Impairment Considerations Arising from COVID-19
The COVID-19 global pandemic, as announced by the World Health Organization on March 11, 2020, has brought about market volatility, resulting in a downturn in general business conditions. This has significantly impacted companies’ financial performance with factors such as workforce restrictions, weakened demand for products and services, travel restrictions, supply chain disruption, just to name a few. While some industries and businesses may be more at risk, there is still overall uncertainty in the market from both a social and economic standpoint. This type of environment can negatively impact key assumptions in financial projections and the valuation of a company, creating a need to review goodwill and other assets.
A goodwill impairment test may be necessary, but assessing whether a triggering event has occurred is paramount. The key in assessing whether a triggering event has occurred is to understand if this is just a temporary decline or a sustained decline in future earnings. Questions to consider when evaluating the need for an impairment test may include:
- Has your supply chain been interrupted and affecting your production?
- Have workforce limitations affected servicing your customers or selling/manufacturing your products?
- Have you lost business due to cancellation of events or closure of facilities?
- Are your clients/customers having difficulty paying invoices or even staying in business?
If ‘yes’ is the answer to any of these questions, a triggering event may have occurred and impairment testing may be in order. For further clarification, visit the SEC website for guidance regarding COVID-19 disclosures.
There could be consequences of not assessing and performing impairment testing if a triggering event has occurred. This could result in potential misstatements of financial statements leaving companies open to litigation for fraudulent conveyance as investors question whether or not they were misled.
The triggering event assessment and potential subsequent impairment testing also applies to private companies that have elected to amortizing goodwill.
As these events unfold, Cherry Bekaert is here to assist companies in evaluating how COVID-19 may impact their impairment testing.