How often does Management Recruiters measure goodwill for impairment?
Management_Recruiters Franchise · 2024 FDDAnswer from 2024 FDD Document
[Item 21: FINANCIAL STATEMENTS]
Goodwill
Goodwill represents the excess purchase price over the fair value of identifiable assets received attributable to business combinations. Goodwill is measured for impairment at least annually, or whenever events and circumstances arise that indicate an impairment may exist (see "Impairment" below). These events or circumstances could include a significant change in the business climate, legal factors, operating performance indicators, competition, or sale or disposition of a significant portion of a reporting unit. We test for goodwill impairment at the reporting unit level. In assessing the value of goodwill, assets and liabilities are assigned to a reporting unit and the appropriate valuation methodologies are used to determine fair value at the reporting unit level. At December 31, 2023 we had a single reporting unit.
There were no changes to our goodwill in 2023.
Impairment - Goodwill
Goodwill is tested annually for impairment during the third quarter or earlier upon the occurrence of certain events or substantive changes in circumstances that indicate goodwill is more likely than not impaired. Such indicators may include a sustained, significant decline in our stock price; a decline in our expected future cash flows; significant disposition activity; a significant adverse change in the economic or business environment; and the testing for recoverability of a significant asset group, among others. The occurrence of these indicators could have a significant impact on the recoverability of goodwill and could have a material impact on our consolidated financial statements.
For purposes of our impairment test, we operate as a single reporting unit. Determining the fair value of a reporting unit when performing a quantitative impairment test involves the use of significant estimates and assumptions by management. Different judgments relating to the determination of reporting units could significantly affect the testing of goodwill for impairment and the amount of any impairment recognized.
When evaluating goodwill for impairment, we have the option to first assess qualitative factors to determine whether it is more likely than not the fair value of a reporting unit is less than its carrying value. Qualitative factors include macroeconomic conditions, industry and market conditions, and overall company financial performance. If, after assessing these events and circumstances, we determine that it is more likely than not the fair value of the reporting unit is greater than its carrying amount, a quantitative impairment test is not necessary. We also have the option to bypass the qualitative assessment and proceed directly to performing the quantitative impairment test. If completed, the quantitative impairment test involves comparing the fair value of each reporting unit to its carrying value, including goodwill. Fair value reflects the price a market participant would be willing to pay in a potential sale of the reporting unit. If the fair value exceeds the carrying value, no impairment of goodwill is deemed necessary. If the carrying value of the reporting unit exceeds its fair value, we recognize an impairment loss in an amount equal to the excess, up to the carrying value of the goodwill.
Based on our annual assessment, we have concluded that it is more likely than not the fair value of our reporting unit exceeds its carrying value and our goodwill was not impaired.
Source: Item 21 — FINANCIAL STATEMENTS (FDD pages 65–66)
What This Means (2024 FDD)
According to Management Recruiters' 2024 Franchise Disclosure Document, goodwill is assessed for impairment at least annually. Specifically, Management Recruiters conducts this test during the third quarter of the year. However, the company may perform these tests earlier if certain events or changes in circumstances suggest that impairment is more likely than not. These circumstances could include a significant decline in the company's stock price, a decrease in expected future cash flows, significant asset disposition, or adverse changes in the economic or business environment.
For Management Recruiters, impairment testing involves comparing the fair value of a reporting unit to its carrying value. If the carrying value exceeds the fair value, an impairment loss is recognized. The FDD indicates that Management Recruiters operates as a single reporting unit for these tests. Management's judgments and assumptions play a significant role in determining the fair value, which can affect the outcome of the impairment test and the amount of any recognized impairment.
In practice, Management Recruiters has the option to first evaluate qualitative factors to determine if a quantitative test is necessary. These qualitative factors include macroeconomic conditions, industry and market conditions, and the company's overall financial performance. If the qualitative assessment suggests that the fair value of the reporting unit is likely greater than its carrying amount, a quantitative test is not required. Alternatively, Management Recruiters can bypass the qualitative assessment and proceed directly to the quantitative impairment test.
Based on their annual assessments, Management Recruiters has concluded that the fair value of their reporting unit has exceeded its carrying value, indicating that their goodwill was not impaired. This suggests that, at least in recent years, the company's goodwill has been stable and not subject to significant write-downs.