The total value of goodwill impairments by U.S. public companies—on the rise for the past three years—could decline in 2019 due to companies’ rising stock market values.
Goodwill is an intangible asset created when a company acquires another business for more than the value of its hard assets. Companies impair the goodwill if its fair value is less than the amount stated on the balance sheet.
Major goodwill impairments for U.S. public companies reported in 2019, which doesn’t account for the fourth quarter or smaller impairments, exceeded $33 billion, according to Duff & Phelps LLC, a New York-based valuation firm.
The full-year picture will be clearer after companies report fourth-quarter results early next year. But the major goodwill impairments so far this year are down 19% from the $40.74 billion reported through the third quarter in 2018.
Impairments remain far above levels reported over the past decade. Total impairments for full-year 2018 climbed to $78.9 billion in 2018—60% above the annual average over the previous 10 years, according to a Duff & Phelps study slated to be released Tuesday.
The 2018 total rose to the highest level in a decade as the global economy weakened while companies struck large-scale transactions that resulted in losses.
The magnitude of impairments shows that many U.S. companies are struggling with changes in regulations, their industries or the economy, said Greg Franceschi, global leader of the financial reporting practice and the office of professional practice at Duff & Phelps, which tracked 8,800 publicly traded firms in the U.S. for its study.
“Companies’ expectations for transactions have not been reflected in the actual results,” Mr. Franceschi said, “so there’s been a write-down in these prices.” The impairments are highly correlated with macroeconomic factors in a company’s particular industry, although litigation or product failures can also lead to impairments, he added.
So far this year, the biggest impairment is Procter & Gamble Co. ’s $6.78 billion charge for the beleaguered Gillette brand it acquired in 2005. The company cited currency devaluations and declines in the purchase of razors and blades as reasons for the impairment. The size of the impairment pales in comparison with 2018, when General Electric Co.’s $22.1 billion charge took the top spot.
Another hefty write-down this year was CenturyLink Inc. ’s $6.51 billion goodwill impairment caused by the technology company’s falling stock price.
Surprise impairments can cause investors to question their trust in management, said PJ Patel, co-chief executive of valuation firm Valuation Research Corp. “This is about giving you insight into how management thinks and how they go to market and in many ways it reflects on the quality of management,” Mr. Patel said, noting the exception is during market downturns.
The results of the 2020 election in the U.S. and any changes to the goodwill impairment model in the U.S. or internationally could have an impact on impairment values in the future.
The cost-effectiveness of the current rules for measuring goodwill has been the subject of recent scrutiny for two major accounting standards-setters. Companies have said the existing rules for goodwill burden them with unnecessary costs and are too subjective.
The Financial Accounting Standards Board, which sets U.S. accounting standards, and the International Accounting Standards Board, which sets standards in more than 140 countries, are considering revising the rules, which now require companies to test goodwill for potential impairment each year.
If the FASB were to switch from annual impairment testing to amortization—or the write-off of goodwill over the course of years—it could dramatically reduce the volume of goodwill impairments for U.S. public companies, Mr. Franceschi said. The impairment cost would vary depending on the length of the amortization period chosen.
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