Duff & Phelps and the Financial Executives Research Foundation (“FERF”) first published the results of their comprehensive Goodwill Impairment Study in 2009.
This inaugural study examined U.S. publicly-traded companies’ recognition of goodwill impairment at the height of the financial crisis (the end of 2008 and the beginning of 2009), and featured a comparative analysis of the goodwill impairments of over 5,000 companies (by industry), as well as the findings of a survey of Financial Executives International (“FEI”) members.
Now in its ninth year of publication, the 2017 U.S. Goodwill Impairment Study (the “2017 Study”) continues to examine general and industry goodwill impairment trends of 8,400+ U.S. publicly-traded companies through December 2016. The 2017 Study also reports the results of this year’s annual survey of FEI members, which continues to track the level of usage of the optional qualitative goodwill impairment test (a.k.a. “Step 0”) by its members.
The accounting model for goodwill under U.S. GAAP has been simplified through the issuance in January 2017 of Accounting Standards Update (ASU) No. 2017-04, Intangibles — Goodwill and Other (Topic 350): Simplifying the Test for Goodwill Impairment. The new guidance eliminated Step 2 of the quantitative two-step test, and changed the computation of goodwill impairment (if any) to be based on the difference between the fair value and carrying amount of the reporting unit. The 2017 Study features an interview conducted by FERF with Gary Roland, Managing Director at Duff & Phelps, discussing the highlights of this year’s survey, including FEI members’ expectations regarding the impact of the new ASU on their goodwill impairment testing.
Purpose of the 2017 Study
- To report and examine the general and industry trends of goodwill and goodwill impairment of U.S. companies.
- To report the 2017 results of the annual goodwill impairment survey of FEI members (the “2017 Survey”).
Highlights of the 2017 Study
M&A activity was extremely robust in 2016, despite a decline from 2015-a record year in M&A. While deal value dropped by 20% from the prior year, from a historic perspective 2016 was still one of the top years for M&A activity.* This led to $278 billion of goodwill being added to U.S. companies’ balance sheets, the second-highest level since we began tracking this information in 2008.
Total goodwill impairment (“GWI”) recorded by U.S. public companies was cut in half, from $56.9 billion in 2015 to $28.5 billion in 2016, reflecting an improved outlook for the global economy. The number of GWI events also dropped from 350 to 288 for the same period. Therefore, average GWI per event declined by nearly 40%, from $163 million in 2015 to $99 million in 2016. Diving deeper into the details, we find that nine out of the ten industries analyzed saw their aggregate GWI amounts decrease – Healthcare being the only exception. The top three industries in 2016 with the highest decline in GWI are as follows, in order of magnitude ($ billions):
- Energy ($18.2 to $7.2)
- Information Technology ($12.9 to $4.1)
- Industrials ($7.7 to $4.5)
Although Energy was the hardest-hit industry for three consecutive years, it saw a notable improvement in 2016. The amount of GWI in Energy dropped by 60% from 2015, while the number of events dropped from 65 to 27, a nearly 60% decline. Oil prices began their downward trajectory in mid-2014, reaching a 12-year low in early 2016. Oil prices have since made a recovery, with Brent crude oil doubling from the January low of $29 to $57 at year-end 2016, though still far below the peak level reached in 2014. Nevertheless, four of the top ten largest impairment events of 2016 were still in Energy, a reflection of how deeply the industry suffered both in magnitude and number of GWI events.
The plunge in the 2016 aggregate impairment amount was also consistent with general trends observed in financial markets. While at the beginning of 2016 the world economy faced faltering growth and financial market turbulence, by year-end the picture had changed materially. There was a marked change in investor sentiment towards the end of November 2016, which was accompanied initially by a rise in global interest rates, a sharp narrowing of credit spreads, a strengthening of the U.S. dollar, and a rally in equity markets to record highs. Even though in 2016 the U.S. economy expanded at its slowest pace since 2011, investors appeared to expect that the combination of new pro-growth policies and still-accommodative monetary policies by major central banks would help drive growth in 2017.
*M&A activity based on transactions closed in each year, where U.S. publicly-traded companies acquired a 50% or greater interest.