ASC 350 Goodwill & ASC 360 Impairment Testing for a U.S. Public Company
- Goodwill Impairment
- Public Company
TXN Capital LLC was engaged to perform an independent valuation and impairment analysis for a publicly traded U.S. company for financial reporting purposes.
The engagement followed a significant decline in the Company’s share price around the valuation date. Given the change in market capitalization and other relevant financial and market considerations, management needed to assess whether the carrying values of the Company’s long-lived assets and goodwill remained supportable.
A sustained decrease in share price is among the factors that may indicate a triggering event for purposes of an ASC 350 goodwill impairment assessment. The applicable guidance also requires consideration of broader factors such as macroeconomic conditions, industry conditions, financial performance, cost factors, and reporting-unit-specific developments.
TXN Capital’s engagement combined several related analyses into a coordinated financial reporting valuation:
- Enterprise and equity valuation
- Discounted Cash Flow analysis
- Guideline Public Company analysis
- Review of relevant M&A transactions
- Market capitalization reconciliation
- ASC 360 long-lived asset impairment testing
- ASC 350 goodwill impairment testing
The objective was to develop a supportable valuation conclusion using market-participant assumptions while maintaining consistency between the enterprise valuation, long-lived asset recoverability analysis, goodwill impairment test, and observable public-market evidence.
The Valuation Challenge
Impairment testing for a publicly traded company presents a different challenge from a conventional business valuation.
The analysis must consider not only management’s expectations for the business but also the assumptions that market participants would use when evaluating the reporting unit.
This distinction was particularly important in this engagement because the Company’s declining stock price provided observable market evidence that needed to be considered alongside management’s projections.
Accordingly, TXN Capital evaluated:
- Historical financial performance
- Actual results relative to prior forecasts
- Management’s current financial projections
- Earnings-call information and management guidance
- Industry and capital-market conditions
- Public-company valuation multiples
- Expected revenue growth and profitability
- Company-specific operating risks
- Changes in the Company’s stock price
- Observable market capitalization as of the valuation date
Under ASC 820, fair value reflects a market-participant perspective rather than solely entity-specific assumptions. The supporting valuation framework similarly emphasizes that cash flows, cost of capital, acquisition premiums, and potential synergies used in a fair value analysis should be considered from a market-participant perspective.
Facing an ASC 350 or ASC 360 Impairment Trigger?
Enterprise and Equity Valuation
TXN Capital applied both the Income Approach and Market Approach to estimate the fair value of the business. Using multiple valuation methodologies allowed the conclusions derived from management’s projected financial performance to be evaluated against observable public-market evidence.
Discounted Cash Flow Method
Under the Income Approach, TXN Capital prepared a Discounted Cash Flow (DCF) analysis using management-provided financial projections as the starting point.
The analysis considered the Company’s expected:
- Revenue growth
- Operating profitability
- EBITDA margins
- Capital expenditures
- Working-capital requirements
- Taxes
- Long-term operating performance
- Terminal growth expectations
Management’s projections were not considered in isolation.
TXN Capital compared the forecasts with the Company’s historical results, recent operating performance, market expectations, industry trends, and other relevant market-based indications.
This benchmarking process helped evaluate the reasonableness of projected growth and profitability and identify risks associated with achieving the forecast.
Discount Rate and WACC Analysis
The projected cash flows were converted to present value using an appropriate Weighted Average Cost of Capital (WACC).
The cost of equity was developed using a Capital Asset Pricing Model (CAPM) framework, while the overall WACC incorporated a market-participant capital structure and applicable costs of debt and equity.
The assessment also considered risks associated with the Company’s projected performance.
This was particularly important because the Company’s future expectations needed to be considered in the context of the market conditions and operating developments that had contributed to the decline in its share price.
Guideline Public Company Method
TXN Capital also applied the Guideline Public Company Method (GPCM) under the Market Approach.
Comparable publicly traded companies operating in the same or related industries were identified and evaluated.
The analysis considered factors including:
- Relative company size
- Revenue growth
- EBITDA growth
- Profitability
- Operating margins
- Business characteristics
- Market positioning
- Expected financial performance
Relevant enterprise-value multiples were analyzed and selected based on the Company’s relative positioning within the peer group.
Selected multiples were then applied to appropriate financial metrics, including LTM and forward revenue and EBITDA, to develop market-based indications of enterprise value.
The GPCM provided an important independent reference point because it reflected how public-market investors were valuing companies exposed to comparable industry and operating conditions.
Guideline Transaction Method
TXN Capital also reviewed relevant merger and acquisition transactions as a potential additional market-based valuation indication.
The transaction analysis considered available information regarding acquisitions involving companies operating in the subject Company’s industry or related markets.
However, there were a limited number of sufficiently comparable transactions close to the valuation date, and reliable transaction multiples were not consistently available.
Accordingly, the Guideline Transaction Method was considered as supporting market evidence but was not assigned weight in the final valuation conclusion.
This approach avoided placing undue reliance on transactions that did not provide sufficient comparability or market evidence.
Valuation Reconciliation and Conclusion
TXN Capital reconciled the indications developed under the Income and Market Approaches.
