A study released this week by Duff & Phelps finds that U.S. companies recorded $26 billion of goodwill impairment, in 2014, an 18 percent increase from the $22 billion tallied in 2013. The research, released this week at Financial Executives International’s annual Current Financial Reporting Issues Conference, found that the number of goodwill impairment events increased by 24 percent, to 341, throughout the same period.
For the report, Duff & Phelps, a corporate finance advisor, examined general and industry goodwill impairment trends through December 2014 for more than 8,700 companies, public and private.
The average impairment amount was approximately $75 million in 2014, a 5 percent decline from the prior year average of $79 million. Eighty-six percent of survey respondents did not recognize impairment in 2014, which was the lowest level in the past three years.
Sectors that recorded a marked increase in goodwill impairment in 2014 from the previous year include: energy ($2.1 billion to $5.8 billion); consumer staples ($1 billion to $3.5 billion); financials ($1 billion to $3.1 billion); information Technology ($1.6 billion to $3.6 billion); and industrials ($3.2 billion to $3.5 billion). The broad affect of unstable, dropping oil prices was among the reasons cited for the spike in energy company GWI. If that industry was excluded from the study, the aggregate trend would have been flat.
Among the industries that recorded declines, Healthcare plummeted from $3.6 billion to $400 million (an 89 percent drop) and materials, falling from $4.6 to $2.7 billion (a 41 percent decrease).
“The increased 2014 aggregate impairment amount was consistent with macroeconomic trends. While the U.S. economy continued to improve in 2014, plunging commodity prices in the latter half of the year affected certain industries disproportionately,” Greg Franceschi, Duff & Phelps’ managing director said in a statement. “With 2015 M&A activity up significantly over 2014 levels, the highest since 2007, goodwill resulting from acquisitions will remain an important asset class for investors to monitor.”
The survey also found a pronounced uptick in public companies’ use of the qualitative goodwill impairment test known as Step 0, an increase to 54 percent from the 43 percent reported in 2014. Nearly 40 percent of private companies applied the test, doubling the 22 percent usage rate reported in the 2013 survey. Two-thirds of all respondents said Step 0 meets its stated objective of reducing costs.
A companion study focusing on goodwill impairment in the European marketplace will be released in the coming weeks.