...Xinyun Zhang ACCT325 Individual Case Goodwill Impairment at Jackson Enterprises Case 1. When is a company required to perform the two-step test for goodwill impairment? Explain in your own words and provide citation from the ASC. Goodwill is considered impaired when the implied fair value of goodwill in a reporting unit of a company is less than its carrying amount, or book value, including any deferred income taxes. By qualitative factors, if the fair value is less than its book value (likelihood more than 50%), two step of the goodwill impairment test is necessary. According to ASC 350-20-35-2 and 3(A&B&D), if the company determines that it is not more likely than not that fair value is less than the book value, it does not need to perform the two-step impairment test. 2. What qualitative factors should a company consider in determining whether the two-step test should be conducted? List each of these factors for Dynamic and ZD. Explain in your own words and provide citation from the codification. Based upon the case information, do you believe that goodwill is impaired for Dynamic and ZD separately company? Dynamic Qualitative Factors | Citation | Simple manufacturing process technology in this industry increased competitors by 35%. The increase in overall market supply may cost Dynamic depressed product prices. Therefore, their profitability would decline. | ASC 350-20-35-3C(b) | Both regulators and union representatives claimed that pollution...
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...Sports Inc. is a manufacturer of sports equipment. It is a public company with three reporting units: Fitness Equipment, Golf Equipment, and Hockey Equipment. During our audit, certain accounting treatments by Galaxy regarding goodwill impairment were found to possibly contradict with the Accounting Standard Codification. Based on my research of the ASC, my recommendations are that management should perform an interim goodwill impairment test at the end of third quarter of fiscal year 2009; and that management should not carry forward the 09 goodwill impairment test for Fitness and Hockey in 2010. Galaxy is in a competitive industry in which growth and profitability are tied to market and consumer demand. During 2010, as discussed in a press release by the management, Galaxy faced strong competition from Chinese imports that are sold at a lower price. Reduced consumer spending resulted from a slowing economy also hurt Galaxy’s sales. These “unanticipated competition” coming from affordable Chinese imports, and “significant adverse changes in the business climate” represented by a weak economy and reduced consumer spending are circumstances under which the ASC 350-20-35-30 mandates a goodwill impairment test between annual tests3. Therefore, an impairment test shall be carried out as of Sep 30, 2010. Figure 1 I also tracked the changes in control premium to gauge the accuracy of the fair value estimates assuming the 2009 fair values were carried forward. Control premium is...
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...Case #2 Murong Feng, Duy Do, TJ Fritzgerald, Hayden Jacobs 2/13/15 Question 1 Given the facts provided for Eagle in Italy, the building is not impaired under IFRS as of December 31, 2010. The carrying value is 1,100,000, and undiscounted future cash flows are 1,150,000. The carrying value is less than undiscounted future cash flows. According to IAS36 paragraph 12, “in assessing whether there is any indication that an asset may be impaired, an entity shall consider, as a minimum, the following indications: (d) the carrying amount of the net assets of the entity is more than its market capitalization.” Thus, there is not any impairment on the building under IFRS. Question 2 Given the facts provided for Eagle in Italy, the building is impaired under U.S. GAAP as of December 31, 2010. Under ACS 360-35-17, “An impairment loss shall be recognized only if the carrying amount of a long-lived asset is not recoverable and exceeds its fair value. The carrying amount of a long-lived asset is not recoverable if it exceeds the sum of the undiscounted cash flows expected to result from the use and eventual disposition of the asset” In the case, the carrying value is 1,100,000, and the fair value is 850,000. The carrying value is more than its fair value, an impairment should be recognized. However, it is recoverable since its carrying value is less than undiscounted future cash flows. In ASC 360-35-17 “An impairment loss shall be measured as the amount by which the carrying value...
