Jay B. Wachowicz, CFA, Managing Director in our Valuation & Financial Opinions Group, spoke on the New Rules of Impairment Testing for the Financial Executives Research Foundation ("FERF").

For more information and to watch the recording, click here.

Key Takeaways:

The new “Step Zero” test:

• Optional qualitative approach
• Determines more likely than not (greater than a 50% probability) that fair value is greater than carrying value
• Relates to both public and nonpublic businesses
• Replaces triggering factors for interim testing
• Effective for annual goodwill impairment tests performed for fiscal years beginning after December 15, 2011

Qualitative factors to consider:

• General macroeconomic conditions
• Industry and market conditions
• Cost/Expense changes that negatively impact earnings
• Decline/Improvement in financial performance
• Company specific events
• Reporting unit specific events
• Changes in capital markets pricing

Top 10 impairment testing pitfalls:

• Coordination of financial forecasts
• Supportability of assumptions underlying projections 
• Allocation of corporate overhead & assets /liabilities to reporting units 
• Expect rigorous long-lived asset impairment review for property, plant, and equipment as well as indefinite-lived intangibles
• Substantiation of cost of capital in volatile capital markets environment
• Applicability and magnitude of control premiums
• Fair value versus net book value of interest-bearing debt to compute equity value
• Reconciliation of the sum of ALL reporting units to capital markets value regardless of whether or not a reporting unit maintains goodwill on its books
• Deferred income tax considerations in Step 1
• Deferred income tax considerations in Step II