GrowthCast Episode 26: Triggering Events for Interim Goodwill Impairment Evaluation

Join Gareth Montague-Smith as he discusses goodwill impairment, the possibility entities experiencing multiple triggering events as a result of COVID-19 and the importance of discussions with your external auditors during this time.

Transcript

Introduction

[00:00:09] JL: Welcome to today's edition of DHG’s GrowthCast. I'm your host, John Locke. At DHG, our strength lies in our technical knowledge, our industry intelligence, and our future focus. We understand business needs and are laser-focused on company goals. In this ever-changing world, DHG's GrowthCast provides insights and thought-provoking conversations on topics and trends that address growth opportunities and challenges in the current and future marketplace. Thanks for joining us as we discuss tomorrow's needs today.

[00:00:42] ANNOUNCER: The views and concepts expressed by today's panelists are their own and not those of Dixon Hughes Goodman LLP. Always consult the advice of your legal and financial professional before taking any action.

Interview

[00:00:57] JL: Today, we will be speaking about goodwill impairment testing with Gareth Montague Smith. Gareth is a partner in DHG’s Raleigh, North Carolina office with 22 years of experience providing audit, financial, and internal audit services across multiple industries. Gareth focuses largely on internal audits for clients in the manufacturing, distribution, and retail industries in both the public and private sectors. Welcome to GrowthCast, Gareth.

[00:01:24] GMS: Thanks, John. It’s a pleasure to be here.

[00:01:26] JL: Gareth, the potential for goodwill impairment has been a hot topic across many industries following the impact of COVID-19 on the economy, unemployment and daily operations. Can you tell us a little bit more about what goodwill impairment is and why so many people are concerned about it right now?

[00:01:46] GMS: Sure, John. [inaudible 00:01:48], goodwill would be deemed to be impaired if the fair value of a reporting unit has fallen below its current value. From a more technical standpoint, ASC 350 states that entities must evaluate their goodwill for impairment at least annually. However, to the extent an entity reports interim periods, so now we’re talking about mostly public companies and registrants, a goodwill impairment analysis could be necessary if the entity has an indication that the fair value of a reporting unit has fallen below its current value referred to as a triggering event. Understanding what constitutes a triggering event is an important consideration even for companies who fall on the private company counsel or PCC accounting alternative who are not required to assess goodwill for impairment annually. Instead they’re only required when the triggering event occurs.

[00:02:36] JL: Gareth, how will this year be different than previous years?

[00:02:42] GMS: Historically, recording multiple charges for goodwill impairment in a fiscal period could potentially raise concern from both regulators and auditors since we suggest that the entity is unable to accurately apply for goodwill impairment test. The thought here is that you would do the test once, you would get it right, and not have to constantly revise the amount of goodwill recorded throughout a period. What’s interesting here in the current global economy we’re in right now, there is such high levels of uncertainty and unpredictability. I think we might see entities possibly experiencing multiple triggering events throughout their fiscal year.

[00:03:17] JL: Could you give us some examples of trigger events that would lead to a goodwill impairment test and which ones might be the hardest to assess?

[00:03:27] GMS: There are, of course, examples detailed in ASC 350, but I think some of the most challenging triggers to assess are going to be around the deterioration of macroeconomic conditions, as well as the industry and market conditions. I think the real struggle here, and this is kind of going to be subject for a lot of discussion and debate with companies and the auditors are around answering questions like how would we get rock-bottom, if not how much lower are we going to go. Then frankly and arguably the most difficult answer is for how long this is going to continue. These are going to be very difficult questions for a company to answer with any real certainty.

A good example maybe is how the hospitality and lodging industries are going to recover and when. I mean, John, if I said to you when are you going to go out for a meal with a popular restaurant on a Saturday night, stay in a hotel, and get on a plane. Predicting that behavior for people is going to require a significant amount of discussion, analysis, judgment, and a lot of assumptions. That burden of proof is going to be very high.

[00:04:23] JL: That situation is going to be so different with everybody as it relates to their feeling of safety and being able to measure that, put a metric around that for a company is obviously going to be very challenging.

[00:04:36] GMS: I really think this is going to be a real challenge for companies predicting human behavior in a time that’s unprecedented.

[00:04:43] JL: Yeah. Well, how can entities determine if they have experienced one of these triggering events?

[00:04:51] GMS: Evaluating the presence of trigger events is going to require a great deal of judgment and is going to include a number of qualitative and quantitative considerations. A simple example might be of an entity that’s seen a significant decrease in their share price. On the surface, it’s a triggering event potentially. However, in this example, a decrease in the share price might not by itself qualifies a triggering event. In this example, an entity might consider comparing their share price decrease to that of their peers and see if it’s consistent across the industry. If it is consistent, then it’s [inaudible 00:05:21] into a larger economic events and maybe a triggering event.

