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Notable results from annual US goodwill impairment study.

he 2013 U.S. Goodwill Impairment Study includes some notable findings. Approximately $51 billion of goodwill impairments were recorded by U.S. public companies in calendar year 2012, representing a 76 percent increase from $29 billion in 2011. The 2012 aggregate impairment is the highest amount since the level reported at the height of the financial crisis in 2008.

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The total goodwill impairment amount of $5 I billion is based on the company base set selection and methodology used to prepare the study. It provides a consistent basis for comparison of goodwill impairments over the study period. In addition, General Motors Co.'s $27 billion goodwill impairment charge in the fourth quarter was excluded clue to the unique circumstances related to the initial recording and subsequent impairment of its goodwill.

The 2013 study also provides summary highlights of the recently released AICPA Accounting and Valuation Guide Testing Goodwill for Impairment, which is available at www.cpa2biz.com.

History of the Studies

Duff & Phelps and FERF first published the results of their 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), as well as the findings of a survey of Financial Executives International (FEl) members. The 2010 Goodwill Impairment r Study expanded the time horizon over which goodwill impairments were studied to five years and modified the dataset to enable a more in-depth assessment of goodwill impairment trends over time. Industry Spotlights were introduced in 2012 along with cross-tabulation analyses.

Now in its fifth year of publication, the 2013 study continues to examine general and industry goodwill impairment trends observed through December 2012 and report the 2013 results of the annual goodwill impairment survey of FEl members.

The manner in which this information is presented has evolved over time and the 2013 study adds two new tables that bridge industry trends along with other summary data. The graphic on page 54 captures the evolution of goodwill in the study from 2008 through 2012 to aid in assessing goodwill and goodwill impairment trends over time. Mergers and acquisitions (M&A) activity summarizes the transactions (both number of deals and value) to acquire a 50 percent or more controlling interest.

2013 Study Highlights Among the general trends for 2012:

* U.S. companies in the study recorded $51 billion of goodwill impairment, a 76 percent increase from $29 billion in 201 I. This marks the highest aggregate impairment amount since the level reported in 2008, at the height of the financial crisis.

* Goodwill impairments were heavily concentrated, with 47 percent attributable to the three largest impairment events.

* Nearly 67 percent of the goodwill impairments were attributable to just three industries: information technology, industrials and health care.

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* While overall deal volume declined, there was a 30 percent increase in deal value, leading to $21 I billion in additional goodwill recorded on balance sheets.
Goodwill Landscape

2008  188
2009   26
2010   30
2011   29
2012   51

* Source: S&P IQ M&A activity based on transactions closed in each year,
where U.S. publicly traded companies acquired a 50% of greater interest.


* About 43 percent of all U.S. companies carried some amount of goodwill on their balance sheet; however, that number has declined from approximately 48 percent in 2010.

* Of companies carrying goodwill, 10.5 percent recorded a goodwill impairment event, a minimal increase from 10.2 percent in 2011.

* The average impairment per event was $218 million. This is the highest average impairment since the peak of $375 million in 2008 and significantly greater than the low of $86 million in 2009.

Industry Insights for 2012:

* Information technology jumped from fourth place in 2011 to first in 2012, with the highest amount of goodwill impairment ($22 billion, or 43 percent of aggregate impairment), replacing financials, which held the first place in the prior three years.

* Industrials had the largest percentage of companies with impaired goodwill (8 percent), followed by IT and consumer staples (both at 7 percent).

* Over the 2008-2012 period, industrials had the highest percent of companies with goodwill on the books in any given year (62 percent on average), while financials had the lowest proportion (30 percent on average).

* The proportion of companies carrying goodwill that recorded an impairment ranged from 7 percent to 20 percent during the live-year period. IT, consumer staples and industrials have all exhibited a recent upward trend.

* Although goodwill intensity (goodwill as percentage of total assets) across all industries held fairly stable over the years at approximately 6 percent, health care, industrials, telecommunications services and materials have shown a recent upward trend.

Highlights of the 2013 Survey of FEI Members

FEI and Duff & Phelps surveyed FEI members in the summer of 2013 focusing on recent goodwill impairment trends and valuation methodologies utilized. Insights gained from these annual surveys provide a helpful benchmark for companies as they undergo their respective impairment analyses. The following are some highlights from this year's survey.

* Qualitative Impairment Tests. The Financial Accounting Standards Board (FASB) finalized guidance on optional qualitative impairment testing for goodwill in late 2011 (codified by ASU 201 1-08) and for indefinite-lived intangibles in mid-2012 (codified by ASU 2012-02).

Notably, 75 percent of all survey respondents indicated that (hey did not apply the optional qualitative assessment. About 60 percent of those respondents that by-passed Step 0 did so because they prefer the quantitative test, while the other 4 percent did so because it was not cost effective or because of a lack of practical guidance.

Further, of the companies that have recorded indefinite-lived intangibles, 68 percent of public and 48 percent of private company respondents continue to use the traditional annual fair value test for indefinite-lived intangibles.

