COVID-19 Asset Impairment Considerations & Accounting Models
The COVID-19 outbreak has changed the way the people work, where people work, and how people spend their free time. As a result, COVID-19 has had a disproportionate effect on several industry sectors. Certain industries saw an increase in the demand for their goods and services as the world transitioned to a more distanced, low-contact lifestyle. Other industries, such as energy, certain retail sectors, hospitality, and travel, have seen substantial business model disruption that will create sustained negative financial results for an uncertain amount of time.
U.S. GAAP requires companies to evaluate the recoverability of long-lived assets, goodwill, and other intangible assets when events or changes in circumstances indicate that an asset may be impaired. Each of these categories has its own set of rules governing the impairment analysis. This table summarizes the three accounting models.
Impairment Best Practices
- The impairment determination is a complex process, and starting the consideration early is key to maintaining timely reporting.
- Collaborate with the business unit leader for which an impairment analysis is being completed. He or she has direct knowledge of the effects COVID-19 has had on the business unit and can help determine if a triggering event has occurred and validate assumptions used in fair value modeling.
- Involve your financial statement auditors early in the process to align on an impairment analysis approach.
- For a company affected by COVID-19 and with material intangible assets on its balance sheet, consider engaging a fair value expert to determine the best valuation approach and to develop a precise fair value calculation.
The following is a hypothetical example of an impairment disclosure within a company’s financial statements:
We review our long-lived assets for impairment whenever events or circumstances indicate an impairment could have occurred. As a result of the effects of COVID-19, we determined a triggering event occurred related to certain long-lived assets within our North America reporting unit. We performed an undiscounted cash flow analysis utilizing a probability-weighted approach and determined our Michigan production facility has a carrying value that exceeds its estimated undiscounted future cash flows. A discounted cashflow analysis was used to project future cash flows based on our discounted weighted-average cost of capital. As a result, we recorded an impairment charge of $1 million.
We performed impairment analysis for our indefinite-life trademark assets using an income approach and concluded no impairment occurred.
We evaluate goodwill annually or more frequently if events or circumstances indicate an impairment could have occurred. As a result of COVID-19, we determined a triggering event occurred related to our North America reporting unit due to a decrease in expected future cash flows. An income approach for estimating fair value was used to project future cash flows based on our discounted weighted-average cost of capital. As a result, we recorded a goodwill impairment charge of $2 million.
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