In July 2019, the Financial Accounting Standards Board (FASB) issued an invitation to comment on identifiable intangible assets acquired in a business combination and the subsequent accounting for goodwill with the intention of determining if there is a cost benefit issue for public companies.
Specifically, the FASB is soliciting feedback and insight on the following:
- Whether changes to financial reporting should be addressed by the Board
- Whether and how to proceed with simplifications and/or improvements to these topics
- How optionality in the accounting for intangible assets and goodwill is viewed
According to FASB, some stakeholders have questioned whether the cost of an annual impairment test warrants the process every year. Additionally, when there are impairments, stakeholders have expressed concern that the disclosures are not as timely or as informative as they would like.
Each year, companies are required to test their goodwill value on their financial statements. An impairment occurs when the asset’s fair value falls under historical costs. An impairment test can also be triggered outside of the annual test, such as when there is a decrease in share price, the company missed quarterly results, or when other factors occur that could affect future operating plans or priorities.
Contributing to reservations surrounding identifiable intangibles and subsequent accounting for goodwill is that these types of impairments are often considered lagging indicators – it’s a measurable economic factor that changes only after particular patterns or trends emerge, trends which are often predicted in the market well before an impairment is disclosed.
There seems to be general consensus that there is room for improvement when it comes to goodwill impairment disclosures: companies are dissatisfied with the annual requirement and stakeholders find minimal value in the actual disclosures.
S&P 500 Goodwill and Intangible Asset Impairments
To provide a sense of how common goodwill impairments are and the impacts they have on financial statements, Audit Analytics analyzed goodwill and intangible impairments for the S&P 500 between 2014-2018.
We find that even though companies disclosed fewer impairments for goodwill and intangible assets in 2018, the magnitude of these impairments had increasingly significant impacts on financial statements.
In 2018, there were 63 goodwill and intangible asset impairments in the S&P 500, down from the number disclosed each year between 2014 and 2017. Initially, this seems like a positive trend, as less companies are disclosing goodwill and intangible assets impairments.
However, despite fewer impairments, the total impact of goodwill and intangible asset impairment charges in 2018 was considerably higher; the total impact for 2018 was over three times that of the total impact for 2017 – a big jump from one year to the next.
It is important to note that 2018 had the fewest number of companies disclose an impairment, but the charges were considerably higher per impairment. This can partly be attributed to 2018 having the top two costliest goodwill and intangible asset impairment charges, including the massive $22.5 billion charge for GE. Looking at the top ten costliest impairments since 2014, six of them occurred in 2018:
The $22 billion charge disclosed by GE, related to the Company’s acquired power and grid business Alstom, is the costliest impairment charge since ConocoPhillips disclosed a $25 billion goodwill charge in 2009, and represented 32% of GE’s market capitalization.
Also worth noting is that Procter & Gamble’s $8.4 million charge, the third costliest goodwill and intangible asset impairment in the S&P 500 since 2014, occurred in 2019 – indicating that the trend of costly impairments related to goodwill and intangibles may continue.
Considering this recent increase in the magnitude of goodwill and intangible asset impairment charges, combined with the dissatisfaction expressed by stakeholders regarding the costs of impairment testing and the overall value of the disclosures, it will be interesting to see the results from FASB’s invitation to comment and overall what it might mean for the future of impairment testing.
This is Part One of a two-part post analyzing goodwill and intangible asset impairments.
Part Two will look deeper into the specific industries most likely to record these types of impairments.
For more information on impairments, please contact us.