On December 27, 2016 Toshiba Corporation, the Japanese electronics conglomerate, announced the possibility of a goodwill impairment charge related to its U.S. nuclear power plant construction business, specifically, CB&I Stone & Webster Inc. (“Stone & Webster”), which was acquired for $229 million in late 2015 by Toshiba’s Westinghouse Electric Company subsidiary. Both the buyer and target have been plagued by financial difficulties (and goodwill impairment charges) since that time.
We have published a collection of these posts in a book entitled “Market Participant Perspectives: Selections from Mercer Capital’s Financial Reporting Blog.” For our existing clients and blog subscribers, we hope that the book uncovers a post or two of interest that you might have missed the first time around. For clients that we haven’t met yet, there’s probably no better introduction to our team than the collection of posts in this book.
One question that the FASB has wrestled with over the last few years is if goodwill should be amortized or not. It’s been over a decade since amortization was replaced in favor of a periodic two-step goodwill impairment assessment. Adoption of these provisions has varied greatly. Now, more changes to this system are in the works, as the FASB Board met last week and made a few tentative decisions regarding the accounting for goodwill impairment for public and private entities.
On June 15, 2016, the Appraisal Practice Board (“APB”) of the Appraisal Foundation released the final version of the Valuation for Financial Reporting Advisory #2, The Valuation of Customer-Related Assets. The non-authoritative best practices guidance elaborates on valuation approaches and methodologies that can be used to measure fair value of customer-related intangible assets such as customer lists, order or production backlogs, and contractual and/or non-contractual customer relationships. This post briefly discusses this document.
The Brexit vote last week delivered an unexpected (depending on who you ask) macro surprise to financial markets across the globe. While the impact of broad-based volatility on individual companies will obviously vary, negative shocks to stock prices can trigger the need for impairment tests. The following outlines some recent changes to the impairment testing regime – this post first appeared in October 2015 on the Financial Reporting Blog, which provides corporate finance managers with periodic updates and commentary around several topics including impairment testing.
As the end of the year approaches, many companies are preparing for goodwill impairment testing, which frequently takes place in the fourth quarter. And even with some sectors of the equity markets at near-record highs, the potential for goodwill impairment can still be a very real issue for businesses in certain industries. It is against this backdrop that the FASB has proposed some changes to the way companies test goodwill for impairment.
As the current bull market has extended into its sixth year and the S&P 500 continues to reach record highs, have goodwill impairment charges declined? Conventional wisdom would suggest that as markets rise and valuation multiples expand, companies’ goodwill values might be protected. Furthermore, various regulatory entities have recently proposed relaxing standards for goodwill impairment as if higher equity markets have rendered impairment a thing of the past. While this hypothesis might hold true for large cap stocks, this may not be the case for small cap stocks.
In a deal valued at approximately $9.5 billion ($8.4 million in cash and $1.1 in assumed debt), Merck’s acquisition of Cubist was originally expected to result in significant EPS gains by 2016. At least, that was the plan. Mere hours after Merck’s announcement, a U.S. court invalidated four of Cubist’s five key patents on Cubicin, the antibiotic responsible for 80% of the company’s revenue. The decision effectively allows generic production of Cubicin as early as June 2016, four and half years before the original patent expirations in November 2020.
Many financial managers, CFOs, analysts, and valuation specialists are familiar with the concept of a “control premium” or “premium paid” that is often observed when a public company is acquired. A control premium is most often measured with reference to the price paid to acquire the company and its trading price immediately prior to acquisition (or rumor of an acquisition). However, the observed premium may not represent a premium for conceptual control inasmuch as it conveys the quantification of actual changes that can be made by exercising that control.
A recent article from McKinsey & Company examined investor reaction to news of a goodwill impairment. Through analysis of excess returns in the three days before and after announcement, McKinsey found that investors often respond positively, or neutrally, when companies announce a goodwill write-down. Why wouldn’t investors react more negatively? The authors suggest that when investors already understand that an acquisition has been underperforming, the impairment charge may be perceived as an event that communicates acknowledgment on the part of management as well as an opportunity to charge course. The article goes on to encourage companies to be candid with investors about the nature of the impairment and the company’s plans to address the situation and move forward.
A recent post on the Wall Street Journal’s CFO Journal blog reported recent comments by Andrew Ceresny, head of enforcement at the SEC, signaling that financial reporting issues will be the subject of enhanced scrutiny as actions related to the financial crisis recede. In testimony before Congress this spring, SEC Chair Mary Jo White cited efforts by the newly-formed Financial Reporting and Audit Task Force to “identify areas susceptible to fraudulent financial reporting through an on-going review of financial statement restatements and revisions, analysis of performance trends by industry, and the use of technology-based tools.” Through Operation Broken Gate, the task force is focused on audit failures in addition to issuer fraud. The emphasis on valuation issues is not surprising, since the exercise of judgment is an inherent aspect of valuation.
Valuations for social media players get a lot a press, but social media’s cousin online retailing is having a moment of its own. Online retailers with alternative business models offer a particularly interesting perspective on valuation.
Most financial professionals understand that goodwill impairment testing is typically performed annually. However, ASC 350 also prescribes that interim goodwill tests may be necessary in the case of certain “triggering” events. For public companies, perhaps the most common triggering event is a decline in stock price, but a variety of other factors may constitute a triggering event as described in ASC 350. For reporting units undergoing major changes, interim goodwill impairment testing provides management, auditors, and investors with some assurance that the unit’s balance sheet reflects the current expectations for the unit.
This post summarizes current accounting issues receiving regulatory scrutiny including auditor selection and independence, the challenges involved in assigning balance sheet items, including goodwill, to various reporting units, as well as other “red flags.”
The FASB recently endorsed two GAAP exceptions for private companies. The first exception permits private companies to amortize goodwill and implements a simplified model for goodwill impairment testing. The second exception offers a practical expedient that allows private companies to qualify for hedge accounting under ASC Topic 815. Final standards for each are expected to be issued by the end of the year.
Less than a year after its formation, the Private Company Council (PCC) is making progress in its initial efforts to reduce the costs and complexities of financial reporting for private companies that use GAAP.
One of the challenges faced by companies in the goodwill impairment testing process involves estimating the carrying value of a reporting unit when the corporate structure of the business has been reorganized. At Mercer Capital, we have assisted companies with this potential problem on numerous occasions.
Although goodwill remains the largest and most common intangible allocation, the proportion of value allocated to goodwill fell during the past year. Houlihan Lokey recently released its 12th annual Purchase Price Allocation Study, which this year reviewed the intangible asset allocations of 511 transactions during 2012.
The so called “Step 0” impairment test was expected to save firms time and money when it came to testing and reporting their goodwill balances. According to Duff & Phelps, 69% of private companies and 81% of public companies surveyed anticipated applying the Step 0 qualitative test in 2011. One year later, 52% of private companies and 43% of public companies reported actually using Step 0. So what are the issues that keep companies from using the Step 0 qualitative test as expected?
Commodity giant Glencore Xstrata recorded a goodwill impairment charge of $7.7 billion for its mining operations during the reporting period ended June 30, 2013. The writedown is a good reminder that value can change quickly, and there is no “bright line” regarding how soon an asset may be subject to impairment.
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