Aptevo Therapeutics Inc. Goodwill & Intangibles Disclosure
Note 8. Impairment of Intangible Assets, In-Process Research and Development and Goodwill
During the period between the spin off date and September 30, 2016, we experienced a significant decline in our stock price. Based on this, we concluded that a significant potential impairment indicator existed to require us to perform an interim assessment of goodwill and indefinite-lived intangible assets as of September 30, 2016. We performed an interim first step of our impairment assessment and determined there was a potential impairment of goodwill and indefinite-lived intangible assets. Therefore, we performed the impairment assessments of our in-process research and development asset, our long-lived assets, and definite-lived assets and goodwill. In our second step of our goodwill impairment assessment we compared the implied fair value of goodwill to the book value of that goodwill. The implied fair value of goodwill is determined in the same manner as the amount of goodwill recognized in a business combination. That is, the estimated fair value of the business is allocated to all of the assets and liabilities as if the business had been acquired in a business combination and the estimated fair value of the business was the purchase price paid. If the carrying amount goodwill exceeds the implied fair value, an impairment loss is recognized in an amount equal to that excess.
We measured the fair value of both our indefinite-lived and definite lived intangible assets using accepted valuation techniques. The significant estimates used included our weighted average cost of capital, long-term rate of growth and profitability of our business, and working capital effects. Our assumptions are based on actual historical performance, expected results after commercial launch of our otlertuzumab product, and implied risk premiums based on market prices of our equity and debt as of the assessment date. To validate the reasonableness of the fair values, we reconciled the aggregate fair values of the business determined in step one to the enterprise market capitalization. Enterprise market capitalization includes, among other factors, the market capitalization of our stock and an acquisition premium based on historical data from acquisitions within the same or similar industries. In performing the reconciliation, we used the market value of our stock price, the stock price on the valuation date and considered such other quantitative and qualitative factors we considered relevant. This assessment resulted in the recognition in the third quarter of 2016 of a loss on impairment of in process research and development costs related to our otlertuzumab candidate of approximately $41.8 million and $29.2 million of goodwill.
As evidenced by a significant decline in our stock price, we determined that the adverse change in the business climate discussed above was an indicator requiring the testing of our long-lived assets for recoverability and performed this test as of September 30, 2016, prior to completing the tests above. The results of the evaluation indicated that the carrying values of the related assets were recoverable.
About Goodwill & Intangibles Disclosures
Goodwill and intangible asset disclosures reveal the premium paid in acquisitions and how management assesses whether that premium retains its value. Since goodwill is no longer amortized under US GAAP, the annual impairment test is the only mechanism that adjusts carrying values downward — making the assumptions behind that test critically important for investors.
Key signals: a history of goodwill impairments suggests management consistently overpays for acquisitions. Watch the gap between reporting unit fair value and carrying amount — when fair value exceeds carrying amount by less than 10-20%, a small decline in business performance could trigger a write-down. For finite-lived intangibles, examine useful life assumptions across customer relationships, technology, and trade names; aggressive estimates inflate near-term earnings. Compare total intangibles-to-total-assets ratios against peers to assess acquisition dependency. Rising goodwill as a percentage of equity can signal balance sheet fragility.