When does Management Recruiters test goodwill for impairment annually?
Management_Recruiters Franchise · 2024 FDDAnswer from 2024 FDD Document
[Item 21: FINANCIAL STATEMENTS]
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.
Source: Item 21 — FINANCIAL STATEMENTS (FDD pages 65–66)
What This Means (2024 FDD)
According to Management Recruiters' 2024 Franchise Disclosure Document, goodwill is tested annually for impairment during the third quarter. However, Management Recruiters may conduct this testing earlier if certain events or changes in circumstances suggest that impairment is likely. These circumstances could include a significant drop in the company's stock price, a decline in expected future cash flows, significant asset disposition, adverse changes in the economic or business environment, or testing the recoverability of a significant asset group. These indicators could significantly impact the recoverability of goodwill and the company's financial statements.
For the purpose of impairment testing, Management Recruiters operates as a single reporting unit. Determining the fair value of this unit involves significant estimates and assumptions made by the management team. Different judgments in determining reporting units could significantly affect the testing of goodwill for impairment and the amount of any impairment recognized.
When evaluating goodwill for impairment, Management Recruiters has the option to first assess qualitative factors to determine whether a reporting unit's fair value is less than its carrying value. These qualitative factors include macroeconomic conditions, industry and market conditions, and overall company financial performance. If the qualitative assessment suggests that the fair value of the reporting unit is greater than its carrying amount, a quantitative impairment test is not necessary. Management Recruiters can also bypass the qualitative assessment and proceed directly to the quantitative impairment test, which involves comparing the fair value of each reporting unit to its carrying value, including goodwill. If the fair value exceeds the carrying value, no impairment is deemed necessary. However, if the carrying value exceeds the fair value, Management Recruiters will recognize an impairment loss equal to the excess, up to the carrying value of the goodwill.