Sheshunoff & Co. Investment Banking works exclusively with financial institutions when determining goodwill impairment.
Understanding the Requirements
As a national leader in bank stock valuations, our professionals have a long history assisting banks with their goodwill impairment testing and understand what accounting firms need from appraisers to satisfy impairment testing.
With the recent amendment to the Accounting Standards Codification TM — Intangibles, Goodwill and Other Topic No. 350 — management now has the discretion to determine if goodwill impairment testing is necessary based on a qualitative assessment.
In light of depressed bank stock prices, current market volatility, economic stagnation, margin erosion, political gridlock and regulatory pressure, a more likely than not conclusion on your qualitative assessment may be difficult to make without help.
Sheshunoff provides insight, information and analysis for your qualitative assessment.
Bank Goodwill Impairment Testing
Institutions are required to review goodwill reported on financial statements annually, and to test annually for impairment (or sooner if impairment is anticipated). Goodwill impairment testing must follow the guidance provided by the Accounting Standard Codification (“ASC”) standards:
- Fair Value Accounting (ASC 820/SFAS 157)
- Goodwill and Intangible Assets and if impairment is indicated (ASC 350/SFAS 142)
- Business Combinations and Purchase Price Accounting (ASC 805/SFAS 141R)
Sheshunoff assists management by providing insight, information and analysis for the qualitative assessment. Management has the option to first assess qualitative factors to determine whether the existence of events or circumstances leads to a determination that impairment exists. The qualitative assessment should include an assessment but is not limited to:
- General macroeconomic conditions – deterioration in general economic conditions, limitations on the access to capital, and changes in equity and credit market
- Industry and market considerations – deterioration in bank’s market, change in competition, decline in market multiples or metrics in absolute terms and relative to peers, and regulatory or political developments
- Factors having a negative effect on earnings and cash flows (i.e. margins, asset quality, real estate prices etc.)
- Change in historical or projected financial performance, actual earnings vs. over all projected earnings
- Institution specific risks — change in management, key personnel, strategy, customers, contemplation of bankruptcy or litigation
- Events impacting the reporting unit – change in the composition or carrying amount of net asset values, divestiture or acquisition, recognition of impairment loss in financial statements of subsidiary
- Sustained depressed share price — both absolute terms and relative to peer
Based upon this assessment, if management determines that it is more than 50% likely that the fair value of the reporting unit is less than the carrying value including goodwill, then the following is required.
Calculate Fair Value
Our professionals determine the fair value of the financial institution as defined by ASC 820 as “the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date.” In determining fair value, Sheshunoff & Co. Investment Banking uses bank valuation methodology reflecting a multipronged approach:
- Comparable Transaction Analysis
- Marketable Trading Analysis
- Discounted Cash Flow Analysis
- Control Premium Analysis
The Review consists of establishing and comparing the Fair Value of the company to that of its book value including goodwill. Under ASU 2017-04, companies must record goodwill impairment charges if a reporting unit’s carrying value exceeds its fair value. The impairment charge is based on that difference and is limited to the amount of goodwill allocated to that unit (i.e., the carrying amount of the goodwill can only be reduced to zero).
- Market Documentation
- Peer Comparisons
- Other necessary information
The Engagement Includes:
- Financial and Company Analysis
- Application of Valuation Methodology & Approaches
- Supporting Market Data and Documentation
- Preliminary Determination of Goodwill Impairment