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Total goodwill impairment charges continued to fall sharply across a number of industries nationwide throughout 2010, and the number of companies recording goodwill impairment charges dropped by 41 percent, according to a new study by KPMG.
This downward movement represents a continuation of the trend in 2009 when significantly fewer companies took less goodwill impairment charges compared to 2008.
Based on financial information from 1,879 U.S.-based publicly traded companies, goodwill impairment continued its decline to approximately $39 billion in 2010, down from $92 billion in 2009, a drop of almost 60 percent. In addition, the number of companies recording goodwill impairment fell from 217 to 129, accounting for only 7 percent of companies studied in 2010 compared to approximately 12 percent in 2009.
The KPMG study analyzes goodwill impairment for public companies from January 2005 through December 2010 and identifies those industries that were most heavily affected in 2010.
“With the improvement in the U.S. economy and stock market since 2009, and the large goodwill write-downs in prior years—particularly in 2007 and 2008—it appears the retreat in goodwill impairment charges being taken across industries is not an aberration from 2009 but a continuing trend,” said Seth Palatnik, a partner in KPMG’s Economic and Valuation Services practice.
Goodwill is a residual intangible asset that arises from business acquisitions where the amount paid for the company exceeds the fair value of the identifiable net assets of that company. According to Financial Accounting Standards Board ACS Topic 350, Intangibles – Goodwill and Other (originally issued as FASB Statement No. 142), goodwill is not amortized but is instead tested for impairment at the reporting unit level at least annually. Impairment exists when a reporting unit’s goodwill carrying amount exceeds its fair value.
“Similar to our previous studies on goodwill, the occurrence of goodwill impairment charges was spread across a number of industries, with consumer durables having the highest percentage —16 percent—of companies recording goodwill impairment charges as a percentage of industry participants analyzed,” said Palatnik. Diversified financials and media had 12 percent each, while food/staples retailing, and banks, accounted for 10 percent each.
The study found that in 2010 the hardest-hit industries in terms of actual dollar impairment charges taken were diversified financials, accounting for almost 36 percent of the total $39 billion in goodwill impairment charges, followed by telecommunication services and energy, accounting for 12 percent and 10 percent, respectively. Technology hardware and equipment companies registered the highest goodwill impairment charges in KPMG’s 2009 study -- almost 23 percent of the $92 billion in goodwill impairment charges. In 2010, technology hardware and equipment companies represented less than 1 percent of total impairment charges.
Overall, goodwill charges for the technology hardware and equipment companies decreased by more than 95 percent in 2010. Likewise, goodwill charges for the materials, capital goods, and energy industries also decreased significantly from 2009 to 2010.
The automotive and automotive component industry, as well as the retail industry, saw the greatest percentage declines in goodwill impairment charges, with no companies in either of these industries in the study taking a goodwill impairment charge in 2010.
Of particular note, due to the generally lower charges taken across all industries, the median goodwill impairment charge decreased from $97 million in 2009 to $27 million in 2010, a drop of approximately 72 percent.
Looking forward, Howard Scribner, KPMG partner and national leader of the Economic and Valuation Services practice, said: “In general, the amount and number of goodwill impairment charges should continue to trend downward as long as equity market valuations increase or remain stable.” The study, available at http://www.kpmginstitutes.com/taxwatch/insights/2011/evaluating-impairment-risk-in-2010.aspx, was based on financial information of more than 1,879 U.S.-based publicly traded companies across 24 industries, with minimum market capitalization of $500 million, revenues of $500 million, and assets of $300 million. The size of each industry segment ranged from 15 to 179 companies. The study evaluated goodwill impairment over a six-year period, on an annual basis.
Source: Accounting Today
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