Goodwill impairment on the rise

The total amount of goodwill impairment recorded by U.S. public companies climbed 23 percent last year, reaching $35.1 billion in 2017, according to a new study, while the average goodwill impairment per event rose 21 percent to $120 million.

The 2018 U.S. Goodwill Impairment Study by Duff & Phelps is the 10th annual study by the consulting firm. The study examines goodwill impairment trends at more than 8,400 U.S. publicly traded companies through December 2017. In the previous study, Duff & Phelps found a sharp decrease in goodwill impairment, going from $56.9 billion to $28.5 billion, thanks to the stock market (see Goodwill impairments declined nearly 50% last year).

It found that nearly $319 billion of goodwill was added to U.S. companies’ balance sheets during 2017, the highest level since 2008, thanks to an abundance of mergers and acquisitions. For 2018, aggregate goodwill impairment, or GWI, is on pace to bypass 2017, with current disclosures indicating that the top three GWI events this year alone will approach $30 billion.

Seven of the 10 industries analyzed saw their aggregate GWI amounts increase in 2017, with the exception of the energy and information technology industries. The consumer discretionary sector was the hardest hit industry, seeing its overall GWI increase 71 percent last year to $9.3 billion. Energy, the worst-impacted industry for three consecutive years (2014-2016), saw the most noticeable improvement in 2017, as GWI declined 80 percent thanks to rising oil prices.

“Despite strength in both the global economy and U.S. equity markets, U.S. companies experienced an increase in aggregate impairment amounts in 2017,” said Greg Franceschi, managing director and global leader of Duff & Phelps’ Financial Reporting Valuation Practice, in a statement. “Goodwill may be exposed to future impairments particularly given the record $319 billion of goodwill added to corporate balance sheets during 2017 — a reflection of robust M&A activity fueled by the favorable economic and market conditions in 2017. In fact, this is the highest level of aggregate goodwill added since Duff & Phelps began compiling this data in 2008.”

In January 2017, the Financial Accounting Standards Board eliminated Step 2 of the goodwill impairment test in an accounting standards update, but the effective date for U.S. public companies with a calendar year-end isn’t until the beginning of 2020. ASU 2017-04 allows for early adoption, though, and this year’s study found that, of the companies recording the top 10 largest goodwill impairment events in 2017, 80 percent have already adopted the new simplified test.

A companion study by Duff & Phelps on goodwill impairment in the European market is expected to be released early next year. For more information, click here.