Based on the relative quality and relevance of the available information, the final valuation conclusion assigned:
50% weight to the Discounted Cash Flow Method
50% weight to the Guideline Public Company Method
The resulting enterprise value was adjusted for applicable debt, cash, and other relevant items to derive the Company’s equity value.
Equity Value and Market Capitalization Reconciliation
Because the subject was publicly traded, an important component of the analysis was reconciling the independently estimated equity value with the Company’s observable market capitalization.
The concluded equity value of approximately $1.037 billion was closely aligned with the Company’s observable market capitalization.
The analysis did not indicate a meaningful incremental market-participant acquisition premium or discount based on the facts and circumstances considered.
Market capitalization reconciliation is particularly relevant in public-company goodwill impairment analyses. The ASC 350 valuation framework includes DCF, guideline public-company multiples, M&A transaction multiples, and market capitalization reconciliation among the considerations used in estimating and evaluating reporting-unit fair value.
ASC 360 Long-Lived Asset Impairment Testing
Following the valuation analysis, TXN Capital evaluated the Company’s long-lived asset group pursuant to ASC 360.
The asset group included:
- Leasehold improvements
- Fixtures and equipment
- Construction-in-progress
- Finite-lived trademarks
- Computer software
The purpose of the ASC 360 analysis was to determine whether the carrying amount of the long-lived asset group was recoverable from the cash flows expected to result from its continued use and eventual disposition. Developing the ASC 360 Forecast TXN Capital developed a 10-year forecast period based on the weighted-average remaining useful life of the primary assets within the asset group. The analysis considered the cash flows expected to be generated by the assets over the relevant period. Unlike the DCF analysis used to estimate enterprise fair value, the ASC 360 recoverability analysis evaluated the applicable undiscounted cash flows.
Developing the ASC 360 Forecast
TXN Capital developed a 10-year forecast period based on the weighted-average remaining useful life of the primary assets within the asset group.
The analysis considered the cash flows expected to be generated by the assets over the relevant period.
Unlike the DCF analysis used to estimate enterprise fair value, the ASC 360 recoverability analysis evaluated the applicable undiscounted cash flows.
ASC 360 Recoverability Test
Expected undiscounted cash flows of approximately $1.4 billion exceeded the asset group’s carrying value of approximately $900 million.
Accordingly, the long-lived asset group passed the ASC 360 recoverability test.
No impairment of the long-lived asset group was indicated based on the recoverability analysis.
ASC 350 Goodwill Impairment Testing
After completing the applicable preceding impairment analysis, TXN Capital performed the quantitative ASC 350 goodwill impairment test at the reporting-unit level.
ASC 350 addresses goodwill and indefinite-lived intangible assets and generally requires goodwill impairment testing at least annually or when a relevant triggering event occurs.
The quantitative goodwill impairment analysis compares the estimated fair value of the reporting unit with its carrying amount.
If the reporting unit’s carrying amount exceeds its fair value, an impairment is indicated, subject to the applicable limitation based on the carrying amount of goodwill.
Enterprise-Level Goodwill Impairment Test
TXN Capital first compared the estimated fair value of the business enterprise with its corresponding carrying value.
The estimated business enterprise value was approximately $1.50 billion, compared with a carrying value of approximately $1.66 billion.
The carrying amount therefore exceeded estimated fair value by approximately $160 million, indicating goodwill impairment.
Equity-Level Reconciliation
TXN Capital also performed an equity-level reconciliation as an additional reasonableness check.
The estimated fair value of equity was approximately $1.037 billion, compared with a carrying value of approximately $1.198 billion.
The resulting shortfall of approximately $160 million was consistent with the enterprise-level analysis.
Accordingly, the analysis indicated a goodwill impairment of approximately $160 million, subject to the amount of goodwill allocated to the reporting unit and other applicable accounting considerations.
The Outcome
TXN Capital’s analysis provided management with an integrated framework addressing three distinct but interrelated financial reporting matters.
Enterprise and Equity Valuation The Company’s concluded equity value was approximately $1.037 billion and closely reconciled with observable market capitalization as of the valuation date.
ASC 360 Long-Lived Assets The asset group’s expected undiscounted cash flows of approximately $1.4 billion exceeded its $900 million carrying value.
The asset group was therefore determined to be recoverable, and no ASC 360 impairment was indicated.
ASC 350 Goodwill The reporting unit’s estimated fair value was approximately $160 million below its carrying amount.
The quantitative analysis therefore indicated goodwill impairment.
The engagement demonstrates why ASC 350 and ASC 360 analyses should be coordinated carefully. The underlying forecasts, market assumptions, enterprise valuation, carrying values, and public-market evidence need to tell a consistent financial story while still respecting the different measurement requirements applicable to each impairment test.
Key Takeaways for Public Companies
For publicly traded companies, a substantial or sustained decline in share price can create an important impairment consideration, but stock price should not necessarily be evaluated in isolation.
Management may also need to consider changes in operating performance, forecasts, industry conditions, comparable-company valuations, cost factors, capital-market conditions, and reporting-unit-specific developments.
ASC 350 guidance contemplates factors including macroeconomic conditions, industry and market developments, financial performance, reporting-unit-specific events, and changes in share price when evaluating potential impairment indicators.
A robust impairment analysis therefore requires both accounting discipline and valuation judgment.
