Against a backdrop of low oil prices and a spike in mergers and acquisitions, goodwill impairment levels for public companies doubled from 2014 to 2015, hitting their highest mark since the global financial crisis, according to the latest data from Duff & Phelps.
Public companies reported $57 billion in goodwill impairment in 2015, a big jump from the $26 billion reported in 2014 and a stark contrast to the brisk M&A activity that marked the year. Deal values increased two-thirds during the study period, prompting companies to add a total of $458 billion of goodwill to their balance sheets across capital markets.
Gary Roland, managing director for the valuation and finance advisory firm that conducted the study, says troubled oil prices surely played a part in the jump in goodwill impairments. Energy companies alone represented a big part of the overall market increase in goodwill impairments, jumping from $5.8 billion to $18.2 billion. “When you look at those macro factors and trends, energy was an obvious one,” he said. “It stood out by itself.”
Goodwill is an intangible asset that arises on corporate balance sheets as a result of mergers or acquisitions. When an acqired companies is added to the balance sheet, goodwill represents the premium paid to acquire the company beyond the value of its individual assets and liabilities. Investors like to track goodwill because they regard it as an indicator of whether an acquired business is delivering value relative to the purchase price.
The energy sector recorded nearly one-third of the total goodwill impairments reported in 2015, with more than half of all energy companies that carry goodwill on their balance sheets recording an impairment, the study says. Despite that sector standing out, the biggest goodwill impairment events hit the information technology sector. Microsoft took a $5.1 billion hit to goodwill, followed by Yahoo at $4.46 billion. ConAgra Foods came in third at $2 billion.
In addition to market data, the Duff & Phelps study also explores changes that are in the works for how companies will account for goodwill in the future. The Financial Accounting Standards Board is planning to simplify goodwill impairment testing for public companies after agreeing to a simplification earlier for private companies.
FASB is planning to do away with the “step two” detailed fair value exercise that companies are currently required to perform if a high-level preliminary test suggests goodwill carried on the balance sheet should be marked down. The survey found 82 percent of those who responded were in favor of dropping the long-controversial second step of the goodwill impairment test.
The survey also shows companies are making increasing use of an earlier simplification FASB approved, allowing companies to begin their goodwill impairment testing by assessing qualitative indicators alone, which ultimately might be enough to spare them any further calculations. The survey result shows companies are steadily increasing their use of the “step zero” accommodation, as it has become known in the marketplace.
“When it first came out there was concern about the amount of audit review that would need to be done,” says Roland. “But we are seeing a pretty good uptick in adoption of step zero, which is healthy.”