Goodwill impairments more than doubled in 2018, says recent study

The record levels of merger and acquisition activities in 2018 produced $386 billion of recorded goodwill on company balance sheets, the highest level since the first study in 2008 and an increase from the prior record amount of $319 billion recorded in 2017. There was a 16 percent increase in the number of transactions and a 57 percent increase in the value of those deals in 2018. Higher deal levels produce the potential for higher near-term impairment.

The 2018 increase in goodwill impairment was affected by GE’s $22.1 billion charge, but impairments climbed 62 percent excluding GE’s. The study found the top 10 impairments recorded accounted for approximately 70 percent of the total. New in this year’s study is a detailed look at the top 30 recorded impairments of 2018.

Accounting and auditing regulators have been very concerned with timing and amounts of goodwill impairments. The Financial Accounting Standards Board (FASB) has had a number of projects relating to business combinations, goodwill, and intangible assets spanning almost 50 years.

Under current U.S. GAAP, goodwill on the balance sheet must be tested for impairment at least annually. FASB has been working on simplification initiatives for testing goodwill for impairment, including new rules issued in 2017 that eliminated “Step 2” of the test and made the impairment analysis less costly and complex. The Duff & Phelps study noted that of the top 30 largest impairment events in 2018, over 90 percent of those companies had adopted the simplified test. In July, FASB issued an invitation to comment and is reviewing responses received to decide whether additional amendments should be made to the standards for accounting for goodwill and other intangibles.

The current study found seven out of 10 industries analyzed had total goodwill impairment amounts increase for two consecutive years, with the healthcare, consumer staples, and energy sectors having the highest levels (along with industrials, driven by GE).

The majority of the increase in total impairment amounts for 2018 was due to five large impairments on goodwill recorded in transactions that closed from 2015-2017, says Greg Franceschi, managing director and global leader of the financial reporting valuation practice at Duff & Phelps. Additionally, the magnitude of impairment events has generally increased. However, he is optimistic about the future.

“Despite this record amount of impairment in 2018, the largest events of 2019 to date are an early indication that we may actually see a significant decrease in overall goodwill impairment this year,” Franceschi said.