Is COVID-19 a Triggering Event for Impairment Testing?

The longest-operating bull market place considering that Environment War II commenced in March 2009, and more than the past few years, quite a few debated “when, not if,” a downturn would occur. But no one particular could have predicted that a worldwide pandemic would lead to unparalleled disruption and dislocation in the cash marketplaces and the fastest conclude to a bull market place in heritage.

As of March 23, the S&P five hundred experienced fallen approximately thirty{744e41c82c0a3fcc278dda80181a967fddc35ccb056a7a316bb3300c6fc50654} from its February highs. Though the marketplaces have recovered fairly, quite a few industries have been strike difficult. Reporting entities will now need to have to look at whether or not the influence of COVID-19 and the resultant market place downturn constitutes a triggering celebration for functions of goodwill, intangible asset, and fastened-asset impairment screening.

Just before we delve into likely triggering situations, we considered a fast recap on impairment screening demands below U.S. Usually Accepted Accounting Concepts (GAAP) for numerous asset lessons would be useful.

Impairment Screening Requirements

	Goodwill	Indefinite-Lived Intangibles	Lengthy-Lived Assets (together with Finite-Lived Intangibles)
Pertinent Assistance	ASC 350	ASC 350	ASC 360
Screening Requirements	Per year and upon triggering celebration (for private firms electing accounting alternate, only upon triggering celebration)	Per year and upon triggering celebration	Upon triggering celebration
Degree of Screening	Reporting unit (working segment or element)	Personal asset	Asset team (lowest degree of impartial dollars move)
Method of Screening	One particular action on a honest price (e.g., discounted dollars move) foundation	One particular action on a honest price (e.g., discounted dollars move) foundation	Two techniques – initially action on an undiscounted dollars move foundation, 2nd action on a honest price foundation
Purchase of Screening (Assets Held and Utilised)	Third	1st	2nd
Purchase of Screening (Assets Held for Sale)	2nd	1st	Third

 

Triggering Occasions

Triggering situations vary for goodwill/indefinite-lived intangibles and long-lived assets. That said, an impairment of goodwill or indefinite-lived intangibles may possibly induce the need to have to perform impairment screening for long-lived assets. In addition, and although not specifically recognized in ASC 360, substantial entity-degree situations may possibly induce impairment screening for long-lived assets. Below are illustrations of triggering situations for goodwill/indefinite-lived intangibles and long-lived assets, respectively.

Goodwill and Indefinite-Lived Intangibles	Lengthy-Lived Assets (together with Finite-Lived Intangibles)
Macroeconomic circumstances (deterioration in general financial circumstances)	Sizeable minimize in market place rate of a long-lived asset (asset team)
Marketplace and market place issues (deterioration in the surroundings in which a business operates)	Sizeable adverse change in the extent or method in which a long-lived asset (asset team) is being utilised or in its actual physical affliction
Expense components (boosts in uncooked products, labor, and so on.)	Sizeable adverse change in legal components or in the business enterprise local climate
Overall fiscal general performance (destructive or declining dollars flows, decrease in real or planned profits or earnings)	Accumulation of charges significantly in surplus of the total originally envisioned for the acquisition or development of a long-lived asset team
Other relevant entity-specific situations (improvements in administration, critical staff, approach, and so on.)	Present-day-interval, historic, or projected working or dollars-move decline affiliated with the use of a long-lived asset team
Occasions impacting a reporting unit (change in composition of web assets, expectation of disposing all or a part of the reporting unit)	Expectation of disposing a long-lived asset or asset team just before the conclude of its beneficial daily life
Sustained minimize in share rate (in complete terms or relative to friends)

 

Naturally, specified triggering situations listed higher than will be far more relevant to the recent surroundings than others. With respect to COVID-19, we believe firms should specifically look at the pursuing likely triggering situations.

Macroeconomic circumstances this sort of as a deteriorating on in general financial circumstances, constraints on accessing cash, fluctuations in foreign trade prices, or other developments in equity and credit rating marketplaces

Evidently, COVID-19 has impacted macroeconomic circumstances globally. Equity marketplaces have viewed dramatic decreases in price in a shorter interval of time. We have also witnessed unparalleled volatility in the worldwide marketplaces it is tricky to predict how marketplaces will seem tomorrow, allow by itself one particular to two months from now.

