Majority of companies will ‘go it alone’ on goodwill impairment

Is there a role for the independent valuation specialist under the FASB’s new “qualitative” option for assessing goodwill impairment? That was a hot topic of discussion at the third annual Fair Value Summit sponsored by the ASA San Francisco earlier this month. “We’re hearing that a great number of clients are electing to ‘go it alone’ this year,” commented Glen Kernick (Duff and Phelps), who moderated a panel on the FASB’s Accounting Standards Update (ASU) No. 2011-08, Intangibles—Goodwill and Other (Topic 350), Testing for Impairment (Sept. 2011). In fact, according to a recent survey of FEI members by Duff and Phelps, the vast majority (81%) indicated they would perform the qualitative assessment used to bypass step one of the traditional goodwill impairment on their own, without enlisting a third-party valuation firm or analyst. That will certainly save costs for public as well as private companies—which was the “driving force” behind the ASU, Kernick said. But the risks of not using an independent valuator may also carry high costs, particularly given the current volatility of global markets. Plus, any companies on the “borderline” will most likely have to submit their assessments to audit or regulatory review (SEC, PCAOB), and the amount of work this will require “is not a whole lot different” than what an independent valuation would entail, since the latter has many of the factors involved in the qualitative assessment already “baked in,” Kernick said, and “the cost savings would not be great.”

Additional highlights of the D&P/FEI survey:

  • Nearly half (48%) of private companies perform their annual impairment testing in December, compared to only 15% of public companies, which perform the testing earlier—most commonly in November (17%), October (21%), or July (11%).
  • Entity-specific operating changes prompt most public companies (43%) as well as private (53%) to perform an interim goodwill impairment test.
  • In performing step one of the traditional goodwill impairment test, the majority (71%) of private companies compare fair value of the enterprise to their respective carrying amounts, compared to 53% of public companies.
  • If control premiums enter into the analysis, 71% of public companies used general-market based studies compared to 53% of private companies.