Crude Oil Price Decline Could Trigger Goodwill & Asset Impairment Testing For Energy Companies
By Kevin Cannon
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.
About the Author:
Kevin Cannon is a Director in Opportune’s Valuation practice based in Houston. He has 14 years of experience performing business and asset valuations and providing corporate finance consulting. His specific experience includes valuations of businesses and intangible assets for purchase price allocations, impairment, tax planning and portfolio valuation purposes with a focus on upstream oil and gas and oilfield services.