Impairment Testing Under ASC 350 & ASC 360: A Public Company Case Study

General

• We evaluated the Company’s historical performance and analyzed earnings call transcripts, management guidance, and actual performance.
• We also analyzed the reason for the decline in stock price in proximity to the valuation date. This was the triggering event for the valuation.

Income Approach – DCF Method

• We prepared a DCF analysis based on management-provided projections to derive an enterprise value.
• We relied on CAPM to calculate the cost of equity and the market participant capital structure to calculate WACC.
• We developed a de-risked set of projections by benchmarking the Company’s forecast against market-based indications. This helped us support company-specific risk premiums in discount rate determination.

Market Approach – Guideline Public Company Method (GPCM)

• We utilized Capital IQ and general market research to identify companies operating in the related industry.
• We selected valuation multiples based on a comparison of the Company’s size, growth, and profitability relative to the peers.
• We applied selected multiples to LTM and NFY revenue and EBITDA to calculate the Company’s enterprise value.

Market Approach – Guideline Transaction Method (GTM)

• Due to the limited number of transactions in proximity to the valuation date and the lack of available multiples, we presented the transactions but ultimately did not rely on this method.

Conclusion

• We applied 50% weight to each of the DCF and GPCM.
• We also performed market capitalization reconciliation, wherein we compared the concluded equity value with market capitalization. The analysis did not indicate any meaningful market participant acquisition premium or discount, as no additional market-participant synergies or improvements were available beyond the Company’s normalized operations.

• The long-lived asset group included leasehold improvements, fixtures and equipment, construction-in-progress, finite-lived trademarks, and computer software.
• We developed a 10-year forecast based on the weighted average remaining useful life of the primary assets in the asset group.
• We performed the Step 1 recoverability test by comparing the carrying amount of the long-lived asset (asset group) to the sum of its expected undiscounted pre-tax cash flows from continued use and ultimate disposition over its remaining useful life.
• Based on our analysis, we concluded that the asset group passed the recoverability test.

• We performed both enterprise-level and equity-level tests and observed that the carrying value exceeded fair value. Hence, we concluded that goodwill was impaired.