COVID-19 Valuation Impacts: Goodwill Impairment Testing in Q1/Q2 2020

By: PJ Patel | Larry Van Kirk

In this segment from VRC’s recent webcast, PJ Patel and Larry Van Kirk share important insights into recent conversations they’ve had with public and private company clients related to determining if the coronavirus is a triggering event requirement goodwill impairment testing in Q1 or Q2 2020.

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[Transcription]

[PJ Patel:] Larry, how about the clients you’re talking to? So you’re working, you know, more with the private equity portfolio companies and the public companies. Are they thinking about impairment testing as an example for Q1 or Q2 or both? What are they doing with projections and forecasts? Thoughts that you can share on that?

[Larry Van Kirk:] Yeah. Sure. So we’ve been fielding a number of calls both on the private and public companies kind of concerning quarterly impairments, and I kind of characterize it on two sides of the fence. On the one side, we’ve got, similar to what JJ was referring to, we’ve got certain industries. So we’ve got tourism, hospitality, transportation, retail, for example. Even some manufacturing industries that are obviously experiencing some issues.

And on the one side of the fence, you’ve got certain companies that think that again, the underlying fundamentals haven’t changed. That this is a temporary blip in the radar and therefore, really don’t think they have impairment issues. However, given the stock market activity, some of the auditors are pushing back saying, hey, you might have a triggering event in which you need to show us something. And so we’re being asked to help them with modeling. And most of the modeling that we’ve been seeing, you know, companies again, just don’t really know, as we all wish we could have a crystal ball, right?

But at the same token, what they’re trying to do is to try and help get through the triggering event process is show some sort of impact over a three, six, maybe even nine-month period in that, whatever’s left in their 2020 time period, and kind of show the rest of the forecast or expectations remaining constant.

Again, there are some companies though on the other side of the fence which, in maybe tourism or hospitality, where they can definitively see an issue maybe going out farther in which they try to predict, you know, how are people going to respond to an amusement park? Are you gonna go back there very quickly? Is the response gonna be quick? If you host large events, like a public forum or a tradeshow, will folks go back in a rapid fashion after that or is it going to be a very slow response?

So basically, we’ve been talking about both supply chain, operational issues, whether that, you know, is short-term or long-term. And again, the definitive thing from our perspective, PJ is, is this a temporary disruption that just may not indicate impairment, but just need additional disclosure or some evidence to your audit firm? Or is this something that has a longer impact and may lead to impairment kind of considerations? And those are discussions we’re having.

[PJ:] Got it. Yeah. It’s interesting. I think, one of the things that I’m seeing is, you know, as we get towards the end of Q1 here, it seems like there’s not enough known to really maybe show impairment today. But then picking the ball back up maybe three or four weeks from now to see if this is going to be a longer-term issue. Sounds like you’re probably seeing something similar to that.

[Larry:] Yeah. And really the, you know, for some of these companies, the trough happened like the end of March, right before the quarter, so is it a Q1 or is it a Q2? And, you know, how long do you look at the stock market price? So, all of these things kind of play into that process and whether you do a Q1 or Q2 kind of test.

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Questions About Goodwill Impairment Testing, in Light of COVID-19 Impacts?

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