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Goodwill Impairment Testing
Why Choose Us
Similarly, ALM providers without extensive experience in 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 (DCF) models in full accordance with the CECL model. Forecasts made using less sophisticated credit estimate techniques such as vintage analyses provide far less insight compared to 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 Approach
QUALITATIVE TEST
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.
QUANTITATIVE TEST
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.
FEATURED
WHAT OUR CLIENTS SAY
“Over the last several years, Five Star has relied on the skills and expertise of the Wilary Winn team to perform our annual goodwill impairment testing. They have always been […]”
–Tyler Beck, Senior Vice President & Chief Operating Officer, Five Star Credit Union – Dothan, AL