* Goodwill Impairment Trends. The proportion of public companies recognizing an impairment in 2012/2013 (37 percent) is similar to that in last year's survey (36 percent). However, private companies showed a notable decline from 34 percent to 23 percent.

* Causes of Goodwill Impairment. Macroeconomic and industry conditions appear to have improved relative to the 2012 survey. The proportion of respondents citing factors specific to the reporting unit as the reason for taking an impairment has increased from the prior year's survey, nearing 60 percent of companies in the 2013 survey.

* Extent of Goodwill Write-down. When a goodwill impairment was recognized, public companies were more likely than private companies to write-off 100 percent of their goodwill carrying amount, with 43 percent of respondents doing so. In contrast, 44 percent of private companies wrote down goodwill balances by less than 20 percent.

* Small Private vs. Large Public Companies. Several cross-tab analyses were performed to draw some insights into specific subsets of the respondents to the 2013 survey. For instance, responses for small private companies (with revenue less than $100 million) were contrasted to those of large public: companies (with revenue greater than $1 billion).

Small private companies were almost three times as likely to be anticipating an impairment loss in the near future. They were also about three times more likely to disregard control premiums altogether in their goodwill impairment analysis. Conversely, large public companies were almost nine times more likely to rely on general market studies when supporting their control premium assumptions.

New Guidance

The feedback provided by 2013 survey respondents was instrumental in capturing FEI members' awareness of current guidance available to assist with goodwill impairment analyses; namely the draft AICPA Ac counting and Valuation Guide Testing Goodwill for Impairment; and the Appraisal Practices Board (ApB) Valuation Advisory Discussion Draft The Measurement and Application of Market Participant Acquisition Premiums (MPAP).

A significant proportion of respondents were unaware of these efforts, with only 50 percent of respondents familiar with the AICPA guidance and only 20 percent aware of the MPAP valuation advisory.

Guides for Preparers

To meet the needs of preparers, auditors and valuation specialists, the AICPA recently released the AICPA Goodwill Impairment Guide that provides guidance and illustrations on goodwill impairment analyses. Though the guide is non-authoritative, it continues a tradition set by prior AICPA guides on a range of topics including IPR&D (In Process Research & Development) and cheap stock, which have gained wide use and acceptance in practice.

Nearly 39 percent of public company and 65 percent of private company respondents were unaware of the draft AICPA guide. Now that the guide has been issued in final form, familiarity with it will likely increase.

Among other items, the draft MPAP Valuation Advisory guide proposes and documents best practices in determining whether a control premium is appropriate in valuations used for financial reporting purposes, as well as how to measure it. One of the highlights of the guide is that the exclusive reliance on benchmark control premium data to derive a MPAP is not consistent with best practices.

This is notable in light of the survey responses, where 51 percent of public companies still relied solely on market-based studies to support the level of control premium in their latest goodwill impairment analysis. In fact, 94 percent of companies that relied exclusively on general market-based studies were either not aware of (80 percent); or were aware but had not read (14 percent) the MPAP guide.

Practical Considerations

As companies undertake future goodwill impairment tests, it is important to review and consider any relevant guidance, including the new AICPA guide and the draft MPAP Valuation Advisory. Specific areas that have received scrutiny, and which are covered in these guides, include the following:

* Comparison to Market Capitalization: It is considered best practice for public companies to compare the sum of the fair values ot their reporting units to their market capitalization and explain any differences. It is not best practice to default to a generic "control premium" as the reconciling item.

* Market Participant Assumptions: One should consider the manner in which market participants would operate a reporting unit as well as the impact of any market participant synergies, such that the exit value is maximized. ! Control Premiums: Only market participant acquisition premiums should be considered in financial reporting. MPAP should be supported by reference to enhanced cash flows and/or a reduction of risk, rather than sole reliance on benchmark control premium data.

Further, they should be applied in the context of total invested capital rather than on an equity basis.

* Weights Assigned to Multiple Value Indications: Companies should give thoughtful consideration to the weights assigned to the different valuation techniques employed, including the market and income approaches.

Among the key findings from the fifth annual Duff & Phelps and Financial Executives Research Foundation U.S. Goodwill Impairment Study, the 2012 aggregate impairment is the highest since the level reported at the height of the financial crisis in 2008.

RELATED ARTICLE: Goodwill Impairment Guidance Highlights

AICPA--Testing Goodwill for Impairment

* Use of shared assets among reporting units

* Market participant assumptions

* Comparisons to market capitalization

* Application of the optional qualitative assessment

APB--Discussion draft: Market Participation Acquisition Premiums

* MPAPs should be supported by reference to enhanced cash flows and/or a reduction of risk

* Relying solely on benchmark control premium data to derive a MPAP is not consistent with best practices

* MPAP should be applied in the context of total invested capital rather than on an equity basis

Gary Rolanci managing director; Duff & Phelps, and Carla Nunes, director, are based in the firm's office of professional practice in Philadelphia. To obtain a copy of the study, visit www.duffanclphelps.com or www.ferf.org.
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Title Annotation:Research
Author:Roland, Gary; Nunes, Carla
Publication:Financial Executive
Date:Dec 1, 2013
Words:1916
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