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Does Your Cannabis Business Have Goodwill or Intangible Assets? Impairment Testing May Be Required

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 choose 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, cannabis 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 receivership; 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 Cannabis Companies

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.

Kevin McLaughlin

Partner | Cannabis Practice Leader | CPA

Kevin is a Partner at Centri Business Consulting and the leader of the firm’s Cannabis Practice. He has more than 10 years of public accounting and consulting experience. View Kevin McLaughlin's Full Bio

Gerald Cullins

Partner | Valuation Practice Leader

Jerry is a Partner at Centri Business Consulting and the leader of the firm’s Valuation Practice. He has more than 20 years of valuation experience and has analyzed and valued companies for numerous purposes, participating in a wide variety of industries, including technology, life sciences, energy, retail, and manufacturing.. View Gerald Cullins's Full Bio

Mike Fazzolari

Director | MBA, FMVA, ABV

Mike is a Director at Centri Business Consulting. He has 15 years of professional experience, including valuation, investment banking, financial analysis, and project management, of which 10 years are related to valuation. View Mike Fazzolari's Full Bio