Goodwill Charges Sink Like a Rock

Goodwill impairment charges plummeted in 2009, reflecting large write-downs in 2008 and an improving economy.

Goodwill impairment charges dropped dramatically in 2009, falling nearly 73% from the prior year, says a new study from KPMG. The decline is mostly attributable to an increase in the amount of goodwill write-downs taken in 2008, which left less goodwill on corporate balance sheets in 2009, says KPMG.

The study looked at the financial statements of nearly 1,800 publicly traded companies based in the United States. Aggregate goodwill impairment charges fell to $92 billion in 2009, down from $340 billion the year before. The percentage of goodwill carried on corporate books shrank by more than half in 2009, dipping from 10% of the total carrying value of company assets to just below 5%.

Goodwill, the amount paid for an acquisition that exceeds its fair value, is recognized as an asset and must be tested for impairment at least once a year. It is considered impaired if the fair value of the acquired company (or reporting unit from the parent company’s perspective) falls below its carrying value.

The percentage of surveyed companies that took goodwill impairment charges fell from 17% in 2008 to 12% in 2009. Impairment charges represented just 3% of goodwill in 2009, compared with 30% in 2008. The median impairment charge for the companies in the survey decreased 62%, from $258 million in 2008 to $97 million in 2009.

The KPMG study also examined goodwill impairment by industries. In 2009 the hardest-hit businesses were technology hardware and equipment companies, with an aggregate $21.4 billion worth of impairment charges, representing 23% of total goodwill impairment write-downs for that year. They were followed by telecommunications-services companies and software and services companies (see chart below). By contrast, banks, whose impairment charges fell more than 90% in 2009 to $3.9 billion, represented 4% of total impairment charges.

Meanwhile, in a March study of 6,000 publicly traded companies, financial advisory firm Duff & Phelps and Financial Executives International found that the ripple effect from the 2008 recession caused 68% of the companies to recognize a goodwill impairment charge. The companies wrote down a total of $260 billion, according to the study, which will be updated this fall.

To a degree, the decline in goodwill impairment charges can be read as a lagging indicator of economic health, says Gary Roland, a managing director at Duff & Phelps. The slowly improving economy has spawned an increase in company values over the past two years, which by default means there are fewer goodwill write-downs, he points out.

Goodwill impairment

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