Important trends in goodwil impairment.

Author:Roland, Gary

Approximately $21 billion of goodwill impairments were recorded by U.S. public companies in calendar year 2013, representing a 59 percent decrease from the $51 billion reported in the prior year, according to the Duff & Phelps 2014 U.S. Goodwill Impairment Study. The 2013 aggregate impairment is at the lowest level since the height of the financial crisis in 2008, which is also consistent with U.S. macroeconomic and stock market trends.

Of particular interest in this year's survey of Financial Executives International (FEI) members is the continued uptick in the use of Step 0, with public companies increasing their usage rate from 29 percent to 43 percent, and private companies following a similar trend, rising from 22 percent to 29 percent. Further, a significant number of public company respondents (42 percent) preferred to use the traditional quantitative test. Among respondents that did not have such preference, almost 75 percent indicated Step 0 was being used for some or all reporting units, marking a significant increase over last year's 53 percent.

Recognizing that the population of respondents to the surveys varies from year to year, and that the survey results are based on a relatively small number of respondents, Duff & Phelps undertook an additional independent analysis of public company disclosures to further examine the trend of Step 0 use for public companies. This Step 0 Study indicated an overall increase in the application of the qualitative goodwill assessment by public companies from 33 percent to 41 percent, consistent with the FEI survey findings.

History of the Studies

Duff & Phelps and the Financial Executives Research Foundation (FERF) first published the results of their Goodwill Impairment Study in 2009. This inaugural study examined U.S. publicly traded companies' recognition of goodwill impairment at the height of the financial crisis (the end of 2008 and the beginning of 2009), as well as the findings of a survey of FEI members. The 2010 Goodwill Impairment Study expanded the time horizon over which goodwill impairments were studied to five years, and modified the dataset to enable a more in-depth assessment of goodwill impairment trends over time. Industry Spotlights were introduced in 2012, along with cross-tabulation analyses.

The 2013 study added two new comparison tables that bridged industry trends along with other summary data; these tables have been updated and continue to be included this year.

Goodwill Landscape

Now in its sixth year of publication, the 2014 study continues to examine general and industry goodwill impairment trends observed through December 2013, and reports the 2014 results of the annual goodwill impairment survey of FEI members.

Figure 1 captures the evolution of goodwill in the study from 2009 through 2013 to aid in assessing goodwill balances and goodwill impairment trends over time. Mergers and acquisitions (M&A) activity summarizes the transactions (both number of deals and value) by U.S. publicly-traded companies to acquire a 50 percent or more controlling interest (as only a change of control would trigger the recording of goodwill).

2014 Highlights and Trends

* U.S. companies in the study recorded $21 billion of goodwill impairment in 2013, a 59 percent decrease from $51 billion in 2012. This marks the lowest aggregate impairment amount since the level reported in 2008, at the height of the financial crisis.

* The concentration of goodwill impairments attributable to the three largest impairment events declined from 47 percent to 22 percent.

* Industry concentration also declined, with 52 percent of the 2013 aggregate amount of goodwill impairments attributable to three industries: materials, health care and industrials (versus 67 percent for the top three industries in 2012).

* Overall deal volume and value declined for transactions involving a greater than 50 percent interest acquired by U.S. publiclytraded acquirers (see Figure 1). There was a 47 percent decrease in deal value...

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