How to assess – not guess – goodwill impairment caused by COVID-19

6/12/2020
How to assess – not guess – goodwill impairment caused by COVID-19

Evaluating goodwill for impairment is imperative in the current environment. These four best practices will help you correctly assess, not just guess, matters related to goodwill impairment. 

COVID-19 has triggered an economic downturn and put negative pressure on most companies’ financial performance. So whether you’re a public or a private company, you should plan to evaluate your goodwill for impairment. Clearly, it can be hard to determine impairment without an established benchmark that models the level of uncertainty and volatility COVID-19 has created. But you don’t have to guess – following these four best practices will provide the support you need to make your assessment.

Create a foundation based on what’s known and knowable.

1. Create a foundation based on what’s known and knowable.

The general expectation is that most businesses are, or will be, impacted by the COVID-19 pandemic. We don’t know when things will return to normal, or what that normal will look like. So how can you even begin to forecast your goodwill impairment? Start with what’s known and knowable. Look at the available information and apply reason and logic as best you can. Having a solid rationale behind how you develop your numbers, even if they ultimately do not bear out, shows you put thought and due care into the process.

2. Consider timing relevant to your business cycle. 

At the end of the first quarter, the market was still too volatile for most businesses to reasonably assess operational impact, including goodwill impairment. Additionally, your business cycle might allow you to ramp up later in the year, giving you the opportunity to make up for earlier losses. While you can’t delay the process indefinitely, focusing on testing in Q2 allows you to better determine and quantify the true impact to your business. 
Create a foundation based on what’s known and knowable.
Create a foundation based on what’s known and knowable.

3. Run multiple scenarios and consider the extremes.

It’s vital to consider multiple scenarios, ideally at least three – your base case, your upside case,and your downside case. Carefully assess, through market and industry data, expectations around recovery and factor those into your analyses. Then, choose the appropriate estimate as your guide. 

For example, if your initial indication of impairment is $70 million on $100 million in value, the upside is that you still have $30 million of value to continue assessing in future periods. However, your downside assessment might show an impairment of the full $100 million in value. It may be better to err on the side of conservatism than to reach an estimate and then come back with additional losses later in your year. However, you need to be as precise as possible given the inherent market uncertainties still at play. If swings in your assessment are too extreme, your stakeholders may question your understanding of the business. 

 

4. Ask why and watch out for the calm before the storm.

People have been stockpiling certain foods and commodities, which translates into a significant sales spike for some companies. The temptation may be to say, “We’re doing great! We don’t need impairment testing.” However, spikes in short-term sales may suggest a drop later in the year – so prepare, forecast, and assess accordingly, especially if you could have future supply chain issues. You can’t completely discount what the market suggests, regardless of its volatility, but it shouldn’t serve as the only indication of your company’s value. 
Ask why and watch out for the calm before the storm

In addition to these tips, if you’ve recently made a material acquisition, you might need to reassess value. Fair value determined at transaction close – for example, a $100 million acquisition in January 2019 – and carried through the current period – is likely to look a little different in today’s market; so you should probably take a second look.

For more information on goodwill impairment testing and other COVID-19-related considerations for your business, visit our COVID-19 resource center and our valuation services page.

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Mary Ann Travers - social
Mary Ann K. Travers
Principal, Complex Analytics & Investment Thesis Valuation Services Leader
Steven Schumacher
Steven A. Schumacher
Partner