Its closing bell for 2008, (whew finally...) and this year in addition to the usual laundry list of closing activities for USGAAP related accounts, there is bound to be an extensive list of activities to be added to the closing checklist on the CFO's calendar.... "Impairment Testing"
Companies are under FAS 142 required to look for factors that may lead to goodwill or other intangible asset impairments at quarter ends but aremandatorily required to examine and assess whether a firms goodwill and intangible assets have been impaired at the year end. This is to be performed regardless of there being a triggering event.
A goodwill write-down is required when the impairment is deemed permanent — or not "recoverable within a reasonable amount of time". In accounting terms, if the stock price stays below carrying value for 60 days it generally means a triggering event. We are in that kind of situation now, in which many companies are experiencing depressed pricing for longer than 60 days, and not seeing much volatility on the upside,
Where there is smoke there is fire, well if plummeting stock and real estate prices weren't enough, significant cash flows have begun to dry up. These will make it a thorny and a rather intriguing time on the excel sheets for financial analysts drawing up their round of cash flows over the next 5 years for impairment analysis testing.
The testing process itself is onerous and can be thorny, as it includes running several valuation models, examining and reworking internal forecasts, gathering and digesting analysts' price targets, reviewing historical pricing, and crunching industry data. Whats more once all this is through on the excel sheets, the same needs to be convinced to the board, thanks to SOX & as well as to the audit firms. Companies may need to plan additional time devoted to this activity.
Assuming after all the testing, there is a permanent impairment and a Company is required to book impairment losses, "USGAAP rules prevent impairment losses to be reversed in the future.
This means that if the year 2008 were to be the worst year for a decade, we will be stuck with these impairment losses sitting in the reserves in the years to come. This can however be overcome, once you either sell the business unit in which the goodwill loss has been booked or the easier way out convert your accounts to IFRS as IASB allows reversal.........
Well converting to IFRS maybe an easier solution as you can offset your losses by booking DTA (deferred tax assets) on the impairment losses with the hope that these will reverse once you convert to IFRS.......but thats only when you can pass the going concern test in the first place.......blip..zzzbliiipppzzz
Merry Christmas to Goodwill testing (i have time until March 31 as my books close then..)
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