Given the recent downturn in the economy as a result of the effects of the coronavirus, one of the areas SEC filers should focus on during quarterly reporting is whether interim goodwill impairment testing should be performed during the quarter ended March 31, 2020 (Q1 for fiscal year-end entities) or later. As noted in FASB ASC 350-20-35-30, “Goodwill of a reporting unit shall be tested for impairment between annual tests 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.” Examples of such events or circumstances (“triggering events”) noted in ASC Topic 350 (which are not all inclusive) include:
- Macroeconomic conditions such as a deterioration in general economic conditions, limitations on accessing capital, fluctuations in foreign exchange rates, or other developments in equity and credit markets
- Industry and market considerations such as a deterioration in the environment in which an entity operates, an increased competitive environment, a decline in market-dependent multiples or metrics (consider in both absolute terms and relative to peers), a change in the market for an entity’s products or services, or a regulatory or political development
- Cost factors such as increases in raw materials, labor, or other costs that have a negative effect on earnings and cash flows
- Overall financial performance such as negative or declining cash flows or a decline in actual or planned revenue or earnings compared with actual and projected results of relevant prior periods
- Other relevant entity-specific events such as changes in management, key personnel, strategy, or customers; contemplation of bankruptcy; or litigation
- Events affecting a reporting unit such as a change in the composition or carrying amount of its net assets, a more-likely-than-not expectation of selling or disposing of all, or a portion, of a reporting unit, the testing for recoverability of a significant asset group within a reporting unit, or recognition of a goodwill impairment loss in the financial statements of a subsidiary that is a component of a reporting unit
- If applicable, a sustained decrease in share price (consider in both absolute terms and relative to peers).
If these triggering events or other relevant events occurred, entities must consider to what extent they (along with any offsetting positive and mitigating events and circumstances) impact the fair value and carrying amount of their reporting units in order to determine whether interim impairment testing is required. This consideration is based on whether these events collectively cause it to be more likely than not that the fair value of a reporting unit is less than its carrying amount.
A number of the triggering events discussed above are likely to have occurred for many entities as a result of the effects of the coronavirus, which could cause a decline in the fair value of a reporting unit to a level below its carrying amount. As a result, we expect that many SEC filers will be required to perform interim goodwill impairment tests for one or more reporting units during the first quarter of this year. While this is especially the case for SEC filers with reporting units that did not pass the most recent goodwill impairment test by a significant margin, all filers should carefully consider potential triggering events and the need for interim goodwill impairment testing given the substantial effects of the coronavirus.