Thought Leadership

COVID-19: Other Topics

The extent and duration of the economic fallout from the Coronavirus (COVID-19) outbreak remain uncertain. However, one thing that is certain is that most businesses will be affected by this pandemic.

Our DGN Advisory team is following the accounting & finance impacts of COVID-19 very closely. The below-thought leadership contains various topics that we believe will impact many of our clients, across our many service offerings. Please check back on a regular basis as we will be continually updating this site in real-time.


  • Does your business have any inventory and/or long-lived assets (e.g. machinery, land, buildings, or finite-lived intangible assets) on its balance sheet?

  • Does your business have any indefinite-lived intangible assets (e.g. intangible assets related to trade names or customer lists) on its balance sheet?

  • Does your business have and Goodwill on its balance sheet?

If the answer is “yes” to any of the above questions, depending on your business reporting requirements, you may want to ensure you are considering whether any effects of the COVID-19 crisis on your business represent an “impairment indicator” that would trigger an interim impairment analysis (in addition to the annual requirements) and require you to assess now whether or not any of these assets are in fact impaired.

The impairment guidance is quite nuanced. Accounting Standards Codification (ASC) 350 (Intangibles — Goodwill and Other) & ASC 360 (Property, Plant, & Equipment) contain the guidance that most U.S. GAAP (Generally Accepted Accounting Principles) businesses are required to follow when assessing whether or not they have an impairment.

Some example items that we believe could be perceived as impairment indicators during these challenging times are:

  • Workforce shortages due to government restrictions
  • Workforce reduction due to a reduction in demand for the respective company’s product
  • Businesses whose supply chain has been disturbed or whose sales have fallen because of the current conditions
  • Seasonal inventory or inventory with short shelf-lives would likely be most at risk of loss
  • The respective company (or competitors) have reported store closures (temporary or permanent)
  • Production shutdowns (including those ordered by the government)
  • Market multiples for the industry have declined
  • A loss in operating cash flow or a net loss in the current period & future projected periods now exist

When thinking through the above indicators the guidance also requires you to weigh positive mitigating factors against the impairment indicators.

When a company determines that it is more likely than not that an impairment is likely to exist, the next step is usually to proceed with a quantitative impairment test which essentially requires you to calculate the “fair value” of the respective asset and compare it to the carrying amount of the asset.  If the fair value is lower, an impairment would exist.

Please don't hesitate to reach out to us if you find your company needing assistance with assessing potential impairment.  Our team, consisting of both Certified Public Accountants (CPAs) and Certified Valuation Analysts (CVAs), is uniquely positioned to help clients not only think through potential impairment indicators but also value the potential impairment, account for the potential impairment, and communicate management’s impairment position with auditors and other interested parties.


Cost of Capital:

Our DGN Advisory team has been thinking about what the COVID-19 pandemic could mean for financial valuations. You, of course, need to consider the date of the valuation and other relevant factors, but we believe that it would not be prudent to ignore the current economic conditions when performing valuations during these times. Research, and history, show that the path to economic recovery will not be overnight. Accordingly, we expect this pandemic will have a significant impact on business valuations through, in many cases, a decrease in current cash flows, a decrease in growth projections, and an increase in the discount rate (e.g. the cost of capital).

One key component of most financial valuations is the cost of capital (the denominator in most valuations). Ceteris paribus, the higher the cost of capital, the lower the enterprise value.

Some key components driving the cost of capital are the risk-free rate of return as well as the equity risk premium. We believe that we will be seeing increases in each of these components of costs of capital due to the economic conditions we currently find ourselves in.

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