By David Hern, CPA/ABV, ASA, GABB Affiliate and financial analyst
If you haven’t heard of COVID-19 or Coronavirus–or as my 6-year-old refers to it, the ball with red broccoli on it–then you’ve been living under a rock. Regardless of your quarantine efforts, your business is experiencing a severe coronavirus symptom that could have a major impact on your 2020 financials and audit. For any company that completed an M&A transaction in the last few years, large impairment expenses are likely to occur by this time next year.
COVID-19: my 6-year-old refers to it as the ball with red broccoli on it
Many companies are in the throes of their 2019 audits and are thankful they do not have to pile yet another item on their to-do list. These same companies are probably finishing up purchase price allocations (PPAs) for ASC 805 – Business Combination accounting from deals completed in 2019. However, CFOs and Controllers across the US need to be developing and saving their current COVID-19 financial projections immediately. Why? For starters, many of these companies likely chose to switch to amortizing goodwill over a 10-year period after completing their PPA. What these executives do not realize is just because you are writing off intangible assets does not mean they do not need to be tested for impairment. U.S. generally accepted accounting principles require you to test your goodwill for impairment expense under FASB ASC 350 if there has been a “trigger event.” I can promise you every auditor worth their salt across this great land is going to define a global pandemic which we’ve not seen the likes since the Spanish Flu will as a “trigger event.” At one point, the major stock indices were down well over 30% from their highs.
There are several triggering events noted in ASC Topic 350 that could apply including:
- Macroeconomic conditions such as a deterioration in general economic conditions,
- Overall financial performance such as a negative or declining cash flows or a decline in actual or planned revenue or earnings,
- A sustained decrease in share price, etc.
Consequently, valuation analysts will have to be engaged to determine if a decline in fair values of various reporting units are below their carrying amounts resulting in an impairment expense. Sofer Advisors would be happy to talk with you about your unique circumstances and how they may be a triggering event. Please contact us for a free consultation.