The coronavirus pandemic has drastically impacted global markets. It has not only disrupted supply chains, but it has also affected consumer buying behavior and restricted certain traveling and workforce capabilities. All of these factors have had adverse effects on the financial health of certain companies.
As a result, companies are having to reevaluate their financial reporting, which includes their right-of-use (ROU) assets, their property values, their intangible assets, and their goodwill. When a company’s carrying value on financial statements exceeds its fair value, it is considered to be impaired. Goodwill impairment should be something that companies are already testing for on an annual basis, but certain events, like the global pandemic, are cause for additional testing.
Other example triggering events include certain cost factors, management changes, bankruptcy, events that affect reporting units, and a deterioration of economic conditions or the environment that a certain company operates within. To determine if an impairment exists, fair value must be assessed. In some cases, so must recoverability that is based on undiscounted cash flows. Since COVID-19 has lowered the fair value of companies, goodwill impairment is likely to be an issue that will impact all businesses across a variety of markets.
If a business conducts a test which proves goodwill impairment, it is important that they hire a specialized valuation firm. Goodwill impairment is already a complex matter that considers a significant number of factors, but the coronavirus pandemic has had unprecedented and uncertain impacts that are outside of what a typical goodwill impairment might be. For example, companies will need to figure out if the pandemic’s effects will be temporary or more permanent, which will influence their future cash flows and impairment. They must also consider both the direct and indirect consequences of the pandemic.
Our team of professionals at Appraisal Economics have extensive experience in goodwill impairment analysis and the valuation of fair value. It is difficult for many companies to understand what this pandemic means for their business, but our experts are here to guide you through these unsettling times. If you have any COVID-related questions or need to address goodwill impairment, contact us today.
COVID-19: Increased Risk of Impairment of Goodwill
