U.S. Companies’ Goodwill Write-Downs Expected to Rise After 2021 Decline

Companies report goodwill on their balance sheets when they buy a business for more than the value of its net assets. The acquiring business must measure the fair value of its reporting units annually. If that figure is less than the amount recorded on the books, the company reduces the value of the goodwill.

Pre-tax goodwill impairments totaled $8 billion in 2021, based on a review of filings through Monday—at which point about 47% of 8,900 public U.S. companies had filed their annual reports, according to Kroll LLC, a risk-consulting firm formerly known as Duff & Phelps LLC.

The figure is a fraction of the total in 2020, when impairments hit a record $142.5 billion as the value of assets owned by companies declined in the first year of the Covid-19 pandemic.

This year, impairments will likely exceed those of 2021 as companies face more economic uncertainty stemming from higher inflation and the impact of Russia’s invasion of Ukraine on financial markets and supply chains, said Carla Nunes, a managing director at Kroll.

“The U.S. economy is still steady and the fundamentals are still good,” Ms. Nunes said. “They’re just not as good as they were in 2021.”

Companies that divest their Russian holdings could face large asset impairments, which include goodwill. However, given that many U.S. companies have built their Russian operations from the ground up instead of through acquisitions, the number of goodwill impairments related to Russian investments will probably be somewhat limited, Ms. Nunes said.

Additional impairments may arise from companies’ exposure to Europe in general since the economic outlook in the region is dimming as the conflict continues, she said.

Since 2008, there have been 11 acquisitions by U.S. public companies of Russian firms, assets or minority stakes valued at a total of $1.75 billion, including one deal—financial-services firm Freedom Holding Corp.’s 2020 acquisition of Russian securities brokerage IC Zerich Capital Management JSC—since 2015, Kroll data showed.

The 2021 figure was the smallest since 2006, when goodwill impairments totaled $6.1 billion, though the pool of companies studied, at roughly 5,000, was smaller than today’s. Kroll, which in 2013 added more than 3,000 companies to its annual study, tracked more than 8,900 businesses for its latest study.

Some of the year’s largest impairments by companies including healthcare services firm Cardinal Health Inc., insurer Prudential Financial Inc. and copier maker Xerox Holdings Corp. were small by previous years’ standards.

Xerox recorded a $781 million charge due to pandemic-related impacts on its print business. The Norwalk, Conn.-based company tests for impairments every October and doesn’t expect another charge this year, Chief Financial Officer Xavier Heiss said. “We see flat to slight growth in the print business,” Mr. Heiss said.

Cardinal Health took a $1.3 billion charge as higher commodities and transportation costs weighed on profits. Prudential said it booked a $1.06 billion charge due to lower-than-expected revenue growth for its Assurance IQ business, which it acquired for $2.35 billion in 2019, and a decline in the value of its industry peers.

The largest impairment in 2020 by comparison was oil-field-services company Baker Hughes Co. ’s $14.77 billion write-down tied to its oil-field services and equipment business.

European goodwill impairments recorded in 2021 by companies in the Stoxx Europe 600 Index totaled €18 billion, equivalent to $19.98 billion. That is down 66.7% from the previous year, according to Kroll data as of Monday.

The pandemic, inflationary pressure and supply-chain disruption will likely continue to play a significant role in companies’ goodwill impairments, whether in the U.S., Europe or elsewhere, said Feng Gu, professor of accounting at the State University of New York at Buffalo. “In this environment, everybody is affected,” Mr. Gu said.

Write to Mark Maurer at [email protected]