Understanding the trends surrounding the implications of goodwill impairment during economic recessions might be helpful for companies that are facing contraction in the current economic environment. Our research highlights these trends and provides evidence about goodwill and goodwill impairment from more than 56,000 firm-year observations during two recent economic contractions. Our study provides evidence that when the economy hits a recession, companies that have goodwill may record a significant amount of goodwill impairment in general. This goodwill impairment will lead to (1) a reduction in the amount of goodwill on the balance sheet and (2) a significant drop in net income and earnings per share (EPS) on the income statement.

Goodwill arises in a business combination when the amount paid is more than the fair value of the specifically identifiable net assets acquired. Of course, the acquiring company doesn’t want to pay more for the net assets or the stock than necessary. Either the acquired company managers don’t want to sell the net assets for less than appropriate or the stockholders of the acquired company don’t want to sell their shares for less than appropriate. Therefore, we’re left to assume that an arms-length business combination between two willing parties sets the fair value of the acquired company. However, it’s often the case that this fair value exceeds the fair value of the identifiable net assets acquired.

Many years ago, goodwill was amortized for financial reporting purposes over a period not to exceed 40 years. However, in 2001, the Financial Accounting Standards Board issued Statement of Financial Accounting Standards No. 142, Goodwill and Other Intangible Assets, which changed U.S. Generally Accepted Accounting Principles (GAAP) for goodwill to an impairment model. Rather than amortize goodwill, a company tests it for impairment. These tests occur at least annually and more frequently if events happen that indicate that impairment may have occurred. A private company GAAP alternative now allows goodwill amortization over a period not to exceed 10 years, but that rule doesn’t apply to public companies. U.S. tax law didn’t allow goodwill amortization deductions until the mid-1990s. For certain business combinations and with appropriate tax elections, goodwill can be amortized over 15 years for tax purposes. Of course, since goodwill impairment write-offs for financial reporting won’t coincide with a straight-line tax amortization, the timing differences will lead to deferred tax accounting.

Business Cycle Expansions and Contractions

The National Bureau of Economic Research (NBER) has tracked U.S. business cycle expansions and contractions for more than 170 years. By its definition, a contraction starts at the peak of a business cycle and ends at the trough. Between trough and peak, the economy is in an expansion. Expansion is the normal state of the economy; most recessions are brief. However, the time that it takes for the economy to return to its previous peak level of activity or its previous trend path may be quite extended. Our research focused on the last two contractions reported by the NBER and the periods of economic expansion that surrounded them. One contraction was from December 2007 to June 2009, and the other was from February 2020 to April 2020.

By the nature of economic contractions, it may not be surprising that goodwill impairments are more frequent and have a bigger impact on income and EPS during contractions. The causes of the contraction could lead to the impairment in the value of the goodwill, as businesses struggle to move through the contraction. In fact, if the goodwill is tested for impairment because of the events leading to the contraction rather than just as an annual impairment evaluation, increasing impairments could be expected. It’s also possible that companies are more willing to write down goodwill when operating results are already weak. This may prevent a write-down during an expansion when operating results are otherwise positive.

Our results focus on the broad market, including companies and industries across multiple Standard Industrial Classification (SIC) codes. However, results can easily vary for specific SIC codes and companies within those SIC codes. The variation could come because of (1) the nature of each industry, (2) the likelihood of business combinations within that industry, (3) the nature of goodwill within that industry, and (4) the economic events or circumstances that could impact loss in goodwill value.

Study Design

We gathered data over a 20-year period from 2003 to 2022 from Compustat, which contains fundamental financial data for active and inactive publicly traded companies. This time frame included two periods of contraction as previously mentioned with the three periods of expansion before and after these contractions. Table 1 presents business cycle expansion and contraction periods defined by NBER during our sample period. We gathered data about goodwill, goodwill impairment, asset totals, income, and EPS for companies over this time frame. We analyzed the data to provide information about goodwill frequency and magnitude, goodwill impairment frequency and magnitude, and impairment impact on income and EPS. We compared this information for the contraction periods vs. the expansion periods. We analyzed the data for all companies and also analyzed it by SIC code to show variations among industries. We provide results for all companies, but we also illustrate specific SIC code data to show variation.

Table 1: NBER U.S. Business Cycle Expansions and Contractions

Sample Period
Month and Year
Month and Year
 Expansion 1  June 2003
 November 2007
 Contraction 1  December 2007
 June 2009
 Expansion 2  July 2009
 January 2020
 Contraction 2  February 2020
 April 2020
 Expansion 3  May 2020
 September 2022


Frequency and Magnitude of Goodwill

How prevalent is goodwill in companies’ books? The answer to this question may provide a measure of the relevance of this research to CEOs and CFOs. We measured this by looking at the ratio of companies with goodwill to the total number of companies observed. Figure 1 shows that over the research period, approximately 50% of companies had goodwill listed on their books. This percentage was quite consistent over the 20 years of the study. However, industries in different SIC codes may follow very different patterns. Figure 1 also shows the ratio of goodwill companies for SIC codes 2 and 7 to show the variation, both from one SIC code to another and within specific SIC codes over the 20 years of the study. For SIC code 7 (Services), the ratio of goodwill companies increases over the 20-year period from 64% to 76%. For SIC code 2 (Manufacturing), the ratio starts at 48% but decreases to 41%.

