April 2009 | Issue 37
A recent study by PricewaterhouseCoopers LLP confirms what most observers would probably already suspect; that the number of goodwill impairments taken by corporations has soared in recent months. In particular, in the six-month period since the third quarter of 2008 through March 20, 2009, Fortune 500 companies have announced approximately $230 billion of impairments. This is more than twice the total of impairments recorded by Fortune 500 companies during the three years leading up to the third quarter of 2008.
An Impairment Perfect Storm
A goodwill impairment study under FAS 142 starts with a look at the value of a company as compared to its carrying value on the books. A sour stock market sets the stage for an impairment by reducing the apparent fair value of a company as compared to its book value. Add to this a further reduction in value due to earnings being battered by the recession and you have an impairment “perfect storm.”
As of March 20, 2009, 44% of publicly-traded Fortune 500 companies were trading at a price below book value. Of these companies, 52% have announced impairment charges since June 2008. Of the 56% of Fortune 500 companies trading above book value, 21% have recognized goodwill impairments.
Stock Market Shrugs Off Impairment Announcements
PWC also performed a study to determine the effect of the announcement of a goodwill impairment on a company’s stock price. Using a sample of S & P 1500 companies that had announced impairments during the first three months of 2009, and comparing their stock price movements to the movement of the S & P 500 stock index over the same period, they found that the impairment announcements typically had little impact on stock price. A copy of the PWC study is available here.
