The COVID-19 pandemic has impacted, to varying degrees, both the current and future financial performance of almost every company across all industries. As a result, assessing goodwill impairment has become a hot topic, with some companies taking another look at the valuation-related processes surrounding their existing goodwill impairment procedures. Furthermore, the FASB is also considering extensive changes to the subsequent accounting for goodwill and providing an alternative for private companies and certain not-for-profits.
One of the many effects of the pandemic is that anticipated future performance could look very different than historical results. Therefore, and because many companies are resource constrained, forecasting has become even more challenging. As a result, some finance departments are supplementing their forecasting procedures with scenario analyses, including Monte Carlo simulation models. When doing so, management should ensure that they have a thorough understanding of the key drivers in their valuation models and the reliability of the related inputs by identifying the more subjective ones and applying sensitivity analysis to support their conclusions. Furthermore, due to the uncertainty associated with certain key assumptions used in impairment testing models, companies should incorporate strong internal controls surrounding these estimates.
In an effort to address concerns expressed about the subsequent accounting for goodwill and provide reporting relief for certain entities impacted by the pandemic, the FASB issued a standard on March 30, 2021 that provides an alternative to goodwill impairment triggering event evaluations for private companies and not-for-profits. The objective of the standard is to address the cost, complexity and usefulness of the information associated with performing an interim triggering event evaluation when only reporting annual financial statements. The standard allows private companies and not-for-profits to perform a goodwill triggering event assessment, and any resulting test for goodwill impairment, at the end of the reporting period, whether in an interim or annual period. The amendments take effect for fiscal years beginning after December 15, 2019.
The FASB has also embarked on another project with the objective of revisiting the subsequent accounting for goodwill and identifiable intangible assets broadly for all entities, including considerations for improving the decision usefulness of the information and rebalancing the cost benefit factors. Due to concerns about the cost to perform the goodwill impairment test, the FASB has issued various pieces of guidance, some applicable to all entities and others for private companies and not-for-profits. In subsequent meetings, the FASB has discussed research and analysis on goodwill amortization periods and methods for an impairment-with-amortization model, as well as evolving amortization models in which the subsequent accounting for goodwill changes over time. The FASB has directed staff to perform additional research and outreach relating to factors and criteria that would justify deviation from the default amortization period (i.e. 10 years) and how the factors to consider for the amortization period and the criteria to justify a deviation would interact with the specifics of a cap.
For more information on the identifiable intangible assets and subsequent accounting for goodwill project, please visit the FASB’s website.
Bennett Thrasher continues to monitor the impact of the pandemic on valuation-related goodwill impairment procedures and keeps up with the most recent FASB guidance in order to ensure our clients comply with the latest requirements and avail themselves of any reporting-related relief provided. For more information on these developments or for other valuation inquiries, contact Gina Miller or Brett Dixon by calling 770.396.2200.