Interesting to note too is entities that use budgets and forecasts to demonstrate the recoverability of goodwill. Their ability to accurately budget and forecast is going to be put into question. [inaudible 00:05:37] entities, they created a budget or a forecast prior to March 2020 are very unlikely to have considered the rapid deterioration of the economy caused by the virus. Accordingly, the weight put on budgets and forecasts in supporting the recoverability might lessen, and other forms of evidence might have to be considered.

[00:05:54] JL: That’s really an interesting point. You think about all the work that was done pre-March 2020 as it relates to all types of budgeting, forecasting, etc. Now, people are just getting to the point where they’re thinking, “What is so different, and how can I look at a budget and have confidence in it going forward?” I was just talking with a banker friend of mine this morning, and they were talking about just appraisal values and how crazy it is. They can't use appraisal values in many instances that were done prior to COVID. They’re going have to go back and do real estate appraisals. The impact of this as far as having to redo all your budgets and forecasts is significant as far as being able to move forward relative to goodwill.

[00:06:44] GMS: Yeah. I agree and I think what’s going to be a challenge here is the accuracy of the budget is something that you’re [inaudible 00:06:49] often rely on, and that’s candidly going to get thrown out because you’ve got this unforeseen event, this unpredictable event that’s occurred that has challenged your ability to accurately budget and forecast.

[00:07:05] JL: Anything else, Gareth, that companies should be thinking about right now?

[00:07:10] GMS: I think as with everything accounting related, engaging with discussions with your excellent auditors early in the process is going to be really important. With all the uncertainty and fluidness going on right now, excellent auditors are going to be very, very concerned and not only with getting it right as they always have been but with the goal post potentially continuing to move and in who knows what direction. I would expect them to be very skeptical and that this would be a significant point of focus for any of their clients with goodwill and the balance sheets.

We think that for most businesses also, there would always be a presumption that there has been some kind of triggering event, and I think many of these discussions, again, require additional EQCR, national office, second partner reviews which obviously adds another level of complexity and potentially time in your audit. Getting ahead of it and having those discussions I think are going to be really important.

[00:08:02] JL: That’s really interesting, Gareth. Any other nuances that might be unique or challenging?

[00:08:08] GMS: I think there’s going to be a lot of judgment too around impairing less than 100% of the goodwill recorded, unless it's really clearly linked to reporting unit since outlying and maybe it’s doing well even in the COVID era, whereas some of the other reporting units are not. But I would foresee it had been difficult to demonstrate that we haven't had deteriorating macroeconomic conditions that doesn't impact every reporting unit within the company. I think this is going be a fairly burdensome exercise for a lot of folks.

Also, I think you might see a lot of CFOs and controllers just want to write off all their goodwill completely to avoid demonstrating the value. However, I don’t think that’s acceptable under US gap, and unfortunately you’re going to have to go through that process of determining the recoverability of goodwill.

[00:08:56] JL: So it’s tricky. It's going to be a tough evaluation for a lot of financial professionals within organizations. It’s going to take some real thought, due diligence, and consultation. Agreed?

[00:09:08] GMS: Absolutely, yeah. I think that this is – Everyone is going to be very skeptical and worried that what's next. What’s going to happen in the next 12 months? I think that’s going to impact our ability to accurately predict because I don't think we’re going to be able to accurately predict. Those discussions, pushing on assumptions and challenges are going to be there and are going to be fairly extensive I would think.

[00:09:33] JL: If you had any final comments, thoughts, challenges for the financial professionals listening in on the podcast today, what would be the final thing that you'd like to leave with them?

[00:09:47] GMS: I don’t want to sound like a broken record here, but as I said, I think trying to get in front of your excellent audits are really early in the process. Discuss your expectations agreement on the approach. It’s going to be critical in getting to the right answer but it’s also going to be critical getting it in a fairly efficient manner.

[00:10:04] JL: Great. Well, Gareth, thanks so much for your time today. It’s been a pleasure having you on the GrowthCast podcast and hope to have you back sometime in the near future.

[00:10:13] GMS: Again, thank you, John.

End of Interview

[00:10:15] JL: You’ve been listening to DHG GrowthCast with our special guest, Gareth Montague Smith. We hope that our discussion on goodwill impairment, the behaviors and triggering events that impact goodwill will prompt you to have meaningful discussions with your auditors. I’m John Locke and I look forward to reconnecting with you soon on an upcoming episode of DHG GrowthCast.

About DHG's GrowthCast

At DHG, our strength lies in our technical knowledge, our industry intelligence and our future focus. We understand business needs and are laser focused on company goals. In this ever-changing world, DHG’s Growthcast, provides insights and thought -provoking conversations on topics and trends that address growth opportunities and challenges in the current and future marketplace. Join us in discussing tomorrow’s needs today.

Disclaimer: The views and concepts expressed by today’s guests are their own and not those of Dixon Hughes Goodman LLP. Always consult with your legal and financial professional before taking any action.

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