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...ACCT 301 – intermediate Accounting 1 Case Study Due date: December 3, 2015 Objectives of the Case: This case gives students the opportunity to apply the guidance in ASC 350 to determine: • What goodwill impairment indicators should be evaluated. • Whether an interim period step 1 impairment test should be performed Applicable Professional Pronouncements: ASC 350-20, Intangibles — Goodwill and Other: Goodwill (ASC 350-20) ASC 820, Fair Value Measurement (ASC 820) Research Databases: Use the FASB Accounting Standards Codification Database to research the authoritative literature (FASB pronouncements) relevant to the issues in question. The web link and login information of the database is available on D2L. Instructions: a) Your name, class section, and responses must be typed on this document. b) Write your answer right below each question using ARIAL font size 11 unless specified otherwise. c) Your responses must be clear, concise, supported with persuasive arguments, and free from grammatical and spelling errors. d) There is no limit on the length of your response. e) Two submission formats are required: (1) an electronic version must be submitted via designated D2L drop box, and (2) a hard copy version must be submitted at the beginning of the class on the due date. Late submission will not be accepted (no exceptions). f) For hard copy submission, only print the cover page and the pages containing your responses. It must be...
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...Summary of Case Facts Donna Corporation operates in the U.S and Italy, and it prepares its financial statements in accordance with the U.S. GAAP for US lenders and with the IFRS for U.K. parent. U.S. operation: As of December 31, 2012, Donna owns a commercial building that represents: A cash-generating unit (CGU) under IFRSs and a long-lived asset classified as held and used under U.S. GAAP. In December 2012, Donna’s competitor sold an identical commercial building much less than asking price. Information about the building is as follows. Donna’s Building 12/31/12 ($’000) Carrying amount $4,500 Value in use $4,000 Fair market value less cost to sell $3,800 Fair market value $3,900 Undiscounted future cash flows $4,200 Italian operation: Donna acquired an Italy company in 2010 and goodwill was recorded. The Italy operation represents a cash-generating unit (CGU) under IFRSs and a long-lived asset classified as held and used under U.S. GAAP. Information about the Italy operation before impairment analysis is as follows. Carrying Value Before Impairment Analysis 12/31/12 ($’000) Cash 50 Property, plant, and equipment (PP&E) 3,000 Land 150 Goodwill 300 Total assets 3,500 Liabilities (1,300) Carrying value 2,200 At the end of 2012, the newly elected government passed legislation that will adversely affect Donna. Donna’s management noted the following at 12/31/2012: 12/31/12 ($’000) Value in use of CGU 1,800 Present value of future cash flow...
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...Eagle Impairment Case The following report outlines an analysis of Eagle Company’s assets in Serbia and Italy. With the information provided, we have created a detailed report to assess which assets should be impaired along with its impairment value under the IFRS and US GAAP standards. Eagle in Italy Under IFRS: Eagle owns a commercial building in Italy. The carrying amount is $1,100 with $900 being the value in use. According to IAS 36 P18, “An asset is impaired when its carrying amount exceeds its recoverable amount.” In this case, the carrying amount ($1,100) exceeds the recoverable amount (Higher of Value in use) of $900. Eagle should report an impairment loss of the difference of the carrying amount and the value in use: $1,100 - $900 = $200,000. Eagle should report an impairment loss of $200,000 for their cash-generating unit (CGU) in Italy. Under US GAAP: According to US GAAP, if the undiscounted future cash flows ($1,150) exceeds the carrying amount ($1,100), then no impairment loss is recorded. Since that is the case, under US GAAP, Eagle should not report an impairment loss on their CGU. Eagle in Serbia Under IFRS: Eagle acquired a smaller competing company in 2011 in Serbia; goodwill was allocated to the CGU. The guidelines for determining whether an impairment loss is recorded are the same as the scenario for Eagle in Italy, “An asset is impaired when its carrying amount exceeds its recoverable amount.” The fair value of the PP&E was $1 million...
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...| Goodwill | Research paper | | | ACC 620 - Advance entities Contents: Introduction 2 Accounting standards of goodwill development 3 Affection on SFAS 141 and SFAS 142 4 The definition of goodwill 4 Contribution to the creation of goodwill 5 Goodwill inclusion and exclusion 6 Identification of goodwill and intangible assets 7 Calculation of goodwill 7 Goodwill impairment 10 Comparison IFRS with U.S. GAAP for goodwill 11 Conclusion 13 References 14 Introduction: When one company gains control over the others, a business combination is established. As a part of this process, reciprocal accounts and intra-entity transactions must be adjusted or eliminated to ensure that all reported balances truly represent the single entity and current financial reporting standards require the acquisition method to account for business combinations. However, in many cases, the parent records both the consideration transferred and the individual amount of the identified assets acquired and liabilities assumed at their acquisition-date fair values are difference. Thus, GAAP requires the acquirer recognizes the asset goodwill as the excess of the consideration transferred over the collective fair values of the net identified assets acquired and liabilities assumed. Nevertheless, in a business combination, assets of the purchase price and book value of assets varies greatly. Such as the 1989 Time and Warner merged the two companies...
