Public companies reported the lowest levels of goodwill impairment in 2013 since the financial crisis touched off a downward spiral in corporate values beginning in 2008.

In its annual study of goodwill impairment, valuation firm Duff & Phelps founds public companies recorded write-downs totaling $21 billion in 2013, down nearly 60 percent from the $51 billion reported in 2012 and a fraction of the $260 billion reported in 2008. The average impairment amount across more than 5,100 companies included in the study fell to $108 million in 2013, down 50 percent from the prior year but still higher than the 2009 average amount of $86 million.

The results suggest corporate values are generally holding their own, says Greg Franceschi, managing director of the firm. “This is directly related to the performance in the market,” he says. “The market caps of publicly traded entities were on the upswing from prior years, so this is that built-in cushion that these companies have.” Goodwill is an intangible asset on corporate balance sheets that arises after an acquisition, representing the premium paid to acquire a company beyond the fair value of its collective assets. Investors like to track it as an indicator of whether a particular acquisition has panned out or gone sour.

Companies are required to test the value of goodwill on the balance sheet annually to determine whether it is still valid or has become “Impaired” and needs to be written down. The method for testing goodwill for impairment has been criticized as onerous, leading to a new test meant to simplify it, and further discussion of whether it can be made yet simpler again.

In its 2014 study, Duff & Phelps examined whether companies are making use of “step zero,” or the most recently simplified method for testing goodwill for impairment. The study found 41 percent of companies were able to use the simpler method in 2013, up from 33 percent in 2012. The simplified test enables companies to determine based on qualitative analysis whether goodwill has held up before they are required to do a full quantitative analysis, which can lead to a fair value measurement of all the assets and liabilities in a reporting unit.

The Financial Accounting Standards Board is in the process of exploring whether to make the test even easier still by allowing companies to write down goodwill over a period of time, as FASB’s Private Company Council has already convinced FASB to allow for private companies. Opponents believe that approach doesn’t provide investors with the insight they want on acquisitions. “With the significant adoption of the step zero test, FASB has offered a cost-effective tool,” says Franceschi. “If you move to an amortization method where it is tested only at the entity level, a great deal of useful information will be lost.”

In other highlights, the study found the market total for goodwill impairment was not dominated in 2013 by any single or handful of massive events, like HP’s notorious write-down associated with its Autonomy acquisition. More than half the impairments, however, were concentrated in three industries: materials, healthcare, and industries, notably not information technology.

 

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