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US corporate goodwill amortization is expected to rise after falling in 2021

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US listed companies are expected to write off more goodwill this year than last year as they grapple with the financial fallout from the Russian war in Ukraine and persistently high inflation.

Companies record goodwill on their balance sheets when they buy a company for more than its net worth. The acquiring company must determine the fair value of its reporting units on an annual basis. If this value is less than the amount shown in the books, the company writes down the value of the goodwill.

Pretax goodwill impairments totaled $8 billion in 2021 based on a review of filings through Monday — by which time about 47% of 8,900 public U.S. companies had filed their annual reports, according to Kroll LLC, an earlier well-known risk consulting firm Duff & Phelps LLC.

The number is a fraction of the total in 2020, when impairments hit a record $142.5 billion as the value of companies’ assets fell in the first year of the Covid-19 pandemic.

This year, impairments are likely to exceed 2021 as companies face greater economic uncertainty due to higher inflation and the impact of the Russian invasion of Ukraine on financial markets and supply chains, said Carla Nunes, managing director at Kroll.

Every day, millions of seafarers, truck drivers, dockers, warehouse workers and delivery drivers ensure that mountains of goods are transported to shops and homes to meet consumers’ increasing expectations for convenience. But this complex movement of goods that underpins the global economy is far more fragile than many realize. Photo illustration: Adele Morgan

“The US economy is still solid and fundamentals are still good,” Ms. Nunes said. “They’re just not as good as they were in 2021.”

Companies divesting their Russian holdings could face significant impairments of assets, including goodwill. Given that many US companies have built their Russian operations from scratch rather than through acquisitions, the number of goodwill impairments related to Russian investments will likely be somewhat limited, Ms Nunes said.

Additional drags could come from corporate exposure to Europe more generally, as the region’s economic outlook dims amid ongoing conflict, she said.

Since 2008, 11 Russian companies, assets or minority stakes have been acquired by US public companies totaling US$1.75 billion, including one transaction – financial services company Freedom Holding corps

2020 Acquisition of Russian securities brokerage IC Zerich Capital Management JSC – since 2015, Kroll data showed.

The 2021 figure was the lowest since 2006, when goodwill writedowns totaled $6.1 billion, although the pool of companies studied was smaller than it is today, at around 5,000. Kroll, which added more than 3,000 companies to its annual study in 2013, tracked more than 8,900 companies for its latest study.

Some of the year’s biggest hits by businesses, including healthcare services company Cardinal Health inc,

Insurer Prudential Financial inc

and copier maker Xerox Holdings corp

were small compared to previous years.

Xerox recorded a $781 million charge due to pandemic-related impact on its printing business. The Norwalk, Connecticut-based company tests for impairment each October and expects no further charge this year, Chief Financial Officer Xavier Heiss said. “We see flat to slight growth in the printing business,” said Mr. Heiss.

Cardinal Health had to pay $1.3 billion as higher raw material and transportation costs weighed on profits. Prudential said it booked a $1.06 billion charge due to lower-than-expected revenue growth for its Assurance IQ business, which it acquired for $2.35 billion in 2019, and a decline in the value of its industry peers .

By comparison, the largest detractor in 2020 was oilfield services company Baker Hughes co

The $14.77 billion writedown was related to the oilfield services and equipment business.

European goodwill impairments recorded by companies in the Stoxx Europe 600 Index in 2021 totaled €18 billion, equivalent to US$19.98 billion. That’s down 66.7% year-on-year, according to Kroll data from Monday.

The pandemic, inflationary pressures and supply chain disruption are likely to continue to play a significant role in depreciating the goodwill of companies, whether in the US, Europe or elsewhere, said Feng Gu, professor of accounting at the State University of New York in Buffalo. “In this environment, everyone is affected,” Mr. Gu said.

write to Mark Maurer at Mark.Maurer@wsj.com

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