Report: Pandemic fuels goodwill impairment spike in 2020

The “2021 U.S. Goodwill Impairment Study” identified $142.5 billion in goodwill impairment recorded in 2020, a significant rise from $71 billion in 2019. The number of goodwill impairment events jumped 45 percent, from 318 in 2019 to 462 in 2020.

In 2008, the first year Kroll analyzed as part of its study, $188.4 billion was observed across 502 goodwill impairment events as a result of the financial crisis.

According to the study, which reviewed more than 8,900 U.S. publicly traded companies’ goodwill impairments, the economic impact of the Covid-19 pandemic created “significant upheaval” for companies in 2020. The average goodwill impairment per event rose by 38 percent to $308 million, the second highest level since $375 million in 2008.

Topping the list of the largest impairments recorded during 2020 was Baker Hughes at $14.8 billion, followed by AT&T ($10.5 billion) and Berkshire Hathaway ($10 billion), as observed by Kroll.

Industry trends: In eight of the 10 industries analyzed, goodwill impairment increased or remained at similar levels. The exceptions were consumer staples, which benefitted from stay-at-home lockdown policies, and healthcare, which faced increased demand created by the health crisis.

According to Kroll, the industries with the largest increase in goodwill impairment in 2020 were:

• Energy: Aggregate goodwill impairment reached a record $41.7 billion, from $8.7 billion in 2019. “Global demand for oil plunged as governments worldwide imposed lockdown policies following the outbreak of Covid-19 … which, combined with a temporary oil price war between Saudi Arabia and Russia, led to a collapse in prices,” Kroll stated in its report.
• Financials and real estate: Aggregate goodwill impairment increased from $400 million in 2019 to $19.1 billion in 2020, its highest level since 2008. While shutdowns of retail and hotel properties affected real estate, financial institutions were “challenged by further margin compression as monetary policies implemented by major central banks in 2020 to counter the effect of Covid-19 drove interest rates even lower,” Kroll stated. Also noted was a rise in credit losses.
• Industrials: Aggregate goodwill impairment nearly tripled, from $4.5 billion in 2019 to $13.2 billion in 2020. “Government restrictions related to the pandemic, especially regarding air travel, caused a severe downturn in demand across the industry,” said Kroll.

Looking ahead: “U.S. industries have mostly recovered from the slump in 2020, and while there is still some diverging performance by companies within the same industry, they are overall in a much better position relative to the prior year,” Kroll stated in its report.

“At the time of writing, the disclosed top 10 goodwill impairment events for 2021 reached a combined $5 billion, which pales in comparison to the top 10 in 2020,” Kroll stated. “Although full 2021 calendar year-end results for U.S. public companies will not be known for some time, early reporting points to overall goodwill impairment merely reaching $7 billion in 2021. Even if goodwill impairment increases slightly from this level, an amount this low has not been observed since 2006.”