Is COVID-19 a Triggering Event for Impairment Testing?

The longest-running bull market due to the fact Globe War II began in March 2009,

The longest-running bull market due to the fact Globe War II began in March 2009, and above the past handful of yrs, a lot of debated “when, not if,” a downturn would happen. But no just one could have predicted that a international pandemic would direct to unprecedented disruption and dislocation in the capital marketplaces and the quickest close to a bull market in history.

As of March 23, the S&P five hundred experienced fallen just about thirty% from its February highs. Though the marketplaces have recovered considerably, a lot of industries have been strike tough. Reporting entities will now need to look at no matter whether the effect of COVID-19 and the resultant market downturn constitutes a triggering celebration for uses of goodwill, intangible asset, and fastened-asset impairment testing.

In advance of we delve into opportunity triggering situations, we thought a quick recap on impairment testing specifications under U.S. Commonly Recognized Accounting Concepts (GAAP) for various asset courses would be practical.

Impairment Screening Specifications
Goodwill Indefinite-Lived Intangibles Extended-Lived Assets (which include Finite-Lived Intangibles)
Appropriate Steering ASC 350 ASC 350 ASC 360
Screening Specifications  

Per year and upon triggering celebration (for non-public firms electing accounting alternate, only upon triggering celebration)

Per year and upon triggering celebration Upon triggering celebration
Level of Screening Reporting unit (operating segment or ingredient) Specific asset Asset team (lowest stage of independent cash move)
Strategy of Screening  

One stage on a reasonable benefit (e.g., discounted cash move) basis


One stage on a reasonable benefit (e.g., discounted cash move) basis


Two steps – very first stage on an undiscounted cash move basis, second stage on a reasonable benefit basis

Order of Screening (Assets Held and Utilised) 3rd First Next
Order of Screening (Assets Held for Sale) Next First 3rd


Triggering Activities

Triggering situations differ for goodwill/indefinite-lived intangibles and lengthy-lived property. That explained, an impairment of goodwill or indefinite-lived intangibles may possibly trigger the need to conduct impairment testing for lengthy-lived property. In addition, and though not especially identified in ASC 360, substantial entity-stage situations may possibly trigger impairment testing for lengthy-lived property. Below are illustrations of triggering situations for goodwill/indefinite-lived intangibles and lengthy-lived property, respectively.

Goodwill and Indefinite-Lived Intangibles Extended-Lived Assets (which include Finite-Lived Intangibles)

Macroeconomic conditions (deterioration in standard financial conditions)


Considerable lower in market price of a lengthy-lived asset (asset team)

Marketplace and market issues (deterioration in the ecosystem in which a firm operates) Considerable adverse change in the extent or fashion in which a lengthy-lived asset (asset team) is becoming made use of or in its physical problem

Expense things (improves in uncooked supplies, labor, and so on.)


Considerable adverse change in lawful things or in the small business weather


All round economic overall performance (damaging or declining cash flows, decline in real or prepared revenue or earnings)


Accumulation of expenses noticeably in surplus of the quantity originally predicted for the acquisition or building of a lengthy-lived asset team

Other pertinent entity-unique situations (improvements in administration, important staff, system, and so on.) Recent-period of time, historic, or projected operating or cash-move reduction associated with the use of a lengthy-lived asset team

Activities impacting a reporting unit (change in composition of web property, expectation of disposing all or a part of the reporting unit)

Expectation of disposing a lengthy-lived asset or asset team prior to the close of its practical lifestyle
Sustained lower in share price (in complete phrases or relative to peers)


Obviously, certain triggering situations shown over will be additional pertinent to the present-day ecosystem than other folks. With respect to COVID-19, we believe that firms should especially look at the adhering to opportunity triggering situations.

