Evaluating Impairment Risk: Goodwill impairment continues its downward trend in 2010 

Based on data compiled by KPMG LLP, goodwill impairment continued to decline across a number of industries throughout 2010. This downward movement represents a continuation of the trend in 2009 when fewer companies took less goodwill impairment charges compared to 2008.


This study analyzes goodwill impairment for public companies from January 2005 through December 2010 and identifies those industries that may have been more heavily affected. The study's aim is to help financial executives assess recent goodwill impairment trends.

Goodwill is a residual intangible asset that arises from business acquisitions where the amount paid for the company exceeds the fair value of the identified net assets of that company. According to FASB ASC Topic 350, Intangibles – Goodwill and Other, goodwill is not amortized but is instead tested for impairment at the reporting unit level at least annually. Impairment exists when a reporting unit's goodwill carrying amount exceeds its fair value. The impairment amount is calculated through a hypothetical business combination exercise that determines the fair value of goodwill compared to its carrying value.

 

Goodwill impairment continues its descent

Goodwill impairment losses continued to decline to approximately $39 billion in 2010 down from $92 billion in 20091, a drop of almost 60 percent, based on a study of financial information from 1,879 U.S.-based publicly traded companies. In addition, only 7 percent of companies studied in 2010 recorded a goodwill impairment loss compared to approximately 12 percent in 2009.

 

Annual goodwill impairment trend

 

Industry highlights

Our study shows that in 2010 the hardest hit industries in terms of actual dollar impairment losses were diversified financials, which accounted for almost 36 percent of the total goodwill impairment losses, followed by telecommunication services, and energy, which accounted for 12 percent and 10 percent, respectively.

 

Technology hardware and equipment companies registered the highest goodwill impairment losses in KPMG's 2009 study2 at almost 23 percent. This year, technology hardware and equipment companies represented less than 1 percent of total impairment losses. Overall, goodwill impairment losses for these technology hardware and equipment companies decreased by more than 95 percent in 2010.

 

Goodwill impairment losses for the materials, capital goods, and energy industries also decreased significantly from 2009 to 2010. The automobile and automotive component industry as well as the retailing industry saw the greatest percentage declines in goodwill impairment losses, with no companies in either of these industries in our study recording a goodwill impairment loss.

 

Similar to our previous studies on goodwill impairment, losses were spread across a number of industries. In 2010, the hardest hit industries in terms of the number of companies recording goodwill impairment charges as a percentage of industry participants analyzed were:

 

  • Consumer durables – 16 percent
  • Diversified financials – 12 percent
  • Media – 12 percent
  • Food and staples retailing – 10 percent
  • Banks – 10 percent

 

It should be noted as well that the median goodwill impairment loss for the companies included in KPMG's analysis also declined between 2009 and 2010. Due to the generally lower losses recognized across all industries, the median goodwill impairment loss decreased from $97 million in 2009 to $27 million in 2010, a drop of approximately 72 percent.

 

On average, similar to our 2009 study, goodwill represented less than 5 percent of the total carrying value of assets of the businesses included in the study. This data point seems to support the fact that merger and acquisition activity that would yield goodwill on company balance sheets has not yet returned to prerecession levels. In addition, 2010 impairment losses represented approximately 1 percent of companies' goodwill. Comparatively, in 2009, impairment losses represented approximately 3 percent of goodwill.3

 

2010 goodwill impairment industry summary4

 

Concluding thoughts

With the improvement in the U.S. economy and stock market since 2009, and the large goodwill write-downs in prior years - particularly in 2008 and 2009 - it appears the retreat in goodwill impairment losses recognized across industries is not an aberration from 2009 but a continuing trend. Similar to our previous study for 2009, higher market valuations stemming from better operating performance in an improving economy contrasted with lower goodwill carrying values are likely to reduce the number of triggering events, amounts, and occurrences of goodwill impairment losses for companies that have goodwill on their balance sheet.

 

Methodology

KPMG's study was based on financial information of 1,879 U.S.-based publicly traded companies across 24 industries, with minimum market capitalization of $500 million, revenues of $500 million, and assets of $300 million. The size of each industry segment ranged from 15 to 179 companies. KPMG's study evaluated goodwill impairment over a six-year period, on an annual basis.

 

More information

This analysis was written by Seth Palatnik, partner, and Evlon Charles, manager, with KPMG LLP's Economic and Valuation Services (EVS) practice. KPMG's EVS practice offers a wide range of business services to help companies succeed in the ever-changing global market, including valuation services, transfer pricing documentation, planning and risk management, and economic analysis.

 

For more information on the report, contact:

 

Jordan Lamm

Principal and National Leader - Valuation Services

Chicago

T: 312-665-2263

E: jlamm@kpmg.com

 

For more information on how our professionals can help you address your valuation-related issues, please contact one of the following Valuation Services leaders in your area.

 

Howard Scribner

Partner and National Leader - EVS

Short Hills

T: 973-912-6368

E: hscribner@kpmg.com

 

Steven J. Sherman

Partner and Global Chair - Valuations Committee

Chicago

T: 312-665-5337

E: sjsherman@kpmg.com

 

Steve Stewart

Principal and Western Leader - EVS

Los Angeles

T: 213-955-8656

E: sastewart@kpmg.com

 

Will Williams

Principal and Eastern Leader - EVS

Atlanta

T: 404-222-7751

E: wwilliamsiii@kpmg.com

 

 

 

1 Evaluating Impairment Risk: Goodwill impairment declines in 2009, KPMG LLP, © 2010.
2. Ibid.
3. Ibid.
4. Source: CapitalIQ Database.