U.S. public companies recorded $28.5 billion in goodwill impairment in 2016, half the $56.9 billion they reported in 2015, according to a new study.
The study, by the valuation firm Duff & Phelps and released this week at Financial Executives International’s Current Financial Reporting Issues conference in New York, found the number of impairment events fell from 350 in 2015 to 288 in 2016, while the average amount of goodwill impairment per event declined by nearly 40 percent.
A total of $278 billion of goodwill was added to U.S. companies’ balance sheets last year, the second highest amount since 2008, reflecting the strong M&A climate.
“The decrease in goodwill impairments in 2016 correlates with general trends in the financial markets," said Duff & Phelps managing director Greg Franceschi, co-chairman of the AICPA Goodwill Impairment Task Force, in a statement. "There was a marked change in investor sentiment towards the end of 2016, which was accompanied by a rally in equity markets to record highs.”
The report noted that the plunge in the 2016 aggregate impairment amount was consistent with general trends in the financial markets. At the start of 2016 the world economy was still dealing with faltering growth and financial market turbulence, but by the end of the year, the picture had changed dramatically. There was a significant improvement in investor sentiment towards the end of November, accompanied initially by a rise in global interest rates, a sharp narrowing of credit spreads, a strengthening of the U.S. dollar, and a rally in equity markets to record highs. Even though the U.S. economy expanded last year at its slowest pace since 2011, investors anticipated new pro-growth policies and continuing monetary policies by major central banks to drive growth in 2017.
Energy had the biggest decline in goodwill impairment in 2016, falling approximately 60 percent compared to 2015, in both the amount and number of impairment events, reflecting a significant recovery in oil prices during the year. Nevertheless, four of the top ten largest impairment events of 2016 occurred in the energy sector.
The information technology sector also experienced a significant decrease in the amount of goodwill impairment, declining 68 percent.
Aggregate goodwill impairment amounts decreased in nine out of the 10 industries analyzed in the study, with health care being the only exception.
Among public companies who responded to the survey, 52 percent reported that they use the optional qualitative goodwill impairment test (also known as “Step 0”), a decline from 59 percent in 2015, while private company use slipped from 50 to 45 percent. The results suggest that the use of Step 0 could be a stabilizing factor, with approximately 50 percent of all respondents applying the qualitative test.
FASB simplified the goodwill impairment test in January, eliminating “Step 2” of the test. Half the survey respondents indicated they haven’t yet assessed the impact of the change ahead of the mandatory effective date. Of those who have, 70 percent anticipate the impact will be minimal in terms of the frequency and magnitude of impairments.
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