What if you had a trove of fresh valuation data and insights at your fingertips when making decisions about investing in your company’s future? If you’ve completed a goodwill impairment valuation, you are likely sitting on an information gold mine but may not be getting the full benefit.
Goodwill impairment is gaining attention after US regulators recently walked back plans to replace the required testing for impairment with a more straightforward amortization approach. In addition, goodwill impairment valuations may become more frequent in the near term given the recent and expected volatility in the stock market increasing the potential for impairment.
While the Financial Accounting Standards Board’s decision to keep the requirement for goodwill impairment (ASC 350) may not seem like a moment to celebrate for those who approach this task with gritted teeth and a compliance mentality, we have seen that companies that use the process as an input for strategic decision-making can obtain significant competitive value from the exercise.
Goodwill is recorded after an acquisition and reflects the price paid in excess of the identifiable net assets. The impairment charge is the adjustment companies must make if the fair value of a reporting unit falls below the balance sheet value. Under US GAAP, companies are required to test for goodwill impairment at least annually, as well as on an interim basis if there is a triggering event for potential impairment.
Hidden insights from goodwill impairment valuations
Goodwill impairment valuations, which are effectively sum-of-the-parts analyses, can help management:
- Hold a strategic conversation about the company’s business portfolio, including deciding which businesses warrant additional investment capital, and which may be candidates for fixing or divesting
- Use the required reporting unit valuations, as well as supplementary valuations of segments, divisions and lines of business, to impose good governance on investment decisions
- Communicate the company’s capital allocation strategy to leadership and the board
- Obtain insights provided by a long-range forecast, which may already be available as part of the goodwill valuation but are not being reviewed by strategy and financial decision-makers
Even when there is little or no risk of impairment, we find some companies elect to perform an annual goodwill valuation, instead of the qualitative test, because they have found it a valuable input to fiscal planning. Equity analysts regularly use sum-of-parts valuations in their research because of the insights they provide.
There’s evidence that plenty of organizations understand the value of goodwill impairment valuations. In Strategic Valuations 2022, a recent EY survey of 150 CFOs, respondents said the three most important internal uses for valuations are strategic planning and portfolio analysis (47%), budgeting and long-range forecasting (43%) and capital allocation decisions (37%). [Figure 1]
Goodwill impairment has many uses
Q: For which internal purposes do you currently use goodwill impairment valuations? (select up to 4)