systematic amortization as under prior guidance. The two-step impairment test starts with a comparison of the reporting unit’s fair value to carrying value. Impairment is indicated if the fair value of the reporting unit is less than carrying value. Step 2 of the impairment test involves quantifying the amount of impairment by determining the implied fair value of the reporting unit’s goodwill.
A broad look at the S&P 500 provides some clues regarding the magnitude of potential impairment for companies throughout the economy. In the following table we compare the market capitalization of companies in the index to their respective book values. While the actual analysis for an individual company depends on reporting unit structure and a host of other unique facts and circumstances, consideration of the price/book multiple is often viewed as a reasonable proxy for assessing where goodwill impairment is likely to exist.
While financial stocks have been hardest hit, no sector has been immune. Over 25% of the companies in the S&P 500 are valued by the market at a discount to accounting book value. We would expect a sampling of smaller companies throughout the economy to reveal similar results.
Regardless of a company’s regular annual testing date, SFAS 142 prescribes an interim test upon occurrence of an event or change in circumstances that would more likely than not reduce the fair value of the reporting unit below its carrying amount. In our practice, we are observing many audit firms that regard the sharp decline in stock prices and the general economic uncertainty to be triggering events for an interim impairment test.
When it comes to financial statement reporting, dependable valuation advice is more important than ever. In our experience, audit firms are increasingly uncomfortable with do-it-yourself goodwill impairment analysis. At Mercer Capital, we have been helping clients navigate fair value reporting requirements since the FASB revised the purchase accounting rules in 2001. Call one of our professionals to discuss your unique situation in confidence.