The World Health Organization (WHO) announced that COVID-19 (also known as coronavirus) has become a pandemic on March 11. This outbreak has contributed to market volatility causing substantial declines in market capitalization, one of many factors for consideration as to whether a triggering event for an impairment test has occurred. Company projections may be affected by disruptions in its supply chain, a shift in demand for its products or services, or the loss of customers. While some industries and companies may be more vulnerable than others, both the effects of a pandemic and aggressive COVID-19 containment measures may affect social and economic behavior, increasing overall uncertainty. In the aggregate, these factors can result in a negative impact on the outlook and valuation of businesses, and the recoverability of any associated goodwill. This necessitates an assessment of whether a triggering event has occurred that requires goodwill impairment testing. An evaluation of potential impairment of other assets, including intangibles, prior to conducting the goodwill impairment test is also required, if a triggering event has arisen.
Distinguishing a temporary drop in stock price from a sustained decline is a critical element in concluding whether a triggering event has occurred. Share price volatility in and of itself may not be determinative, and all facts and circumstances require careful evaluation as the events unfold over time. A goodwill impairment in an extremely volatile market should not be a foregone conclusion.
Duff & Phelps can help companies navigate through the impairment triggers and in the event an impairment analysis is required we can assist with valuations of goodwill, indefinite-lived intangibles and long-lived assets for impairment testing purposes pursuant to ASC 350, Intangibles – Goodwill & Other, ASC 360 -10, Impairment or Disposal of Long-lived Assets, as well as International Accounting Standard 36: Impairment of Assets.
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