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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