Overview

An article that appeared in The Wall Street Journal mentions the magnitude of impairments that have arisen as a result of the Covid-19 pandemic (Maurer, 2020Links to an external site.). As pointed out in the article, the decision to take an impairment charge is an acknowledgement that the future is not expected to play out as it once was expected to.

Long-lived capital projects may be particularly vulnerable to failing to meet expectations. Much like what you have encountered in the course, these projects are evaluated with present value methods.

Action Items

• What is it that a company like Chevron overlooked in making its decision to invest in Venezuela?
• If you were responsible for determining the net present value of Chevrons Venezuela operations, how would you modify the inputs to your calculation if you felt there were greater than anticipated risks?

this is the full article below

U.S. companies are writing down more of their assets during the coronavirus pandemic than they have in years.

Finance chiefs are reducing the value of company assets such as airplanes, cruise ships and movie theaters in response to changes in consumer behavior that threaten the viability of their business models.

"You have assets at least for a period of time generating zeroor close to zerorevenue," said Steve Hills, who heads up the technical accounting consulting unit at Stout Risius Ross LLC, an advisory firm.

The 2,000 largest U.S. businesses by market capitalizationfrom oil companies to airlines and restaurant chainshave been recording higher pre-tax impairments as existing assets and investments produce poor returns amid the widespread economic downturn.

"If businesses can't sell their products or services, the assets they're holding are most likely worthless," said Philip Keejae Hong, an accounting professor at Central Michigan University.

Impairment charges totaled $261.7 billion for the first six months of the year, up 187.6% from the $91 billion booked during the same period in 2019. The first-half figure is also 29% larger than the $203.1 billion recorded in all of 2019, according to financial-technology firm New Constructs LLC.

The total figure for write-downs in the first half of the year is among the highest for the past 20 years, but lower than such charges in all of 2008, when impairments hit $486.77 billion, and 2015, when they totaled $383.3 billion.

Under U.S. accounting rules, companies have to take impairment charges, or write-downs, when the sum of estimated future cash flows from an asset is less than its book value.

This applies to tangible assetssuch as factoriesand intangible assets such as brands or goodwill, which is created when one company buys another for a price higher than the fair market value of its assets.

Write-downs usually mean that an asset has lost some of its value, while write-offs indicate a total loss of value.

Oil giant Chevron Corp. impaired all of its $2.6 billion investment in Venezuela for the quarter ended June 30, citing the deteriorating operating environment in the South American country.

"Our future capital decisions need to be more robust and more disciplined so that we don't have impairments in the future," Chevron's Chief Financial Officer, Pierre Breber, said.

"In this case, we took our book value down to zero," Mr. Breber said, adding that the company aims to reduce impairments going forward.

Fourteen of the 20 largest impairments in the first six months were booked by oil-and-gas businesses amid a decline in prices and pressure to reduce carbon emissions.

Non-U.S. oil companies Royal Dutch Shell PLC and BP PLC in June said they were writing down the value of their assets by $22 billion and $17.5 billion , respectively.

Companies in other industries also marked down assets. Walt Disney Co. on Aug. 4 booked a $4.95 billion charge as part of its first quarterly loss since 2001 .

"This impairment reflects an underperformance of the international channels business that we were already seeing, and then that was exacerbated by the impact of Covid-19," Disney CFO Christine McCarthy said during the company's earnings call, referring to a division of non-U.S. TV networks. The international-channels business reported a 44% drop in revenue in the most recent quarter.

Retailer Macy's Inc. on July 1 recorded $3.2 billion in impairment charges due to changes in long-term revenue projections. Store closures contributed to a 45% decline in sales during the most recent quarter.

Companies are expected to write down less as the economy recovers in the third quarter, said David Trainer, chief executive at New Constructs. "It's going to generally move in step with the economy, which is better, and getting better, but still not as good as it once was," he said.

Write to Mark Maurer at mark.maurer@wsj.com

Credit: By Mark Maurer