PCAOB continues to highlight goodwill/impairment issues

BVWireIssue #82-3
July 22, 2009

The most recent audit inspection reports by the Public Company Accounting Oversight Board (PCAOB) emphasize the importance of recognizing, testing, and accounting for impairments of goodwill under FAS 142, Goodwill and Other Intangible Assets, as amended. For instance, in one of its inspections of a large accounting Firm (July 9, 2009), the PCAOB notes:

In this audit, when reviewing the issuer's assessment of goodwill for impairment, the Firm failed to test the revenue and expense projections, including the underlying assumptions, used to estimate the fair value of the issuer's largest reporting unit. In addition, the Firm failed to evaluate whether certain intercompany payables were appropriately included in the carrying amount of the reporting unit…

Similarly, in its latest summary of 2004, 2005, 2006, and 2007 Inspections of Domestic, Annually Inspected Firms, (December 15, 2008), the Board found generally that:

Inspection teams observed instances of inadequate testing by firms of fair value estimates in connection with firms' evaluation of the possible impairment of goodwill and other long-lived assets. The inspectors observed instances where firms had not tested the reasonableness of management's significant assumptions and the underlying data that the issuers had used in valuation models. As a result, the auditors did not have sufficient evidence to conclude on the issuers' estimates of fair value. For example, the inspectors identified instances where significant assumptions, such as the future revenue growth rate, operating margins, discount rates, and terminal values, were either not tested at all, or were tested only through discussions with management. In some of these situations, management's assumptions were that revenues would increase significantly in the near future despite evidence to the contrary, such as recent declining revenue trends or known increases in competition in the issuer's industry. Inspection teams also observed instances where firms had not challenged management's conclusions that assets did not need to be tested for impairment, despite evidence of impairment indicators…

Don’t miss this opportunity to nail down all the important impairment issues. Given the increasing complexity of accounting for goodwill impairment during these volatile financial times, valuation analysts will want to tune into BVR’s next teleconference, “Goodwill Impairment in a Troubled Economy,” featuring Ed Morris, Jim Alerding, and Brian Steen, which takes place tomorrow, Thursday, July 23 at 10:00am PT/1:00pm ET. Attendees will receive two CPE credits. To register, click here.

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