Macroeconomic conditions this sort of as a deteriorating on in standard financial conditions, restrictions on accessing capital, fluctuations in foreign exchange prices, or other developments in fairness and credit history marketplaces

Plainly, COVID-19 has impacted macroeconomic conditions globally. Equity marketplaces have found dramatic decreases in benefit in a short period of time of time. We have also witnessed unprecedented volatility in the international marketplaces it is tough to forecast how marketplaces will search tomorrow, enable by itself just one to two months from now.

Governments have begun to intervene as they try to avoid a prolonged economic downturn. From a U.S. viewpoint, it is unknown no matter whether or when endeavours to “flatten the curve” will be successful and allow the place to get again to small business as usual. As this carries on to unfold and a larger info established is accessible for examination, we will have a greater perception as to the short-, medium-, and lengthy-expression impacts on the international economic system.

Marketplace and market issues consist of elements this sort of as a deterioration in the ecosystem in which an entity operates, an amplified competitive ecosystem, a decline in market-dependent multiples or metrics (regarded as in the two complete phrases and relative to peers), a change in the market for an entity’s items or companies, or a regulatory or political progress

Though just about all firms have been influenced in some way by COVID-19, certain industries have been additional adversely impacted than other folks. The airline business was down just about sixty% in the last thirty day period, based on the S&P five hundred Airways Marketplace Index. Cruise line shares are down as considerably as 87% 12 months-to-date. In addition, bar and restaurant shares are down above 40% in the last thirty day period, based on the Dow Jones U.S. Dining establishments & Bars Index, with specific restaurant shares down as considerably as ninety%. Conversely, certain firms have found an boost in desire for their items and companies for the duration of this time.

With this context, it is distinct certain industries will need to look at impairment testing faster than other folks and probable prior to their once-a-year testing date. In figuring out no matter whether a triggering celebration has occurred, firms should look at all info and circumstances, which include the close to- and medium-expression outlook for desire for items and companies in their particular business.

All round economic overall performance consists of this sort of things this sort of as damaging or declining cash flows or a decline in real or prepared revenue or earnings as opposed with real and projected results of pertinent prior intervals

In light-weight of the COVID-19 disaster, a lot of firms have already warned that earnings will be decrease than forecasted. Community firms symbolizing a wide spectrum of industries have noticeably reduced or taken off earnings steerage. It will probable choose some time for firms to evaluate the effect of COVID-19 on their unique small business and to update their forecasts to account for it. After firms are able to evaluate impacts to real and forecasted results, they should look at no matter whether this sort of impacts characterize a triggering celebration.

In accomplishing so, the threshold for figuring out no matter whether a triggering celebration has occurred may possibly differ by reporting entity. For case in point, reporting entities that consummated a the latest product acquisition or experienced a the latest occurrence of goodwill impairment are at additional chance. Any lower in upcoming cash move expectations would probable trigger an incremental impairment as opposed to a reporting entity that handed its most the latest impairment check by a broad margin.

If applicable, a sustained lower in share price (look at in the two complete phrases and relative to peers)

To be distinct, a decline in the total stock market is not, in and of alone, automatically a triggering celebration. The stock market can be remarkably unstable, and the intent of the steerage is not to induce a wave of impairments every single time the stock market swings. This is why ASC 350 especially utilizes the phrase “sustained lower.”

Regrettably, the steerage does not determine or prescribe what is meant by “sustained.” Specific firms and industries may possibly already be able to assert, with a large stage of self confidence, that their present-day share price declines will be “sustained,” but we do not have the requisite info established to identify no matter whether this will be genuine for the total market or a lot less instantly impacted firms and industries.

No matter of no matter whether or not it is identified that an speedy triggering celebration has occurred, it is essential that public firms consist of ideal disclosures as to the hazards introduced by COVID-19 and the present-day financial ecosystem. To the extent that this sort of conditions persist and grow to be an impairment trigger, the SEC will count on that firms have presented an ideal stage of foreshadowing in their public filings.

Steve Hills is a controlling director and head of the complex accounting consulting follow at Stout,a international advisory agency. Dave Lindstrom is a director in the valuation advisory team.

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