With the recent decrease in crude oil prices and market capitalizations, auditors and regulators will now very likely have a renewed focus on impairment testing for goodwill and long-lived assets on the balance sheets of U.S. energy-focused companies.
The fourth quarter of 2018 witnessed a dramatic downturn in crude oil pricing. From October 1, 2018 to December 31, 2018, the West Texas Intermediate (“WTI”) spot price per-barrel (“/bbl”) of oil declined from $75.31/bbl to $45.15/bbl, a decrease of 40%. Market capitalizations of many U.S. energy-focused companies have followed suit.
(Source: U.S. Energy Information Administration)
Under Accounting Standards Codification Topic 350, Intangibles: Goodwill and Other (ASC 350), goodwill is tested for impairment at least annually or when a triggering event dictates; under Accounting Standards Codification Topic 360, Property, Plant and Equipment (ASC 360), long-lived assets are tested for impairment when a triggering event dictates. A sharp decrease in commodity pricing over a period of several months, such as occurred with crude oil prices in the fourth quarter of 2018, may qualify as a triggering event.
As such, publicly- and privately-held companies should ensure that they are adequately addressing their year-end 2018 goodwill and long-lived asset impairment testing procedures.
To learn more about how 2017 amendments to ASC 350 simplified the process of testing goodwill for impairments, CLICK HERE.