As energy market capitalizations decline, addressing year-end goodwill and long-lived asset impairment testing will be paramount in 2021.

Market equity prices and indices continued to decrease for many energy companies during 2020. For instance, between January 13, 2020, and December 31, 2020, the S&P Oil & Gas Exploration and Production Select Industry Index decreased by approximately 36%, inclusive of a rebound in the second half of the year. Likewise, the S&P Oil & Gas Equipment Select Industry Index decreased by 42% during this same timeframe, also inclusive of a rebound in the second half.

With this continued decrease in market capitalizations, coupled with commodity price declines in recent years, auditors and regulators will continue to focus on impairment testing for goodwill and long-lived assets on the balance sheets of energy-focused companies.

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. Continued declines in market prices such as those that occurred during most of 2020, along with associated changes in industry fundamentals (e.g., changes in drilling plans for E&P companies and changes in customer buying patterns for oilfield services companies), may qualify as triggering events.

In summary, publicly and privately held companies need to adequately address their year-end 2020 goodwill and long-lived asset impairment testing procedures. Doing so promptly will ensure that year-end and quarterly financial statement audits and reviews will proceed as smoothly as possible and will also lead to greater shareholder and stakeholder transparency.

Originally published on CPA Practice Advisor, January 18, 2021.  Republished with permission.