We noted in a previous post that both the Securities and Exchange Commission and the audit world are paying more attention to several items in the financial statements that are likely to be hit particularly hard by Covid-19.

Among those items was impairment of goodwill or intangible assets. Today in its first-quarter earnings release, United Airlines ($UAL) gave us a great example of that headache.

United declared a $50 million impairment on the value of its flight routes to China. Here’s what the company had to say:

The company recorded $63 million of special charges, primarily associated with a $50 million impairment for its China routes. The company conducted impairment reviews of certain intangible assets in the first quarter of 2020, which consisted of a comparison of the book value of those assets to their fair value calculated using the discounted cash flow method. Due to the COVID-19 pandemic and the subsequent suspension of flights to China, the company determined that the value of its China routes had been impaired.

One might assume that this $50 million impairment is unwelcome, but not terribly significant considering United’s many other business challenges at the moment. After all, United listed $3 billion in intangible assets as of Dec. 31, and $1.15 billion of that sum was specifically related to flight routes.

A $50 million impairment does qualify as material (4.4 percent of that $1.15 billion), but not by much.

This isn’t the first time United has impaired intangible assets related to flight routes, either. In 2018 it recorded a $105 million charge for routes in Brazil, and another charge of $206 million for flights to Hong Kong.

But here’s where it gets interesting — United’s impairment analysis for flight routes was flagged as a Critical Audit Matter.

CAMs: A Refresher

CAMs, as you may recall, are new disclosures that audit firms are required to make about their clients. CAMs are any line-item that can be material to the financial statements, and also relies heavily on complex, subjective judgment.

Declaring something a CAM doesn’t necessarily mean something is amiss in that line item, although that can be the case. It’s more akin to the audit firm telling investors, “This line item here is material, but it’s really hard for us to get an empirical, data-driven assessment of how reliable it is. There’s a lot of judgment involved.”

As we were sifting through United’s 10-K for more detail about its intangible assets, we found that CAM disclosure from the firm’s auditor, Ernst & Young. Here’s what EY had to say:

Auditing management's annual route authorities indefinite-lived intangibles impairment test was complex and highly judgmental due to the significant estimation required in determining the fair value. The fair value estimate was sensitive to significant assumptions such as revenue growth rate, cost per available seat mile and the discount rate, each of which is affected by expectations about future market or economic conditions. As a result of the subjectivity of the assumptions, adverse changes to management's estimates could reduce the underlying cash flows used to estimate fair value and trigger impairment charges.

That’s disclosure of the CAM itself. EY also had to explain the steps it took to address the complexity of the disclosure:

To test the estimated fair value of the Company's route authorities indefinite-lived intangibles, we performed audit procedures that included, among others, assessing the fair value methodology used by management and evaluating the significant assumptions used in the valuation model. We compared significant assumptions to current industry, market and economic trends, and to the Company's historical results. We assessed the historical accuracy of management's estimates and performed sensitivity analyses of significant assumptions to evaluate the changes in the fair value of the intangible assets that would result from changes in assumptions. We also involved a valuation specialist to assist in our evaluation of the Company's valuation methodology and discount rate.

Analysts who follow United might want to keep all this in mind, especially as United grinds through what is likely to be a terrible year for airlines. We might see more impairments of other routes, or more impairments of routes that had already suffered impairments in the past. All of that will flow through to the income statement, making already bad numbers that much worse.