ENCORE CAPITAL GROUP INCECPG
ENCORE CAPITAL GROUP INC Goodwill & Intangibles Disclosure
Note 15: Goodwill
The Company’s goodwill is tested for impairment at the reporting unit level annually in the fourth quarter and in interim periods if certain events occur that indicate that the fair value of a reporting unit may be below its carrying value. Determining the number of reporting units and the fair value of a reporting unit requires the Company to make judgments and involves the use of significant estimates and assumptions. As of December 31, 2025, the Company had three reporting units, MCM, Cabot, and Encore Asset Reconstruction Company (“EARC”), that carried goodwill.
Effective for the year ended December 31, 2025, the Company changed its annual goodwill impairment testing date from the first day of the fourth quarter to the last day of the fourth quarter. This change was applied prospectively and is intended to better align the impairment testing process with the Company’s annual budgeting process. Management believes this change enhances the reliability and relevance of the impairment analysis by allowing the use of finalized financial projections in the assessment. In 2024, the Company performed its annual goodwill impairment test as of October 1, 2024, the previous goodwill impairment annual testing date, and subsequently conducted an additional test as of December 31, 2024 which led to a goodwill impairment charge. As a result, the change in testing date does not result in a period exceeding twelve months between impairment tests. This change was not material to the Company’s consolidated financial statements as it did not delay, accelerate, or avoid any potential goodwill impairment charge.
The Company applies various valuation techniques to estimate the fair value of each reporting unit when performing a quantitative impairment test, including the income approach and the market approach. Under the income approach, the Company uses a discounted cash flow method, or DCF, to estimate the fair value of a reporting unit. In applying the DCF method, an identified level of future cash flow is estimated. The cash flow projections are based on five-year financial forecasts developed by management that include purchasing volume, collections forecasts, capital spending trends, and cost assumptions to support anticipated growth, which are updated annually and reviewed by management. The value of the net cash flows beyond the fifth year (the “Terminal Year”) is determined by applying a market multiple to the projected estimated remaining
collections. Annual estimated cash flows and a Terminal Year value are then discounted to their present value at an appropriate discount rate to obtain an indication of fair value. The Company bases the discount rate on the weighted-average cost of capital adjusted for the relevant risk associated with business-specific characteristics and the uncertainty related to the reporting unit’s ability to execute on the projected cash flows. Because DCF analyses are based on management’s long-term financial projections and require significant estimates and judgments, the market approach is conducted in addition to the income approach in estimating the fair value of a reporting unit. Under the market approach, the Company uses a Guideline Public Company Method and, when data is available, a Guideline Merged & Acquired Company method to estimate the fair value of equity and the business enterprise value of a reporting unit. The Guideline Public Company approach uses financial metrics from similar publicly traded companies to estimate fair value. The Guideline Merged and Acquired Company method calculates fair value by analyzing the actual prices paid for recent mergers and acquisitions in the industry. The fair value estimate of the Company’s reporting units was derived primarily from the income approach, and to a lesser extent, the market approach as described above. The Company believes that the current methodology used in determining the fair value at its reporting units represent its best estimates. In addition, the Company compares the aggregate fair value of the reporting units to its overall market capitalization.
The Company chose to proceed directly to performing quantitative tests for both MCM and Cabot reporting units for the annual goodwill impairment test on December 31, 2025, and determined that no goodwill impairment existed at the two reporting units. The Company also conducted qualitative analysis on the goodwill carried at its EARC reporting unit and concluded that no impairment existed as of December 31, 2025.
Management continues to evaluate and monitor all key factors impacting the carrying value of the Company’s recorded goodwill. Adverse changes in the Company’s actual or expected operating results, market capitalization, business climate, economic factors or other negative events that may be outside the control of management could result in a material non-cash impairment charge in the future.
The following table summarizes the activity in the Company’s goodwill balance (in thousands):
________________________
Total Company | |||||
Balance as of December 31, 2022 | $ | 821,214 | |||
| Goodwill impairment | (238,200) | ||||
| Effect of foreign currency translation | 23,461 | ||||
Balance as of December 31, 2023 | 606,475 | ||||
Goodwill acquired(1) | 11,268 | ||||
| Goodwill impairment | (100,600) | ||||
| Effect of foreign currency translation | (9,335) | ||||
Balance as of December 31, 2024 | 507,808 | ||||
| Effect of foreign currency translation | 28,483 | ||||
Balance as of December 31, 2025 | $ | 536,291 | |||
(1)In December 2024, the Company completed a step up acquisition of EARC and recognized $11.3 million of goodwill. This goodwill balance is included in the Company’s EARC reporting unit.
The accumulated goodwill impairment loss at the Cabot reporting unit was $338.8 million as of December 31, 2025 and 2024, and $238.2 million as of December 31, 2023.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.