As a result of COVID-19’s expanding impact on business operations and business continuity, both auditors and the accounting regulatory bodies are likely to direct more attention to whether indefinite-lived intangible asset balances, other long-lived asset balances, and goodwill balances reported by affected companies (or companies operating in affected industries) have become impaired. If you are currently leading the finance or accounting department of a company that has been significantly impacted by COVID-19 and are evaluating whether impairment testing may be appropriate, questions that may be appropriate to ask yourself include:
- Did my team rely on a “Step 0” qualitative assessment to satisfy the company’s most recent annual impairment testing requirement related to goodwill and/or indefinite lived intangible asset(s)?
- Was there less than a 10% cushion between the fair value of any reporting units and their respective carrying values as of the most recently completed goodwill impairment test?
- Has my company’s market capitalization fallen below the carrying value of net assets (i.e., book value of equity)?
- Is “social distancing” directly impacting whether customers are visiting my company’s stores or seeking my company’s products or services?
- Are challenges within my company’s supply chain affecting my company’s ability to fulfill customer orders and, accordingly, meet forecasted revenues?
- Are challenges within my company’s supply chain resulting in increases in the cost of the products that my company sells and, accordingly, impacting my company’s reported net income?
- Is the impact of COVID-19 requiring my company to rethink the manner in which it (a) has conducted its operations or utilized its long-lived assets in the past and/or (b) will conduct its operations or utilize its long-lived assets in the future?
- Is my business subject to sustained disruption and/or negative impact, even if the spread of COVID-19 were to cease tomorrow or in the near future?
- Am I considering the recognition of a valuation allowance or planning to increase the current valuation allowance recorded against my deferred tax asset balance due to a change in my outlook related to future performance or financial results?
If the answer to any of these or similar questions is “yes,” you may find yourself subject to increased pressure to perform interim period impairment tests related to goodwill, indefinite-lived intangible assets, and/or long-lived assets. Even if you do not believe that your company’s goodwill, indefinite-lived intangible assets, or other long-lived assets will ultimately be impaired, incremental documentation may be required by your auditors to support your conclusion(s) and/or incremental disclosures may be warranted to address your exposure or sensitivity to impairment due to the constant and volatile changes to current market conditions.
We, at MorganFranklin, recommend that you engage in early conversations with your Board of Directors, Audit Committee, and auditors to discuss the risk of and/or potential need for impairment charges. We also recommend that you revisit your internal control and disclosure control protocols to ensure that they are appropriately designed to address any potential impairment issues that may arise under the current unstable and volatile economic and market conditions. While your ultimate conclusions regarding impairment will continue to be subject to significant assumptions and judgments that may evolve with the response to the spread of COVID-19, we believe that it is imperative for you to take real-time steps to address and document your conclusions regarding any potential risk of impairment in order to facilitate appropriate dialogue regarding impairment concerns with your auditor and to avoid the risk of delayed or late financial reporting.
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Do you need help thinking through impairment matters or other accounting, reporting, and internal control matters that may arise or have already arisen as a result of the rapid spread of COVID-19? MorganFranklin Consulting is here to support. Our Technical Accounting Solution Center (TASC), Valuation specialists, and Sarbanes-Oxley (SOX) experts are available to assist with any challenges that you may encounter during these unprecedented times. Contact us today!