Is COVID-19 a Triggering Event for Impairment Testing?

The longest-jogging bull industry because Entire world War II began in March 2009, and around

The longest-jogging bull industry because Entire world War II began in March 2009, and around the past number of decades, many debated “when, not if,” a downturn would manifest. But no a single could have predicted that a worldwide pandemic would guide to unprecedented disruption and dislocation in the money markets and the fastest close to a bull industry in history.

As of March 23, the S&P 500 had fallen just about thirty% from its February highs. Though the markets have recovered relatively, many industries have been strike hard. Reporting entities will now require to take into account no matter if the effects of COVID-19 and the resultant industry downturn constitutes a triggering event for uses of goodwill, intangible asset, and mounted-asset impairment testing.

Just before we delve into possible triggering events, we considered a swift recap on impairment testing demands beneath U.S. Usually Accepted Accounting Principles (GAAP) for a variety of asset lessons would be practical.

Impairment Screening Specifications
Goodwill Indefinite-Lived Intangibles Very long-Lived Property (which includes Finite-Lived Intangibles)
Appropriate Advice ASC 350 ASC 350 ASC 360
Screening Specifications  

Yearly and upon triggering event (for private businesses electing accounting alternate, only upon triggering event)

Yearly and upon triggering event On triggering event
Level of Screening Reporting device (working section or element) Individual asset Asset team (cheapest level of unbiased money flow)
System of Screening  

1 step on a good value (e.g., discounted money flow) basis


1 step on a good value (e.g., discounted money flow) basis


Two actions – initial step on an undiscounted money flow basis, second step on a good value basis

Buy of Screening (Property Held and Applied) 3rd Very first Next
Buy of Screening (Property Held for Sale) Next Very first 3rd


Triggering Situations

Triggering events differ for goodwill/indefinite-lived intangibles and lengthy-lived property. That claimed, an impairment of goodwill or indefinite-lived intangibles could induce the require to conduct impairment testing for lengthy-lived property. On top of that, and while not precisely discovered in ASC 360, important entity-level events could induce impairment testing for lengthy-lived property. Under are examples of triggering events for goodwill/indefinite-lived intangibles and lengthy-lived property, respectively.

Goodwill and Indefinite-Lived Intangibles Very long-Lived Property (which includes Finite-Lived Intangibles)

Macroeconomic disorders (deterioration in normal financial disorders)


Considerable decrease in industry value of a lengthy-lived asset (asset team)

Marketplace and industry concerns (deterioration in the surroundings in which a organization operates) Considerable adverse modify in the extent or way in which a lengthy-lived asset (asset team) is remaining made use of or in its actual physical affliction

Price elements (boosts in raw products, labor, and many others.)


Considerable adverse modify in authorized elements or in the enterprise weather


General financial efficiency (damaging or declining money flows, decrease in true or prepared profits or earnings)


Accumulation of fees noticeably in extra of the amount of money initially predicted for the acquisition or development of a lengthy-lived asset team

Other related entity-certain events (changes in administration, essential personnel, system, and many others.) Recent-period, historic, or projected working or money-flow decline linked with the use of a lengthy-lived asset team

Situations impacting a reporting device (modify in composition of web property, expectation of disposing all or a part of the reporting device)

Expectation of disposing a lengthy-lived asset or asset team in advance of the close of its useful lifestyle
Sustained decrease in share value (in absolute conditions or relative to friends)


Of course, particular triggering events mentioned above will be a lot more related to the latest surroundings than some others. With respect to COVID-19, we believe that businesses should precisely take into account the subsequent possible triggering events.

Macroeconomic disorders these kinds of as a deteriorating on in normal financial disorders, constraints on accessing money, fluctuations in overseas trade charges, or other developments in equity and credit rating markets

Clearly, COVID-19 has impacted macroeconomic disorders globally. Equity markets have viewed spectacular decreases in value in a small period of time. We have also witnessed unprecedented volatility in the worldwide markets it is challenging to predict how markets will glimpse tomorrow, permit on your own a single to two months from now.

Governments have started to intervene as they attempt to reduce a extended recession. From a U.S. perspective, it is not known no matter if or when endeavours to “flatten the curve” will be prosperous and let the place to get back again to enterprise as usual. As this carries on to unfold and a bigger details set is obtainable for analysis, we will have a superior sense as to the small-, medium-, and lengthy-phrase impacts on the worldwide economic system.

Marketplace and industry concerns include things like aspects these kinds of as a deterioration in the surroundings in which an entity operates, an elevated aggressive surroundings, a decrease in industry-dependent multiples or metrics (considered in each absolute conditions and relative to friends), a modify in the industry for an entity’s products or companies, or a regulatory or political improvement

Though just about all businesses have been afflicted in some way by COVID-19, particular industries have been a lot more adversely impacted than some others. The airline industry was down just about 60% in the very last month, based mostly on the S&P 500 Airways Marketplace Index. Cruise line shares are down as significantly as 87% yr-to-day. In addition, bar and cafe shares are down around forty% in the very last month, based mostly on the Dow Jones U.S. Dining places & Bars Index, with personal cafe shares down as significantly as 90%. Conversely, particular businesses have viewed an increase in demand for their products and companies during this time.

With this context, it is obvious particular industries will require to take into account impairment testing faster than some others and very likely prior to their once-a-year testing day. In deciding no matter if a triggering event has occurred, businesses should take into account all specifics and circumstances, which includes the near- and medium-phrase outlook for demand for products and companies in their specific industry.

General financial efficiency features these kinds of elements these kinds of as damaging or declining money flows or a decrease in true or prepared profits or earnings when compared with true and projected success of related prior durations

In light of the COVID-19 disaster, many businesses have now warned that earnings will be decreased than forecasted. Community businesses representing a broad spectrum of industries have noticeably reduced or taken off earnings steerage. It will very likely acquire some time for businesses to evaluate the effects of COVID-19 on their certain enterprise and to update their forecasts to account for it. When businesses are capable to evaluate impacts to true and forecasted success, they should take into account no matter if these kinds of impacts characterize a triggering event.

In performing so, the threshold for deciding no matter if a triggering event has occurred could differ by reporting entity. For instance, reporting entities that consummated a the latest materials acquisition or had a the latest prevalence of goodwill impairment are at a lot more chance. Any decrease in upcoming money flow anticipations would very likely lead to an incremental impairment as opposed to a reporting entity that passed its most the latest impairment examination by a huge margin.

If applicable, a sustained decrease in share value (take into account in each absolute conditions and relative to friends)

To be obvious, a decrease in the in general inventory industry is not, in and of by itself, essentially a triggering event. The inventory industry can be really risky, and the intent of the steerage is not to induce a wave of impairments each and every time the inventory industry swings. This is why ASC 350 precisely takes advantage of the phrase “sustained decrease.”

However, the steerage does not outline or prescribe what is meant by “sustained.” Sure businesses and industries could now be capable to assert, with a superior level of assurance, that their latest share value declines will be “sustained,” but we do not have the requisite details set to establish no matter if this will be correct for the in general industry or fewer specifically impacted businesses and industries.

Irrespective of no matter if or not it is established that an instant triggering event has occurred, it is vital that public businesses include things like correct disclosures as to the dangers presented by COVID-19 and the latest financial surroundings. To the extent that these kinds of disorders persist and turn out to be an impairment induce, the SEC will expect that businesses have supplied an correct level of foreshadowing in their public filings.

Steve Hills is a handling director and head of the technical accounting consulting practice at Stout,a worldwide advisory company. Dave Lindstrom is a director in the valuation advisory team.

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