Goodwill impairment testing post-financial crisis: even with the financial crisis largely behind us, goodwill impairment continues to grab headlines. Here's an examination of the issues preparers should consider, given the FASB's updated guidance in ASU 2011-08 and regulatory concerns.

Author:Franceschi, Greg
Position:Valuation - Financial Accounting Standards Board - Accounting Standards. Codification

To have "goodwill" is generally understood to be favorably disposed upon by others. While the word bears a similar intent in financial accounting vernacular, it remains a difficult task to quantify the amount of goodwill that is bestowed upon a company, any company. Yet, it is not surprising that goodwill has diminished--literally and figuratively since the financial crisis.

According to the 2012 Goodwill Impairment Study conducted and recently released by Financial Executives Research Foundation and Duff & Phelps, corporate America has impaired almost $330 billion in goodwill in the five years since the onset of the financial crisis (data from 2007 to 2011).

And despite a significantly lower and a relatively stable level of annual goodwill impairments since the peak year of the study, goodwill impairment remains significant ($188 billion in 2008, $26-$30 billion in each of 2009 through 2011, and some substantial impairments have been reported in 2012).

What is Goodwill and Do Investors Pay Attention on its Impairment?

Goodwill represents the premium paid by a buyer over the fair value of the net assets acquired in a transaction. Its impairment, then, is a reflection on management's ability (or inability) to appropriately price a transaction and/or to effectively integrate that business to realize the anticipated synergies. Not surprisingly, there are two opposing views.

In simplifying its guidance on goodwill impairment testing recently, the Financial Accounting Standards Board (FASB) acknowledged in paragraph BC 10 of Accounting Standards Update 2011-08 that "many users of both nonpublic entity and public entity financial statements generally exclude goodwill impairment losses from their quantitative analyses" and the revisions were designed with the expressed objective of reducing the costs and complexity associated with performing the annual impairment test.

That's a long way of saying that goodwill and the impairment of goodwill is a nonevent to financial statement users or investors.

The FERF/Duff & Phelps study, however, offers an alternative perspective. Data shows companies that recorded goodwill impairment charges to have underperformed the S&P 500 Index for the 12 months prior to and subsequent to the month in which the impairment is publicly announced. The study examined returns in four six-month intervals (two before and two after) where the median level of underperformance ranged from 0.8 percent to 4.9 percent.

Further, the level of underperformance is at its worst in the seven-to 12-month period leading up to the announcement and progressively...

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