Goodwill Impairment Testing
We offer qualitative and quantitative tests of goodwill impairment.
Why Choose Us
We believe our thorough understanding of interest rate, liquidity and credit risk derived from our ALM and CECL work combined with our knowledge of purchase accounting fair value determinations make us uniquely qualified to offer this service. Valuation firms that do not have extensive ALM experience are at a disadvantage when performing impairment tests because they are not close enough to the marketplace to make sophisticated forecasts for NIM. The best forecasts for NIM incorporate assumptions regarding the forward curve; re-pricing betas and lags, prepayments of assets, and deposit decay. The best input assumptions come from working on ALM daily across multiple clients.
Similarly, ALM providers that do not have extensive experience with estimating credit losses can produce sophisticated forecasts of NIM but are at a disadvantage when estimating life of loan expected credit losses. The best credit loss estimates are made at the proper level of granularity using discounted cash flow models in full accordance with the Current Expected Credit Loss model. Forecasts made using less sophisticated credit estimate techniques such as vintage analyses do not provide nearly as much insight as granular DCF models.
We also have a deep understanding of the financial accounting and regulatory reporting requirements related to goodwill. For example, we can discuss the advantages and disadvantages of amortizing goodwill for those privately held institutions considering this option rather than testing it for impairment.
Our qualitative test begins with an assessment of the macroeconomic conditions in the areas in which the financial institution operates. Among other items, we consider unemployment, median income, and changes in housing prices. We next examine conditions in the financial institution industry especially credit conditions and the interest rate environment. We then assess the specific performance of the financial institution in the context of our broader review. We review the financial institution’s members/customers, profitability, balance sheet composition, loan mix, asset quality and deposit mix. We factor in the financial institution’s net worth and overall ALM profile. Finally, given our findings we reach a conclusion regarding potential impairment.
On occasion, a financial institution will fail a qualitative test of goodwill or be required to perform an initial quantitative test before it can use the qualitative method. In this case, we estimate the fair value of the equity and compare the result to the carrying value. If the fair value exceeds the carrying value, the goodwill is not impaired. If the fair value is less than the carrying value, the goodwill is impaired. The impairment is limited to the carrying amount of the goodwill.
For additional details regarding determining the fair value of equity – see our white paper on Credit Union Purchase Accounting.