Governments have begun to intervene as they try to avoid a prolonged recession. From a U.S. viewpoint, it is unfamiliar whether or not or when attempts to “flatten the curve” will be successful and permit the place to get again to business enterprise as usual. As this carries on to unfold and a increased data set is offered for analysis, we will have a superior perception as to the shorter-, medium-, and long-time period impacts on the worldwide economic system.

Marketplace and market place issues incorporate elements this sort of as a deterioration in the surroundings in which an entity operates, an amplified competitive surroundings, a decrease in market place-dependent multiples or metrics (thought of in the two complete terms and relative to friends), a change in the market place for an entity’s products and solutions or providers, or a regulatory or political growth

Though approximately all firms have been influenced in some way by COVID-19, specified industries have been far more adversely impacted than others. The airline marketplace was down approximately 60{744e41c82c0a3fcc278dda80181a967fddc35ccb056a7a316bb3300c6fc50654} in the previous month, based on the S&P five hundred Airlines Marketplace Index. Cruise line stocks are down as a great deal as 87{744e41c82c0a3fcc278dda80181a967fddc35ccb056a7a316bb3300c6fc50654} 12 months-to-date. In addition, bar and cafe stocks are down more than 40{744e41c82c0a3fcc278dda80181a967fddc35ccb056a7a316bb3300c6fc50654} in the previous month, based on the Dow Jones U.S. Dining establishments & Bars Index, with person cafe stocks down as a great deal as 90{744e41c82c0a3fcc278dda80181a967fddc35ccb056a7a316bb3300c6fc50654}. Conversely, specified firms have viewed an increase in demand from customers for their products and solutions and providers throughout this time.

With this context, it is apparent specified industries will need to have to look at impairment screening sooner than others and most likely prior to their annual screening date. In identifying whether or not a triggering celebration has occurred, firms should look at all points and situation, together with the near- and medium-time period outlook for demand from customers for products and solutions and providers in their specific marketplace.

Overall fiscal general performance incorporates this sort of components this sort of as destructive or declining dollars flows or a decrease in real or planned profits or earnings in comparison with real and projected final results of relevant prior periods

In light of the COVID-19 crisis, quite a few firms have already warned that earnings will be lessen than forecasted. Public firms representing a wide spectrum of industries have significantly minimized or eradicated earnings direction. It will most likely acquire some time for firms to evaluate the influence of COVID-19 on their specific business enterprise and to update their forecasts to account for it. Once firms are able to evaluate impacts to real and forecasted final results, they should look at whether or not this sort of impacts depict a triggering celebration.

In executing so, the threshold for identifying whether or not a triggering celebration has occurred may possibly vary by reporting entity. For illustration, reporting entities that consummated a recent content acquisition or experienced a recent prevalence of goodwill impairment are at far more possibility. Any minimize in long run dollars move expectations would most likely result in an incremental impairment as opposed to a reporting entity that passed its most recent impairment exam by a large margin.

If relevant, a sustained minimize in share rate (look at in the two complete terms and relative to friends)

To be apparent, a decrease in the overall stock market place is not, in and of by itself, automatically a triggering celebration. The stock market place can be extremely volatile, and the intent of the direction is not to induce a wave of impairments just about every time the stock market place swings. This is why ASC 350 specifically utilizes the phrase “sustained minimize.”

Unfortunately, the direction does not determine or prescribe what is meant by “sustained.” Specific firms and industries may possibly already be able to assert, with a superior degree of self-assurance, that their recent share rate declines will be “sustained,” but we do not have the requisite data set to identify whether or not this will be correct for the overall market place or much less directly impacted firms and industries.

Regardless of whether or not or not it is determined that an rapid triggering celebration has occurred, it is critical that community firms incorporate ideal disclosures as to the pitfalls introduced by COVID-19 and the recent financial surroundings. To the extent that this sort of circumstances persist and turn out to be an impairment induce, the SEC will hope that firms have offered an ideal degree of foreshadowing in their community filings.

Steve Hills is a managing director and head of the specialized accounting consulting practice at Stout,a worldwide advisory agency. Dave Lindstrom is a director in the valuation advisory team.

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