Goodwill impairment can indicate trouble. It often suggests that a business combination didn’t meet management’s expectations due to internal challenges or external economic factors. In recent years, market uncertainties, inflation, and rising interest rates have caused goodwill impairments to surge.
Goodwill Impairment Trends
In 2022, 400 U.S. public companies reported a staggering $136.2 billion in pretax goodwill impairments. While 2023 saw fewer companies—353 in total—reporting impairments, the losses still amounted to $82.9 billion, a 39% decrease from 2022 but significantly above the historical average since 2006.
The trend has continued into 2024. For example, Walgreens disclosed a $12.4 billion pretax goodwill impairment in the first quarter, linked in part to its VillageMD acquisition. As market conditions remain volatile, more companies may face similar challenges throughout the year.
It’s important to note that these figures exclude private companies, whose results aren’t publicly available. Private firms often experience a lag in financial reporting, which could mean the impact of goodwill impairment on this sector is delayed but no less significant.
Understanding Goodwill in Financial Statements
Goodwill appears on a company’s balance sheet only when it’s acquired through a merger or acquisition. When a business is purchased, the acquisition price is first allocated to tangible assets, identifiable intangible assets, and liabilities based on their fair market value. Any remaining value is recorded as goodwill—an indefinite-lived intangible asset.
However, goodwill isn’t static. It must be monitored regularly for impairment. Impairment occurs when the fair value of goodwill drops below its carrying amount, reducing both the value reported on the balance sheet and net income on the income statement. Tracking goodwill provides critical insights into the success of a business combination over time.
Impairment Testing: Public vs. Private Companies
Public Companies
Under U.S. Generally Accepted Accounting Principles (GAAP), public companies cannot amortize goodwill. Instead, they must test it for impairment at least once annually or whenever a “triggering event” occurs that could reduce its value. If impairment is identified, the company must write down goodwill immediately.
Private Companies
Private companies have options to simplify goodwill accounting. For example, Accounting Standards Update (ASU) No. 2014-02 allows private firms to:
- Amortize goodwill over a period of up to 10 years.
- Test for impairment only when a triggering event occurs.
However, some private companies, particularly those planning a public offering, may choose to follow public company rules. The decision depends on factors like company size, industry, and strategic goals.
Spotlight on Triggering Events
All businesses—public and private—must assess goodwill impairment when a triggering event arises. Common triggers include:
- Economic downturns or market volatility
- Increased competition
- Significant lawsuits or cybersecurity breaches
- Industry disruptions due to regulations
- Loss of major customers or contracts
- Leadership transitions
- Negative cash flows or operational setbacks
For example, if an economic downturn reduces a parent company’s value post-acquisition, goodwill impairment may occur.
Protecting Your Business from Goodwill Risks
Public companies continuously monitor financial results for potential impairments. In contrast, private businesses often wait until the end of their reporting period to evaluate triggering events. If your company carries goodwill on its balance sheet, it’s essential to regularly assess its value and maintain transparent financial reporting.
Thorough due diligence is critical if you’re considering a merger or acquisition. Evaluating the target’s financial health, market position, and growth potential can help you avoid overpaying and reduce the risk of future goodwill impairments.
Contact us today to analyze your current goodwill valuation or to support your next business acquisition.
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