As a result of the COVID-19 pandemic, many private companies will be tasked with reviewing certain assets for potential impairment during the year. While companies are required to assess if any impairment of assets had occurred during the year, prior to 2020, this was often done rather casually. However, the impact of COVID-19 on most companies and industries creates impairment concerns that were never an issue in the past. What exactly is impairment and how does it relate to certain assets that you may carry on your balance sheet? In short, an impairment loss represents a write-down in the carrying value of an asset on your balance. Getting to the impairment loss takes different approaches depending upon the asset.
Property, Plant, and Equipment
U.S. accounting standards provide a list of six events or changes in circumstances that indicate the carrying amount of a long-lived asset (or asset group) may not be recoverable. A long-lived asset (asset group) is not recoverable if the carrying amount exceeds the sum of the undiscounted cash flows expected to result from the use and eventual disposition of the asset (asset group). If the carrying value is not recoverable, an impairment loss is measured as the amount by which the carrying amount of the asset (asset group) exceeds its fair value. Fair value will likely need to be determined using valuation techniques, which can be complex. In addition, significant estimates will need to be made by you and your management team related to the expected future cash flows related to the asset. In performing this assessment, a long-lived asset or assets are to be grouped with other assets and liabilities at the lowest level for which identifiable cash flows are largely independent of the cash flows of other assets and liabilities. Accordingly, impairment can be recognized on a specific store, an individual manufacturing facility, or a group of assets that represent a specific product line. This approach is also taken for intangible assets that are subject to amortization.
Intangible Assets Not Amortized
Intangible assets that have indefinite useful lives should be tested for impairment annually and more frequently if events or changes in circumstances indicate that it is more likely than not that the asset is impaired. While not exactly the same as the list provided for property, plant, and equipment but pretty similar, the accounting standards provide a list of six events and circumstances that should be considered related to potential impairment of indefinite-lived intangible assets. In a perfect world, this qualitative analysis would have been performed in the early months of the pandemic. In reality, most private companies are giving deeper consideration to this in conjunction with their year-end financial reporting. If you determine that is more likely than not that the indefinite-lived intangible asset is impaired, you need to calculate the fair value of the intangible asset. The fair value is compared to the carrying value to determine whether an impairment loss should be recognized. Again, complex valuations will likely be needed to determine the fair value of the intangible assets.
The process for evaluating and measuring an impairment loss for goodwill has changed over the years in accounting standards. Therefore, there are varying approaches that could be taken by your company and will depend upon whether you amortize goodwill under the private company alternative or not. In short, depending upon what situation you fall in, goodwill should be evaluated for impairment on an annual basis or during the course of the year, if there are events or circumstances indicating potential goodwill impairment that are present. Using the simplified approach, goodwill impairment is recognized based upon any excess of the carrying value of a reporting unit (or entity) compared to its fair value, determined using valuation techniques.
In summary, while you may never have considered impairment of assets in the past as part of your financial reporting responsibilities, this is something that should be monitored throughout the year or may need to be evaluated at the end of each reporting period. Understanding what is involved can help you line up the resources to perform this analysis and any quantitative calculations involved.
Jonathan Poppel, CPA