Is COVID-19 a Triggering Event for Impairment Testing?
The longest-working bull market considering that World War II began in March 2009, and more than the previous several decades, several debated “when, not if,” a downturn would arise. But no just one could have predicted that a world pandemic would guide to unparalleled disruption and dislocation in the capital marketplaces and the quickest end to a bull market in record.
As of March 23, the S&P 500 experienced fallen approximately 30% from its February highs. While the marketplaces have recovered fairly, several industries have been hit difficult. Reporting entities will now need to have to consider irrespective of whether the impression of COVID-19 and the resultant market downturn constitutes a triggering party for uses of goodwill, intangible asset, and set-asset impairment screening.
Ahead of we delve into likely triggering activities, we imagined a brief recap on impairment screening needs under U.S. Generally Approved Accounting Ideas (GAAP) for several asset lessons would be practical.
Impairment Tests Necessities
| Goodwill | Indefinite-Lived Intangibles | Prolonged-Lived Property (like Finite-Lived Intangibles) | |
| Appropriate Assistance | ASC 350 | ASC 350 | ASC 360 |
| Tests Necessities | Every year and upon triggering party (for non-public firms electing accounting alternative, only upon triggering party) |
Every year and upon triggering party | Upon triggering party |
| Degree of Tests | Reporting device (working phase or element) | Specific asset | Asset group (least expensive stage of independent cash flow) |
| Approach of Tests |
1 step on a honest benefit (e.g., discounted cash flow) basis |
1 step on a honest benefit (e.g., discounted cash flow) basis |
Two techniques – 1st step on an undiscounted cash flow basis, next step on a honest benefit basis |
| Get of Tests (Property Held and Utilised) | 3rd | Very first | Next |
| Get of Tests (Property Held for Sale) | Next | Very first | 3rd |
Triggering Occasions
Triggering activities differ for goodwill/indefinite-lived intangibles and very long-lived assets. That claimed, an impairment of goodwill or indefinite-lived intangibles may set off the need to have to perform impairment screening for very long-lived assets. Additionally, and while not specially recognized in ASC 360, significant entity-stage activities may set off impairment screening for very long-lived assets. Underneath are examples of triggering activities for goodwill/indefinite-lived intangibles and very long-lived assets, respectively.
| Goodwill and Indefinite-Lived Intangibles | Prolonged-Lived Property (like Finite-Lived Intangibles) |
|
Macroeconomic ailments (deterioration in general financial ailments) |
Significant reduce in market price tag of a very long-lived asset (asset group) |
| Sector and market factors (deterioration in the environment in which a enterprise operates) | Significant adverse adjust in the extent or way in which a very long-lived asset (asset group) is getting used or in its physical ailment |
|
Price tag things (will increase in uncooked supplies, labor, and many others.) |
Significant adverse adjust in authorized things or in the organization weather |
|
Total money general performance (destructive or declining cash flows, decrease in true or prepared income or earnings) |
Accumulation of expenses appreciably in excess of the amount of money originally anticipated for the acquisition or design of a very long-lived asset group |
| Other relevant entity-certain activities (adjustments in administration, critical staff, technique, and many others.) | Current-time period, historic, or projected working or cash-flow loss related with the use of a very long-lived asset group |
|
Occasions affecting a reporting device (adjust in composition of internet assets, expectation of disposing all or a portion of the reporting device) |
Expectation of disposing a very long-lived asset or asset group in advance of the end of its helpful lifestyle |
| Sustained reduce in share price tag (in complete terms or relative to friends) |
Naturally, sure triggering activities mentioned over will be additional relevant to the existing environment than other individuals. With regard to COVID-19, we believe that firms ought to specially consider the subsequent likely triggering activities.
Macroeconomic ailments this sort of as a deteriorating on in general financial ailments, restrictions on accessing capital, fluctuations in overseas exchange rates, or other developments in equity and credit rating marketplaces
Plainly, COVID-19 has impacted macroeconomic ailments globally. Fairness marketplaces have found dramatic decreases in benefit in a short time period of time. We have also witnessed unparalleled volatility in the world marketplaces it is difficult to predict how marketplaces will look tomorrow, let by itself just one to two months from now.
Governments have started to intervene as they attempt to avoid a extended recession. From a U.S. viewpoint, it is unidentified irrespective of whether or when attempts to “flatten the curve” will be profitable and permit the nation to get back again to organization as common. As this proceeds to unfold and a greater info set is obtainable for evaluation, we will have a much better perception as to the short-, medium-, and very long-expression impacts on the world financial state.
Sector and market factors incorporate features this sort of as a deterioration in the environment in which an entity operates, an increased aggressive environment, a decrease in market-dependent multiples or metrics (considered in each complete terms and relative to friends), a adjust in the market for an entity’s merchandise or solutions, or a regulatory or political enhancement
While approximately all firms have been afflicted in some way by COVID-19, sure industries have been additional adversely impacted than other individuals. The airline business was down approximately sixty% in the final month, centered on the S&P 500 Airways Sector Index. Cruise line shares are down as much as 87% calendar year-to-date. In addition, bar and cafe shares are down more than forty% in the final month, centered on the Dow Jones U.S. Restaurants & Bars Index, with unique cafe shares down as much as ninety%. Conversely, sure firms have found an boost in desire for their merchandise and solutions all through this time.
With this context, it is clear sure industries will need to have to consider impairment screening sooner than other individuals and possible prior to their annual screening date. In identifying irrespective of whether a triggering party has transpired, firms ought to consider all points and situation, like the in the vicinity of- and medium-expression outlook for desire for merchandise and solutions in their individual business.
Total money general performance contains this sort of things this sort of as destructive or declining cash flows or a decrease in true or prepared income or earnings in contrast with true and projected effects of relevant prior durations
In mild of the COVID-19 disaster, several firms have currently warned that earnings will be decreased than forecasted. Public firms representing a broad spectrum of industries have appreciably lessened or eliminated earnings advice. It will possible get some time for firms to assess the impression of COVID-19 on their certain organization and to update their forecasts to account for it. At the time firms are ready to assess impacts to true and forecasted effects, they ought to consider irrespective of whether this sort of impacts signify a triggering party.
In performing so, the threshold for identifying irrespective of whether a triggering party has transpired may differ by reporting entity. For case in point, reporting entities that consummated a the latest content acquisition or experienced a the latest prevalence of goodwill impairment are at additional danger. Any reduce in future cash flow expectations would possible cause an incremental impairment as opposed to a reporting entity that passed its most the latest impairment examination by a large margin.
If relevant, a sustained reduce in share price tag (consider in each complete terms and relative to friends)
To be clear, a decrease in the in general stock market is not, in and of itself, always a triggering party. The stock market can be remarkably risky, and the intent of the advice is not to induce a wave of impairments every time the stock market swings. This is why ASC 350 specially uses the phrase “sustained reduce.”
Regrettably, the advice does not define or prescribe what is intended by “sustained.” Specific firms and industries may currently be ready to assert, with a superior stage of self-confidence, that their existing share price tag declines will be “sustained,” but we do not have the requisite info set to ascertain irrespective of whether this will be accurate for the in general market or fewer right impacted firms and industries.
Regardless of irrespective of whether or not it is identified that an quick triggering party has transpired, it is vital that public firms incorporate proper disclosures as to the dangers offered by COVID-19 and the existing financial environment. To the extent that this sort of ailments persist and grow to be an impairment set off, the SEC will assume that firms have supplied an proper stage of foreshadowing in their public filings.
Steve Hills is a controlling director and head of the technical accounting consulting apply at Stout,a world advisory business. Dave Lindstrom is a director in the valuation advisory group.
