Decline in Valuations May Mean Goodwill Impairment
Public company values fell sharply in 2008 and 2009, and even though they have recovered somewhat, they still are lower now than earlier in the decade. Although they are largely invisible to most people, private company valuations fell at least much during the same period. And when company values fall, then goodwill and some other intangible assets placed on the balance sheet after an acquisition must be tested and – potentially – written down.
The Financial Accounting Standards Board (FASB) published the rules regarding this in 2001, during another market downturn. ASC 350, Assets—Intangibles—Goodwill and Other (formerly FAS 142), requires that a company annually conduct a two step test. 1.) The company must compare the “fair value” of each reporting unit to its carrying value. 2.) If the “fair value” is less than the carrying value, then the company must allocate the reporting unit’s “fair value” to its individual assets and liabilities, including goodwill. If the “fair value” of goodwill is equal to or greater than the carrying value, then there is no impairment. However, if the “fair value” of goodwill is less than the carrying value, then there is an impairment loss equal to the difference in values.
What does that mean in plain English? If a company has in the past acquired another company and has kept it as a separate business unit, then it must test the value of the business unit. On the other hand, if a company has in the past acquired another company and comingled operations, not keeping a separate business unit, then it must test the value of the entire combined company.
The “test” involves comparing the current “fair value” of the business unit or combined company against its carrying or book value. If the “fair value” is lower than the carrying value, then there is an impairment. The “fair value” must be allocated to individual assets and liabilities. In the process, intangible assets – especially goodwill – will have to be written down in value.
Because many companies have experienced a decrease in value during the last few years, it is quite possible that a company with intangible assets – including goodwill – on its balance sheet will be required by its audit firm to apply ASC 350 and consider writing down the intangible assets.
The valuation professionals at Teknos can assist with this process, both by determining the “fair value” of a business unit or a private company and by valuing individual intangible assets. Many of our clients ask us to provide this service in conjunction with preparing a regular IRC 409A / ASC 718 valuation report for option issuance. Because there is some overlap in the projects, we can reduce the amount of work involved and pass the savings to our clients.
For assistance with ASC 350 reporting, please contact us at: .(JavaScript must be enabled to view this email address)