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June Mitchell

Impairment Losses

The data that was collected and shared so far for 2020 was that U.S. public firms took $143 billion in impairments than the past decade according to Duff &Phelps.  This was the largest amount of goodwill in more than a decade the value of certain assets declined during the Covid-19 pandemic which affect everyone worldwide. Companies report goodwill on their balance sheets when they buy a business for more than the value of its net assets. The acquiring business must measure the fair value of its reporting units annually. If that figure is less than the amount recorded on the books, the company reduces the value of the goodwill. The preliminary figure which could change as companies continue to report last year’s results is more than double those of 2019 when impairments totaled only $71 billion. The change is about 3.3 times higher than the annual average over the 10 years according to Duff & Phelps data which they analyzed this was done using more than 8,800 businesses for the study (Maurer, 2019).

This economic recession historically led to an increase in goodwill impairments, as a result, most businesses across the industries were slow during the pandemic.  The U.S. domestic gross products declined by 2.3% in 2020. Among the companies that had the largest write down were the energy companies as well as the telecommunication companies.

One of the largest energy companies was Baker Hughes Co’s $14.77 billion write-down reported last April this is the largest impairment in 2020. This is associated with an oil-field services and equipment business, that Baker Hughes acquired in its merger with General Electric Co’s oil and gas division in 2017. Baker Hughes’s annual revenue for 2020 was $20.705B, a 13.14% decline from 2019. These declines were driven by the uncertainty surrounding the outbreak of the coronavirus (COVID-19) and other macroeconomic events such as the geopolitical tensions between OPEC and Russia, which also resulted in a significant drop in oil prices.

Based on these factors, a triggering event occurred and, accordingly, an interim quantitative impairment test was performed on March 31, 2020. In performing the interim quantitative impairment test and consistent with our prior practice, they determined the fair value of each of the reporting units using a combination of the income approach and the market approach by assessing each of these valuation methodologies based on the availability and relevance of comparable company data and determining the appropriate weighting. Under the income approach, the fair value for each of our reporting units was determined based on the present value of estimated future cash flows, discounted at an appropriate risk-adjusted rate. Including an estimate of long-term future growth rates, based on our most recent views of the long-term outlook for each reporting unit. Their internal forecasts include assumptions about future commodity pricing and expected demand for our goods and services.

The second largest company is AT&T Inc which disclosed last month’s $10.47 billion impairment for the year.  The telecommunications giant said that the write-down was related to the pay-television and Vrio Corp businesses. Which provides DirecTV services in South America and the Caribbean. Cord-cutting was upending the pay-TV market long before the pandemic, but consumers’ shift to digital media accelerated over the past year. AT&T paid $49 billion for DirecTV in 2015. The Fair Value Measurement” provides a three-tiered fair value hierarchy based on the reliability of the inputs used to determine fair value. Level 1 refers to fair values determined based on quoted prices in active markets for identical assets. Level 2 refers to fair values estimated using significant other observable inputs and Level 3 includes fair values estimated using significant unobservable inputs. The level of an asset or liability within the fair value hierarchy is based on the lowest level of any input that is significant to the fair value measurement.  

They believe that the valuation methods are appropriate and consistent with other market participants. (Ernet & Young LLP, February 2021). The consolidated financial statements, and reporting unit goodwill are tested at least annually for impairment, and long-lived assets, including definite-lived intangible assets, are evaluated for impairment whenever events or circumstances indicate that the carrying amount may not be recoverable over the remaining life of the asset or asset group. In connection with fair values, these impairment evaluations involve the utilization of discounted cash flow models, reporting units, and market multiples valuation approaches. As disclosed in Note 9 to the consolidated financial statements, October 1, 2020, estimated fair values of the Turner, HBO, and Entertainment Group reporting units exceeded their carrying values by less than 10%. (Ernet & Young LLP). The separation of the Entertainment Group reporting unit into the Video and Broadband reporting units required additional impairment evaluations before and after the separation, the company recorded a goodwill impairment charge of $8,253 million, representing the entire amount of goodwill allocated for the Video reporting unit and $2,212 million goodwill impairment charge for the Vrio reporting unit, representing the entire amount of goodwill for that reporting unit. 

These are just two of the companies that were affected by the Covid-19 pandemic which play a major role in the economic hardship in 2020 and is continuing.

Peaches Patchette Evette Ealy

Under the U.S. generally accepted accounting principles (GAAP) assets considered impaired must be recognized as a loss on an income statement. An impairment loss is an asset's book value minus its market value. You must record the new amount in your books by writing off the difference. Write the asset's new value on your future financial statements. You may also need to record a new amount for the asset's depreciation. This often occurs when the asset is depreciated or amortized at an underestimated amount or following a decline in the asset's market value. A food company purchased a packaging machine at $100,000 two years ago and depreciates it at $5,000 every year. An impairment loss is recognized immediately in profit or loss. The carrying amount of the asset is reduced. In a cash-generating unit, goodwill is reduced first; then other assets are reduced pro rata.

On an income statement, impairment loss represents a permanent loss of value on a company's assets. This value decline can apply to both intangible and fixed assets. It's important to put an impairment loss on an income statement because it can help you track the financial accuracy of your business, making it easier to avoid mistakes like overstatements. It's helpful to periodically test an asset's value for impairment if it shows certain signs of inaccuracy, like an overestimation of the projected revenue gain, as knowing this information can help you make appropriate financial plans. An impairment loss calculation takes the current book value of the asset and then calculates the difference compared to the total fair value. The equation is for impairment loss is: Impairment loss = book value – fair value.

Example 1

Koelpin Technologies is a manufacturing company that produces modern technology devices. The company recently purchased a selection of new automated machines to help build their newest devices. The seller of the automated machines informed Koelpin Technologies that the new machines should last for at least five years before they need to fix or replace them with newer models. Under this assumption that the machines will at least last for five years at the minimum, Koelpin Technologies purchases 50 of these machines. The purchase price for each machine is $500, resulting in a total purchase price of $250,000.

Two years after Koelpin Technologies makes the purchase, half of the machines experience significant dysfunction. Koelpin Technologies determines that the machines need to be tested for impairment. After thoroughly assessing the issues with the machines, Koelpin Technologies concludes that the 25 machines that malfunctioned now have an estimated worth of $200 each.

When accounting for impairment loss, the staff accountant considers the following information:

Number of machines that malfunctioned, which is 25 in total.

Book value of the machines, which was $500 each.

Fair value of the machines after malfunctioning, which is $200 each.

Impairment loss equation, which is book value (25 x 500) – fair value (25 x 200).

Documented impairment loss, which is $7,500.

Example 2

The Suncoast City Public School Board oversees the school district of two neighboring counties, Westlake County and Rose County. As the population density for these two counties is incredibly small, the board concludes that they can save capital by consolidating all the elementary students from both counties into one large school building. In this effort, the board purchases an old school building at a cost of $700,000. Soon after, an earthquake hits the area and causes severe damage to the newly purchased building. After the disaster, the board concludes that they need to conduct an impairment test. After identifying all the damages to the school, the board determines that the building's estimated worth is now $300,000.

When accounting for impairment loss, the district's primary school accountant considers the following information:

Book value of the building, which was $700,000.

Fair value of the building after the earthquake damage, which is $300,000.

Impairment loss equation, which is book value ($700,000) – fair value ($300,000).

Documented impairment loss, which is $400,000.