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March 6, 2021

COVID impact on 2020 goodwill impairments

The financial community is very apprehensive about the amount of goodwill impairments from the 2020 reporting season. It is expected that the COVID pandemic will have a very heavy impact on impairments and balance sheets.

The highest impairments so far were reported in 2008, at the height of the global financial crisis. Back then, US listed companies reported total goodwill impairments of $ 188 bn.

The year-end reporting of the 2020 financial year is in full progress, and Q4 results are being released these days. So we don’t know yet the full-year impact for 2020. But what is known as of today gives little cause to hope that 2008 will remain on top of the negative ranking.

In May 2020, Suzi Taherian titled her contribution for the CFO Network of Forbes: “Over $200 Billion In Impairments To Hit Corporate Earnings“. The impact of COVID-19 is expected to be more severe than 2008 and there is potential for even greater impairments in 2020 versus in 2008.

These days, Duff & Phelps released its 2020 U.S. Goodwill Impairment Study, examining goodwill impairment (GWI) trends of over 8,800 U.S. publicly traded companies through December 2019. What was known at the date of writing in January 2021 (including Q3 reportings) was that the disclosed top 10 GWI events for 2020 reached a combined $54 bn, far surpassing the top 10 in 2019 (at $37.4 bn). With more substantial GWI events expected to happen during Q4.

Another source, Valuation Research Corporation, noted by early December 2020 that “there have already been more than 65 impairment writedowns this year, versus a little over 70 in all of 2019. It might be reasonable to assume they are just the tip of a very large iceberg.”

Like a rabbit caught in the headlights, the financial community is waiting for the final amount of goodwill impairments on the balance sheets of 2020. As if goodwill was a hot potato or a poison on balance sheets. FASB will also have a watchful eye and apply the results in their consideration of future accounting for goodwill and its amortization. The other side of the coin is, the need for impairments does not depend on goodwill alone, but on the relation between cash flow projections and the sum of all assets. If there is little goodwill, then other (intangible) assets need to be impaired. The poison pill is not goodwill, it is overpayment and/or economic downturn.

The good news is, stock prices have been strong.

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