Have you or your clients purchased a business that resulted in recording goodwill or other indefinite-lived intangible assets to your balance sheet? Financial reporting guidance requires that goodwill be tested for impairment at least annually, unless an exception applies. If you haven’t yet selected a testing date, many companies chose to use a time in the early part of their fiscal fourth quarter so that the analysis can be finalized ahead of the financial audit busy season.
Beyond the annual testing requirement, businesses that have been negatively impacted by current market conditions like rising interest rates, high inflation, supply chain disruption, staffing shortages, or valuation reductions in the public capital markets may have a triggering event that would require interim impairment testing. Financial reporting guidance requires that goodwill be tested for impairment when a triggering event occurs that indicates the fair value of the entity (or a reporting unit) may be below its carrying amount.
Some examples of triggering events 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, or strategy; loss of key 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).
For private companies that elected the alternative available to amortize goodwill and bypass the annual testing requirement, testing is still required upon a triggering event, and the hurdle for passing the impairment testing could be relatively higher or lower depending on the recency of the business combination. For transactions close to the measurement date, goodwill would be higher as a result of subsuming certain intangible assets, i.e., customer relationships and non-competition agreements. For transactions further in the rearview, accumulated amortization may outweigh the higher initial balance.
How Centri Can Help
Even if you’ve done your own impairment testing in years past, there are benefits to seeking outside assistance to properly analyze the appropriate measurement date and determine the fair value of the reporting unit(s) relative to the carrying amount. At Centri, our valuation and technical accounting professionals can be a great resource to keep you on track with your financial reporting requirements. Contact us to learn how our experts can help you.
About Centri Business Consulting, LLC
Centri Business Consulting provides the highest quality advisory consulting services to its clients by being reliable and responsive to their needs. Centri provides companies with the expertise they need to meet their reporting demands. Centri specializes in financial reporting, internal controls, technical accounting research, valuation, and CFO and HR advisory services for companies of various sizes and industries. From complex technical accounting transactions to monthly financial reporting, our professionals can offer any organization the specialized expertise and multilayered skillsets to ensure the project is completed timely and accurately.
For more information, please visit www.CentriConsulting.com
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