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How to Win at Asset Impairment in Uncertain Times

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headshots of david mcquire from embark and steve soter from workiva
May 28, 2020

After COVID-19, the Securities and Exchange Commission made it clear it wanted public companies to consider whether they anticipate material impairments to items like goodwill, intangible assets, long-lived assets, and more. It’s obvious that financial reporting teams have questions around this, said David McGuire, Strategic Accounts Practice Leader at Embark, based on chatter he’s heard in industry groups and reactions to a blog post on accounting impacts of the coronavirus by the financial advisory firm. 

We asked David to share a few more thoughts on asset impairment, given his experience as a Deputy CFO and Chief Accounting Officer for a public company, and before that, as a Big Four audit and advisory senior manager. 

What does the process of assessing impairment look like?

 

First, you’ll take stock of whether you have a triggering event that would lead to impairment testing. The triggers differ across the standards for goodwill, intangibles, and long-lived assets. But if you’re facing deteriorating macroeconomic conditions, industry factors, or a declining share price, then the following tests would come into play:

Goodwill and intangibles

Generally speaking, you have a one-step test.

  1. If the fair value is less than the carrying value, then you would be subject to an impairment. 

Long-lived assets

A two-step test applies here.

  1. Look at the future cash flows on an undiscounted cash basis of your asset grouping. If those are less than carrying value, move to the next step.
  2. Assess carrying value vs. fair value. If fair value is less than carrying value, take a look at impairment.

What are some strategies if you can’t estimate future cash flows?

When you’re not sure what future cash flow will be, consider running multiple models for worst-case, base-case, and best-case scenarios, for example, David says. Running stress tests around your input sensitivity will help clarify which inputs are subject to uncertainty and the range of potential exposure. 

Secondly, review how peers in your industry are handling impairment. Research platforms like Sentieo can accelerate that work, so you don’t have to compile all of it manually.

Connecting data, people, and processes across your internal teams will be crucial in these rapidly changing times. Consider connecting data sources directly to a centralized reporting workspace in the cloud, so all analysts always have access to the same, up-to-date information to slice and dice as needed. Connect or link data across reports as well, so you can update data across all linked instances automatically as conditions change.

What if there’s good news on the horizon?

If you’re one of the companies able to predict a healthy recovery from the downturn, continue stress testing your assumptions and checking the probability of your worst-case scenarios, David says. It’s possible a model will show impairment won’t be necessary, based on your view of a rebound. 

If you do take an impairment charge and record that as a non-GAAP measure, the market will expect some explanation. (In cases like these, it’s especially important to connect numbers and narrative from SEC reports to drafts of news releases and earnings call scripts from the investor relations team for consistency—the strength of the Workiva connected reporting platform.)

Ultimately, the key is to share information so that investors can view your business the same way top leaders view the business.

That’s a high-level look at asset impairment. For more specific guidance, reach out, and Workiva can put you in touch with David’s team at Embark.

David McGuire, Embark’s Strategic Accounts Practice Leader, has over 18 years of industry and public accounting experience, including leading the accounting department of a multinational specialty finance public company and serving as a Big Four audit and advisory senior manager. He demonstrates proactive leadership in challenging environments with a focus on developing teams. David leads through building relationships and prioritizing people and culture.

Steve Soter
Senior Director of Product Marketing
Workiva

About the Author

Steve is Senior Director of Product Marketing and Accounting Industry Principal at Workiva. Previously, Steve served as an accounting leader in multiple roles including Vice President and Controller for Backcountry.com, a private equity owned, online retailer of outdoor products, and as the Director of SEC Reporting for Overstock.com (NASDAQ: OSTK), a $2 billion revenue, online retailer of home goods and blockchain technology company. His experience includes multiple acquisitions, debt offerings, an IPO, and the world’s first digital debt and equity offering (by Overstock). Steve is also a former member of the US XBRL Data Quality Committee.

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