As the Financial Accounting Standards Board (FASB) studies replacing annual goodwill impairment testing with a straight-line amortization model, financial institutions and other companies face two pressing choices:

• Should they continue to perform regular reporting unit valuations even if they’re no longer required to as part of the impairment testing process?
• If so, should those valuations be performed by a third party?

Here is our advice on how CFOs can successfully address these questions.

The strategic value of valuations

If impairment testing is replaced with amortization, the understandable impulse for many CFOs might be to abandon annual reporting unit valuations and devote those resources to other strategic priorities.

At a time when financial institutions and other companies’ strategies are being disrupted by the accelerating digital transformation, new competition and increased stakeholder scrutiny, we believe that could be a mistake.

As shown in recent survey by Ernst & Young LLP, where we serve as principal and senior manager, respectively, most CFOs understand that well-informed, unbiased quantitative analyses of value can provide the actionable intelligence needed to inform decision-making.

Our survey of 51 corporate and regional CFOs of financial institutions with multiple reporting units found that 53% of companies plan to continue performing annual valuations even if not required to, while just 29% said they won’t perform the exercise. Eighteen percent were undecided. 

The question is, are they getting as much out of valuations as they could be?

When used to their full potential, regular segment valuations can form a foundation for evaluating forecasts, challenging growth rates, understanding competitive positioning, and gauging a reporting unit’s value relative to other internal units and competitors.

In our survey, 75% of CFOs said they rely on valuations to inform strategic decision-making; 63% use them to assess the health of individual business lines.

Less encouraging is that just 25% of CFOs reported using valuations to understand whether their stock is over- or undervalued, while fewer than half of CFOs use valuations to guide capital allocation decisions.

After years of being awash in liquidity, misallocating capital in today’s hypercompetitive environment can lead to adverse consequences. Performing regular sum-of-the-parts valuations can help distinguish businesses whose prospects merit preferential access to internal capital from those which may be fix-sell-close candidates.

The benefits of third-party valuations

In our survey, 60% of the companies that perform valuations in-house acknowledged skill and informational gaps that could keep them from getting the most from the valuation process.

In contrast, third-party valuation practices that work with other companies have through-the-cycle valuation experience and understand industry trends in ways that can make the data more actionable.

As advisors, those firms can leverage their expertise in environmental, social and governance (ESG); cryptocurrencies; ecosystem partnerships; and other emerging strategic areas to help C-suite leaders navigate the ongoing digital transformation.

Lacking a stake in the outcome, third parties can assess business performance without bias. For example, they can sniff out when a business is using overly optimistic projections to attract an outsized share of internal capital or identify growth areas where the company has underinvested relative to peers.

Ideally, a third-party valuation firm can become a CFO’s trusted advisor, providing an honest assessment of which strategic levers are most likely to improve performance while also helping the CFO navigate ever-changing investment priorities.

It’s no secret many CFOs struggle to keep pace with the rapidly changing digital landscape even as they are expected to make critical investment decisions. A third party can answer questions that might be uncomfortable for subordinates or peers.

Most CFOs plan to continue using valuations as a tool for informed decision-making, regardless of the FASB’s decision. Getting the most out of them requires the support of a trusted third party.

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