- For health systems, the decline in financial performance due to COVID-19 creates a triggering event for interim or annual impairment testing of certain assets on the balance sheet.
- A two-step process can help hospitals test whether long-lived assets can be written down with an impairment.
- Impairment testing also should be considered for goodwill/indefinite-life assets and for leases.
The COVID-19 pandemic has disrupted many industries, including healthcare. As health systems made room to treat COVID-19 patients by canceling or delaying other procedures, they lost the revenue-generating and profitable service lines that provide necessary cash flow. Although the long-term economic and financial impact of the pandemic is uncertain, it is clear that the current crisis will adversely affect operations and financial performance for most health systems.
As health systems prepare for quarter- or year-end in 2020, there are accounting issues they need to consider for financial reporting purposes. The decline in financial performance creates a triggering event for interim or annual impairment testing of certain assets on the balance sheet.
As designated in FASB’s Accounting Standards Codification (ASC), these include:
ASC Topic 350: Goodwill/indefinite-life assets. Health systems that made acquisitions and booked a material amount of goodwill or other intangible assets may need to reconsider their financial projections if they haven’t achieved the anticipated synergies or volume growth due to the current disruption.
Utilizing an updated forecast that incorporates the impact of COVID 19 would affect the fair value of the reporting unit.a If the fair value of the reporting unit is less than the carrying value, it results in the impairment of goodwill and other indefinite-life intangible assets.
ASC Topic 360: Property, plant and equipment. The current disruption likely creates a triggering event for a health system to perform Step 1 of impairment testing of long-lived assets — an undiscounted cash flow test for a tangible-asset group.
If you adjust the cash flow forecast to account for the cash flow decline during this phase, and the sum of the undiscounted cash flows is lower than the carrying amount of the long-lived assets, Step 2 is required.b
Step 2 entails remeasuring the fair value of the long-lived assets and writing down some of the assets with an impairment if the carrying value exceeds the fair value.
ASC Topic 842: Leases. Most health systems implemented ASC 842 in FY19 and booked all operating leases on the balance sheet as right-of-use (ROU) assets. These assets require the same two steps as ASC 360 for impairment testing.
In addition to generating the cash flow forecast, most health systems will need to reassess their lease terms and the incremental borrowing rate and decide whether to terminate or sublease certain locations where they have ceased operations. All of these factors likely would impact the fair value of the ROU assets.
a. A reporting unit is defined in the ASC as an operating segment or a component of an operating segment.
b. Undiscounted cash flows are cash flows that are expected to be generated or incurred by a project and that have not been reduced to their present value.