Figure 1: Frequency of Goodwill

Exp. 1
Cont. 1
 Exp. 2
Cont. 2
Exp. 3
 42%  39%  41%
 68%  71%  76%
All 52.3%
 48.7%  50.6%  53.1%

Frequency of Goodwill graph

Even if around 50% of companies have goodwill, it may not be considered very important unless the magnitude of goodwill reported is significant, especially with respect to total assets reported. Figure 2 shows that the proportion of goodwill to total assets hovers between 14.5% to 15.4% in our research time frame when we look at companies that report goodwill. We suggest that this is a material magnitude of goodwill on average, certainly enough to be significant to accounting and finance professionals within these companies. Figure 2 further shows some variation by industry. Companies in SIC code 7 (Services) have goodwill around 23% to 24% of assets, whereas companies in SIC code 6 (Finance, Insurance, Real Estate) only have goodwill equaling about 5% to 6% of assets.

Figure 2: Magnitude of Goodwill

Exp. 1
Cont. 1
 Exp. 2
Cont. 2
Exp. 3
 5%  5%  5%
 24%  23%  24%
All 15.4%
 14.7%  14.5%  15.1%

Magnitude of Goodwill graph

Frequency and Magnitude of Impairment

For companies with goodwill, what percentage are reporting goodwill impairment? How does this ratio change during periods of economic contraction compared to periods of economic expansion? Figure 3 illustrates the percentage of companies with goodwill that reported goodwill impairment over our research time frame. For the entire group of companies, the frequency of goodwill impairment during expansion periods is between 7.3% and 12.4%, but during the contraction periods, these percentages are between 17.9% and 21.3%. The peaks in the graph make it obvious that a larger proportion of companies report impairment during periods of contraction than during periods of expansion. For two specific SIC codes, code 2 (Manufacturing) and code 6 (Finance, Insurance, Real Estate), the graph also shows some variation between industries, but the peaks and valleys are still quite consistent for contractions and expansions.

Figure 3: Frequency of Goodwill Impairment

Exp. 1
Cont. 1
 Exp. 2
Cont. 2
Exp. 3
 13%  21%  12%
 8%  12%  5%
All 8.3%
 12.4%  17.9%  7.3%

Frequency of Goodwill Impairment graph

As mentioned earlier, it may not be surprising to see an increasing frequency of impairment losses during periods of economic contraction. However, the peaks during periods of economic contraction and the valleys during periods of economic expansion are stark. Our research doesn’t provide information as to whether the increasing frequency of impairment during contractions is due more to general economic difficulties observed through annual impairment tests or if the causes of the contractions are actually events triggering additional impairment tests. We also can’t determine if at least part of the peaks in impairment recognition are a result of companies being more willing to write down goodwill when financial results are already weak for other reasons.

Again, the importance of goodwill impairment to accounting and finance professionals depends not only on the frequency but also on the magnitude of goodwill impairment. Figure 4 shows goodwill impairment as a proportion of goodwill, again showing the contrast between expansion and contraction periods. During the expansion periods, this proportion is 0.9%, 1.4%, and 0.6%; during the contraction periods, the proportions are much higher at 3.8% and 3.0%. While the peaks and valleys are again obvious, the magnitude may not seem extreme. However, if we include only companies with recorded impairment, the proportions of impairment to goodwill rise to 18.3%, 15.8%, and 12.4% during expansion periods, while the proportions during the contraction periods rise to 29.1% and 22.1%. Using this perspective, the peaks and valleys remain, but the magnitude increases dramatically.

Figure 4: Magnitude of Goodwill Impairment

Exp. 1
Cont. 1
 Exp. 2
Cont. 2
Exp. 3
Impairment companies only
 15.8%  22.1%  12.4%
All 0.9%
 1.4%  3.0%  0.6%

Magnitude of Goodwill Impairment chart


Impairment Effects on Income and EPS

Perhaps even more important than the magnitude of goodwill impairment is the effect of the impairment on income and EPS. We calculated goodwill impairment after tax as a proportion of income before impairment. We also calculated the goodwill impairment effect on EPS as a proportion of EPS before impairment. As the effects of goodwill impairment on income and EPS are very similar, we only present the effect on EPS here. Figure 5 illustrates the goodwill impairment effect on EPS as a proportion of EPS before impairment for the two contraction periods previously mentioned and the three expansion periods surrounding those contraction periods. Again, it’s obvious that the negative effect on EPS peaks in the contraction periods compared to the expansion periods. The peaks during the contraction periods are at 31.9% and 32.9%, while the valleys during the expansion periods are at 8.5%, 16.4%, and 1.3%.

