Goodwill and Intangibles

9 Months Ended

Sep. 30, 2019

Goodwill and intangible assets

Goodwill

Goodwill represents the excess of the purchase price consideration of acquired companies over the estimated fair value assigned to the individual assets acquired and liabilities assumed. Goodwill is allocated to the Company's reporting units at the date the goodwill is initially recorded. Once goodwill has been allocated to the reporting units, it generally no longer retains its identification with a particular acquisition but instead becomes identifiable with the reporting unit. As a result, all of the fair value of each reporting unit is available to support the value of goodwill allocated to the unit.

In January 2017, the FASB issued guidance that simplifies the subsequent measurement of goodwill. The new guidance eliminated Step 2 from the goodwill impairment test which was required in computing the implied fair value of goodwill. Instead, under the new amendments, an entity should perform its annual or interim goodwill impairment test by comparing the fair value of a reporting unit with its carrying amount. An entity should recognize an impairment charge for the amount by which the carrying amount exceeds the reporting unit’s fair value, however, the loss recognized should not exceed the total amount of goodwill allocated to that reporting unit. The Company early adopted these amendments during the second quarter of 2019 in conjunction with a quantitative goodwill test performed due to the Company’s change in operating segments and restructuring of reporting units. See Note 11 for the impact of the goodwill impairment test.

In accordance with US GAAP, inclusive of the newly adopted amendments, the Company tests goodwill for impairment on an annual basis or at an interim period if events or changed circumstances would more likely than not reduce the fair value of a reporting unit below its carrying amount. In testing for goodwill impairment, the Company has the option to first assess qualitative factors to determine whether the existence of events or circumstances led to a determination that it is more likely than not that the fair value of a reporting unit is less than its carrying amount. If, after assessing the totality of events and circumstances, the Company concludes that fair value exceeds its carrying amount, then performing a quantitative impairment test is not necessary. If the Company concludes otherwise, the Company is required to perform a quantitative impairment test that requires a comparison of the fair value of the reporting unit to its carrying value, including goodwill. If the fair value of the reporting unit exceeds its carrying value, the related goodwill is not considered impaired and no further analysis is required. If the carrying value of the reporting unit exceeds its fair value, then the Company recognizes an impairment charge for the amount by which the carrying amount exceeds the reporting unit’s fair value. See Note 11 for further discussion.

Intangible assets

Intangible assets with finite lives are amortized over their estimated average useful lives. The Company does not have any intangible assets deemed to have indefinite lives. Intangible assets are tested for potential impairment whenever events or changes in circumstances suggest that an asset or asset group's carrying value may not be fully recoverable. An impairment loss, calculated as the difference between the estimated fair value and the carrying value of an asset or asset group, is recognized in the accompanying consolidated statements of operations if the sum of the estimated undiscounted cash flows relating to the asset or asset group is less than the corresponding carrying value.

Goodwill and Intangible Assets

In accordance with US GAAP, the Company tests goodwill for impairment on an annual basis or at an interim period if events or changed circumstances would more likely than not reduce the fair value of a reporting unit below its carrying amount. Under US GAAP, the Company first assesses the qualitative factors to determine whether it is more likely than not that the fair value of a reporting unit is less than its carrying amounts as a basis for determining if it is necessary to perform a quantitative impairment test. Periodically estimating the fair value of a reporting unit requires significant judgment and often involves the use of significant estimates and assumptions. These estimates and assumptions could have a significant effect on whether or not an impairment charge is recorded and the magnitude of such a charge.

During the second quarter of 2019, the Company realigned its business segments to Op Co and Asset Co (See Note 1). Prior to the reorganization, our Investment Management segment was also a reporting unit for purposes of measuring and reporting goodwill. The goodwill that was previously attributable to the Investment Management reporting unit was reallocated to the CIM reporting unit within the Op Co segment and the Asset Co reporting unit based on the relative fair value of the respective portions that became attributable to those reporting units. The Asset Co segment is also a reporting unit for purposes of measuring and reporting goodwill.

Based on the change in segments and restructuring of reporting units, the Company determined that it was necessary to perform a quantitative impairment test which involves estimates of future cash flows, discount rates, economic forecast and other assumptions which are then used in the market approach (earnings and / or transactions multiples) and / or income approach (discounted cash flow method).

Based on the results of the impairment analysis, the Company recognized a goodwill impairment, during the second quarter of 2019, in the amount of $4.1 million within the Asset Co reporting unit. No impairment charges for goodwill were recognized during the year ended December 31, 2018.

The following table presents the changes in the Company's goodwill balance, by reporting unit for the periods ended September 30, 2019 and December 31, 2018:



	Investment Management			Investment Bank			Cowen Investment Management			Asset Co			Total
	(dollars in thousands)
Beginning balance - December 31, 2017
Goodwill	$	29,026		$	51,337		$	—		$	—		80,363
Accumulated impairment charges	(10,200		)	(9,485		)	—			—			(19,685		)
Net	18,826			41,852			—			—			60,678

Activity: 2018
Recognized goodwill	—			—			—			—			—
Goodwill impairment charges	—			—			—			—			—

Ending balance: December 31, 2018
Goodwill	29,026			51,337			—			—			80,363
Accumulated impairment charges	(10,200		)	(9,485		)	—			—			(19,685		)
Net	18,826			41,852			—			—			60,678

Activity: 2019
Recognized goodwill (See note 3)	—			81,150			—			—			81,150
Realignment of segment goodwill:
Goodwill	(29,026		)	—			22,705			6,321			—
Accumulated impairment charges	10,200			—			(7,979		)	(2,221		)	—
Goodwill impairment charges	—			—			—			(4,100		)	(4,100		)

Ending balance: September 30, 2019
Goodwill	—			132,487			22,705			6,321			161,513
Accumulated impairment charges	—			(9,485		)	(7,979		)	(6,321		)	(23,785		)
Net	$	—		$	123,002		$	14,726		$	—		$	137,728

In connection with the Quarton transaction (see Note 3), in January 2019, the Company recognized goodwill of $81.2 million and intangible assets (including customer relationships, trade name, backlog and proprietary software) with an estimated fair value of $22.2 million which are included within intangible assets, net in the condensed consolidated statements of financial condition with the expected useful lives ranging from 2 to 4 years with a weighted average useful life of 2.8 years. Amortization expense related to intangibles from the Quarton acquisition for the three and nine months ended September 30, 2019 is $2.2 million and $6.7 million, respectively. Goodwill, the excess of the purchase price over the fair value of net assets, primarily relates to expected synergies from combining operations and has been assigned to the Op Co segment of the Company. Tax deductible goodwill will differ from goodwill recognized by the Company in an amount equal to the difference between actual contingent consideration and estimated contingent consideration (see Note 3).