Goodwill impairment looks to have spiked in 2020

Goodwill impairments recorded by public companies declined in 2019, but the COVID-19 pandemic appears to have caused it to spike in 2020, based on early reports.

A study released Wednesday by Duff & Phelps examined the trends in goodwill impairment of over 8,800 public companies and found that the total GWI they recorded fell 10 percent from $78.9 billion in 2018 to $71 billion in 2019. However, that was still the second highest level after the 2008 financial crisis.

Early reports from public companies for 2020 indicate that the amount of goodwill impairment will far surpass that amount, though, due to the impact of the pandemic on corporate finances. So far, the top 10 disclosed goodwill impairment events for 2020 have totaled $54 billion, far surpassing the top 10 GWI events reported in 2019 (at $37.4 billion).

The early reporting indicates that overall GWI has already exceeded $120 billion in 2020. That’s not quite up to the level of the global financial crisis of 2008, at the height of which, U.S. companies recorded a total GWI of $188 billion, according to Duff & Phelps, which has been issuing annual reports on goodwill impairment for years. Energy appears to be the most affected industry so far, reflecting the collapse in global oil prices after COVID-19 was classified as a pandemic.

“Should the final 2020 aggregate GWI figures remain at a level lower than that in 2008, it will be partly a reflection of the unprecedented level of support provided by both the Federal Reserve (with swift implementation of liquidity-enhancing monetary policies) and the U.S. government (with large fiscal stimulus packages) in response to the COVID-19 crisis,” said the report.

The report goes into more depth about goodwill impairments for 2019, for which there is currently more data available. The top goodwill impairments that year included Procter & Gamble, which recorded $6.8 billion in impairment, Lumen Technologies, which reported $6.1 billion in impairment, and Frontier Communications, which reported $5.7 billion in impairment. However, a single GWI event of $22.1 billion by General Electric had the highest impact on its 2018 aggregate GWI amount.

Communication services, information technology and consumer staples were the top three industries with the largest increase in GWI in 2019. Industrials saw their aggregate GWI plummet over 80 percent in 2019, driven by a single large event in 2018.

A number of industries are likely to see their goodwill impairments rise for 2020, but others probably won’t be as affected. “Looking at 2020, the COVID-19 pandemic was the biggest challenge for U.S. companies, as the related economic recession is expected to be the most severe since World War II,” said the report. “Certain companies benefited from stay-at-home and lockdown policies, while others struggled to survive without the physical presence of consumers. Even within the same industry, there was a marked divergence in performance, depending on the business model and how quickly a company was able to adapt to the new reality.”