Figure 5: Impairment Effects on EPS

Exp. 1
Cont. 1
 Exp. 2
Cont. 2
Exp. 3
 9.5%  13.0%  0.9%
 25.1%  68.7%  1.9%
All 8.5%
 16.4%  32.9%  1.3%

Impairment Effect on EPS graph

To again illustrate some of the variability between industries, Figure 5 also shows these percentages for SIC code 6 (Finance, Insurance, Real Estate) and SIC code 7 (Services). While the peaks and valleys for the contraction and expansion periods, respectively, are still present, the difference between these two industries is especially stark during the second contraction period.

Of course, we recognize that EPS may be depressed in contraction periods because of the general causes of the contractions. This can account for some of the difference between the magnitude of goodwill impairment in expansion vs. contraction periods. However, from earlier illustrations we also know that some of the differences are due to increasing frequency and magnitude of goodwill impairment in contraction periods compared to expansion periods.

Implications for Accounting and Finance Professionals

Our study provides evidence that the frequency, magnitude, and effects of goodwill impairment are more substantial during periods of economic contraction than during periods of economic expansion. The increased frequency and magnitude of goodwill impairment during contraction periods as shown in Figures 3 and 4 result in a negative impact on companies’ EPS during these periods, as shown in Figure 5.

In May 2023, First Republic Bank declared bankruptcy, the third U.S. regional bank to fail in the first half of 2023. This followed the collapse of Silicon Valley Bank and Signature Bank in March 2023. These failures, together with other economic indicators, raise the question of whether we may experience an additional period of economic contraction.

Our study provides evidence that when the economy hits a contraction, companies that have goodwill may record a significant amount of goodwill impairment in general. This impairment will lead to (1) a decrease in the amount of goodwill on the balance sheet and (2) a considerable drop in net income and EPS on the income statement. Consequently, many of the financial ratios based on financial statement numbers will deteriorate, possibly leading to a drop in stock price and a negative impact on management compensation. Therefore, management should be prepared for these potential undesirable consequences of an economic contraction.

Companies may be able to reduce the negative impacts of goodwill impairment in a few ways (see Figure 6). Stronger corporate social responsibility (CSR) reduces the likelihood of goodwill impairment (for example, see Joanna Golden, Li Sun, and Joseph Zhang, “Corporate Social Responsibility and Goodwill Impairment,” Accounting and the Public Interest, February 2019, pp. 1-28). Therefore, companies should strive to improve their CSR activities to reduce goodwill impairment. In addition, managers of companies with overvalued stock might use their overvalued stock to acquire target companies, often engaging in value-destroying acquisitions (for example, see Feng Gu and Baruch Lev, “Overpriced Shares, Ill-Advised Acquisitions, and Goodwill Impairment,” The Accounting Review, November 2011, pp. 1,995-2,022). This ultimately leads to future goodwill impairment. Therefore, companies should be more cautious in their acquisition arrangements, making sure they don’t pay excessive amounts for target companies that may lead to future goodwill impairment.

Figure 6: Reducing Goodwill Impairment

Reducing Goodwill Impairment flowchart

Goodwill impairment is regarded as negative information that hints at deteriorating company performance. Therefore, it’s likely to reduce shareholders’ wealth. Organizations should hire the most competent, experienced managers, as they’ll play an important role in preventing or reducing goodwill impairment (for example, see Li Sun, “Managerial Ability and Goodwill Impairment,” Advances in Accounting, March 2016, pp. 42-51). Finally, a private company or a not-for-profit entity can amortize goodwill instead of making an accounting policy election to impair goodwill (Accounting Standard Codification (ASC) 350-20-35). Those companies may avoid goodwill impairment losses if they amortize goodwill over time.

Goodwill is deductible for tax purposes for some business acquisitions in certain jurisdictions. In those jurisdictions, a deferred tax asset or deferred tax liability is recorded upon acquisition based on the difference between the book basis and the tax basis of goodwill (ASC 350-20-65-3). The tax treatment of a business acquisition may affect the price of the purchase deal and the amount of goodwill and its subsequent possible goodwill impairment. The structure of an acquisition deal can also determine whether an acquirer company can benefit from the existing tax attributes such as tax credit carryforwards and net operating losses of an acquired company. Therefore, companies should carefully consider goodwill-related tax implications when structuring acquisition transactions.

Depending on your company and your industry, you may already feel that you’re in a period of contraction. Or you may feel that you’re about to enter a period of economic contraction. If so, what amount of goodwill do you have on your books? What are the implications of possible goodwill impairment for your company and industry in contraction periods vs. expansion periods? What might be the effects of goodwill impairment on your income and EPS? Do you have plans in place to consider what goodwill write-offs will mean to your financial statements and stakeholders? Preparing your company for economic downturns before a recession happens is vital. You should do things to get your company ready for a possible recession. For example, you may review and revise the budget, identify areas where you can reduce expenses, and make sure you have sufficient cash to cover unexpected expenditures. Depending on the level of goodwill on your balance sheet, you may also consider other strategies to reduce any possible negative impact of goodwill impairment on your income and EPS that may occur during an economic contraction.

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