Goodwill impairment is often a red flag, signaling that a business acquisition has failed to meet management's expectations. It may reveal underlying challenges, from market volatility to operational inefficiencies, that can erode a company’s financial health. With uncertain economic landscapes, persistent inflation, and rising interest rates, goodwill impairments are steadily becoming a focal point for businesses and investors alike.
But how do you assess whether your business might be at risk? And what can you do to manage goodwill impairment effectively? This blog explores the trends, accounting nuances, and proactive steps every business owner, finance professional, and investor should know.
Goodwill impairments have become a significant issue over the past few years, reflecting shifting market dynamics. Take a look at the recent data:
The trend seems to be holding in 2024. For example, Walgreens reported a staggering $12.4 billion pretax goodwill impairment in Q1 2024, partly due to its acquisition of VillageMD. Economic uncertainty suggests other companies may face similar write-downs as the year progresses.
It’s also important to note that these figures largely exclude private companies, whose financial reporting isn’t publicly available. Given the typical lag in financial reporting between public and private sectors, the actual scope of goodwill impairment may be even broader.
Before unpacking goodwill impairment, it’s crucial to understand what goodwill represents on a company’s financial statements. Goodwill is an intangible asset recorded when a business is purchased for more than the fair value of its identifiable net assets (tangible assets, intangible assets, and liabilities). It reflects the premium paid for a company’s brand reputation, customer relationships, or other unquantifiable advantages.
Goodwill is more than just a number on a balance sheet—it’s a lens through which you can evaluate the success of a business combination over time.
Under U.S. Generally Accepted Accounting Principles (GAAP), companies must test goodwill annually for impairment. Additionally, businesses must assess goodwill whenever a "triggering event" occurs that could diminish its value.
Private entities can elect to simplify goodwill accounting under Accounting Standards Update No. 2014-02. The key differences include:
Not all private businesses adopt these simplified practices. Larger private companies, especially those considering a public offering, often choose to follow public company regulations for consistency and credibility.
Both internal and external factors can diminish the value of goodwill. These include:
For example, after an acquisition, if an economic downturn causes the parent company to lose substantial value, this could result in goodwill impairment.
For public companies, goodwill impairments can send shockwaves through the market. A single impairing event can affect earnings reports, shareholder confidence, and the company’s stock price. Meanwhile, private companies might experience funding challenges and strained relationships with lenders if goodwill impairment signals instability.
Proactively monitoring and reporting goodwill is key—especially for private businesses that often defer impairment evaluations until the end of their accounting periods.
Goodwill impairment doesn't have to be a ticking time bomb. Here are some steps your business can take to stay ahead:
Impairment testing doesn’t have to feel like a burden. By staying vigilant and conducting periodic tests—even if not required—you minimize surprises. Align your testing process with your company’s strategic goals.
If you're planning an acquisition, due diligence is non-negotiable. Analyze the target’s financial health, industry position, and growth potential. An overvalued purchase price is often at the heart of significant future write-downs.
Pay close attention to market trends, competitor activity, and economic indicators that could impact goodwill values. Regularly assess potential triggering events within your industry.
Goodwill impairment calculations often involve complex modeling and forecasts. Partnering with experienced advisors can help you interpret results and maintain transparent reporting for stakeholders.
Goodwill impairment is a critical financial metric that deserves your attention—not just during audits, but throughout your company's growth trajectory. Whether you're monitoring existing goodwill, preparing for acquisitions, or aiming for transparent reporting, SD Mayer & Associates is here to guide you.
With our expertise in financial strategy, risk management, and accounting standards, we help businesses like yours safeguard their financial health. Don’t leave goodwill impairment to chance. Contact us today to ensure your company stays ahead of the curve.