Asset Impairment Testing Triggering Events Related to COVID-19

May 8, 2020 | Article

If your company has goodwill or other long-lived assets, you are likely already familiar with annual impairment testing for those assets. Impairment testing is the process of considering if the fair value of an asset has fallen below its recorded cost.
 
In addition to annual evaluations of potential impairments, companies also need to be aware of other events that could cause the need to assess assets for impairment. These events are called triggering events.
 
What is a triggering event?
Triggering events are events or changes in circumstances that indicate that the fair value of an asset may be below its carrying amount. Typically, triggering events vary by asset class.

Asset Class Goodwill Indefinite-Lived Assets Long Lived Assets
Guidance ASC 350 ASC 350 ASC 360
Where to Test Reporting Unit (Potentially entity level if accounting alternative elected) Individual Asset Asset Group (lowest level of independent cash flow)
Order of Testing Third First Second
  Examples of Triggering Events
  Macroeconomic conditions including equity and credit markets

Industry and market considerations including declines in multiples or metrics or a change in the market for products or services

Cost factors that have a negative effect on earnings or cash flow

Declining financial performance compared to projections or recent periods

Entity specific events including changes in management, strategies, customers or litigation

Other items not specifically included above
Macroeconomic conditions including equity and credit markets

Industry and market considerations including declines in multiples or metrics or a change in the market for products or services

Cost factors that have a negative effect on earnings or cash flow

Declining financial performance compared to projections or recent periods

Entity specific events including changes in management, strategies, customers or litigation

Other items not specifically included above
Significant decrease in market price

Current expectation that it’s more likely than not that the asset will be sold or disposed of significantly before the end of the previously determined useful life.

Significant adverse chance in the business climate that could affect the asset

History of operating or cash flow losses or a projection of continuing losses associated with the asset

Significant adverse change in the extent or manner of which the asset is used or its condition

Other items not specifically included above

 
What do you do if a triggering event is identified?
Once you’ve identified a triggering event, consider how it would affect your impairment testing. Review your most recent appraisal or internal annual test and consider the inputs used to measure the assets. Two items to specifically consider are:

  • How does the event(s) change the expected inputs?
  • How does it affect you short term and mid-term outlook?

Consideration of these factors should include all relevant data, including the triggering event and opportunities to mitigate the effect of the triggering event. For example, if you lose a significant vendor relationship, could you fill the gap with other vendors, or would you expect cost and profitability to change? Based on the inputs and outlook, if there is a greater than 50% likelihood that the fair value is less than the recorded value, an impairment assessment would need to be completed.
 
What do you do if you have a triggering event that requires remeasurement?
If you have a triggering event that requires testing:

  • Focus on your business. If time allows, start planning for impairment testing requirements. While it’s easier to document the considerations in real time, it can wait until you ensure business continuity.
  • You’re not alone. While there are some industries that may not experience a triggering event during this time, they are likely the exception.
  • You don’t have to do it alone. Even if you’ve done your own impairment testing in years past, this year, you might want some assistance. Appraisers can be a great resource to keep you on track with financial reporting requirements. Consider contacting your appraiser early as they may be busier this year. Your audit or review team can provide you with referrals if you’d like to consider using an appraiser. Just remember that the referrals can’t be for the same firm, for independence reasons.
  • Start documenting today. Take notes and keep meeting minutes so you’ll be better prepared for the conversation with your audit team and appraiser.

Business continuity is more vital than ever

 
What date should be used in impairment testing?
Any potential impairment will be evaluated as of the point in time that the triggering event occurred, or the point at which the probability of a reduction in value was “more likely than not.” That date will be the date appraisers and auditors ask about short-term and mid-term expectations.
 
Is COVID-19 considered a triggering event?
For most industries, the economic effects of COVID-19 likely will be a triggering event as of the second quarter 2020. Essential businesses and select others may not have a triggering event, but the vast majority will experience a trigger event that should be considered. Recall that remeasurement only occurs if, as you consider all the factors, there is a greater than 50% likelihood that the fair value is less than the recorded value.
 
Does a private company that elected the accounting alternative for goodwill and amortizes goodwill need to consider triggering events?
If you have been amortizing goodwill, you still need to consider triggering events and may have to perform a test for impairment. But there is a silver lining. The amortization likely has decreased the carry value, which also decreases the likelihood of an impairment—but you still must consider it and test if appropriate.
 
We just completed our Purchase Price Allocation; do we really need to test again so soon?
We just took an asset impairment last year; do we really need to test again?
Yes, you still need to consider triggering events and potentially perform an analysis. The more recent the allocation or adjustment to value, the more likely an event would indicate an impairment. This is because the carry value was recently set at fair value, before the trigger, and potentially small events could “more likely than not” indicate a reduction in value compared to the carry value.  
 
Why You Need to Be Concerned About Triggering Events
The economic fallout attributed to COVID-19 is widespread and varied. You certainly aren’t alone if you’re experiencing business interruptions or other adverse conditions that will likely result in missed projections or negative cash flow this year. These conditions may be a sign of a triggering event.
 
Documenting the inputs for impairment testing today will minimize surprises and create an easier experience when you turn your attention to financial reporting.


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