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...Case 2: Eagle Impairment Loss 1. We have referred to IAS 36 to make the decision on the amount that should be impaired by Eagle in Italy. Since in the case it says that there are qualitative factors that suggest an impairment is likely, we have to evaluate based on the recoverability test. IAS claims that we can recognize an impairment loss under the following circumstances: “If, and only if, the recoverable amount of an asset is less than its carrying amount, the carrying amount of the asset shall be reduced to its recoverable amount. That reduction is an impairment loss.”(IAS36-59). To be able to determine the amount impaired, we have to find the definition of recoverable amount. On Page 13 in IAS 36, the recoverable amount of an asset is, “the higher of its fair value less costs to sell and its value in use. (P-13 IAS 36) So, the impairment loss is 1100, 000-900,000=200,000 2. According to the FASB, “An impairment loss shall be recognized only if the carrying amount of a long-lived asset (asset group) is not recoverable and exceeds its fair value.”(360-10-35-17) However, in this case the recoverable costs is 1,150,000 which is larger than the carrying value 1,100,000. Thus, we do not need to record the impairment loss under GAAP. 3. Part 1 IFRS Under IFRS, “A cash-generating unit to which goodwill has been allocated shall be tested for Impairment annually, and whenever there is an indication that the unit may be impaired, by comparing the carrying amount of the...
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...presents the main changes of the regulation in the last years and the key differences between the two accounting treatments. In spite of the new accounting approach there are still lots of discussions, which indicate that the field is still not properly regulated. Finally, the article offers possible directions for future research and reporting practice. Key words: goodwill treatment, impairment of goodwill, intangible assets 1 Introduction We are facing a new era of economic development with a growing significance of intangible assets. Goodwill constitutes a significant asset for numerous companies, especially those which are operating in high technology industries. According to the growing importance of intangibles there has also been a significant change in standards associated with accounting for goodwill. In 2004 International Accounting Standard Board (IASB) issued...
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...Case #2 (Eagle Impairment Loss) Question 1: The Impairment Loss of Eagle in Italy under IFRS Recoverability test: Asset’s carrying amount exceeds the recoverable amount which is the higher of the asset’s value-in-use (discounted present value of the asset’s expected future cash flows) and fair market value less costs to sell. (IAS36-15) According to IAS36-6, “an impairment loss is the amount by which the carrying amount of an asset or a cash-generating unit exceeds its recoverable amount. The impairment loss = Carrying amount - Value in use = $1,100,000-900,000=$200,000 Question 2: The Impairment Loss of Eagle in Italy under U.S. GAAP (FASB 360-10) Recoverability test: Asset’s carrying amount exceeds the undiscounted future cash flows from the asset. Because the carrying amount $1,100 is less than the undiscounted future cash flows $1,150, there is no impairment loss. Question 3: The Impairment Loss of Eagle in Serbia 1. Impairment of Goodwill under GAAP and IFRSs - Two-step approach for testing goodwill impairment under U.S. GAAP (FASB ASC-350-20-35) 1) If assets’ fair value of reporting unit is greater than the carrying amount including goodwill, there is no impairment. 2) If there’s impairment indicated by step 1, then compare implied fair value of goodwill with carrying amount. Implied fair value of goodwill is obtained by deducting the fair values of all the reporting unit’s assets and liabilities from the fair value of the reporting unit. From...
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...diSCuSSeS and SHowS boTH wayS of meaSuRing goodwill following THe aCquiSiTion of a SubSidiaRy, and How eaCH meaSuRemenT of goodwill iS SubjeCT To an impaiRmenT Review. IMPAIRMENT RelevanT To aCCa qualifiCaTion papeRS f7 and p2 Required 1 Calculate the goodwill arising on the acquisition of High on a proportionate basis. 2 Calculate the gross goodwill arising on the acquisition of High, ie using the fair value of the NCI. Solution 1 The proportionate goodwill arising is calculated by matching the consideration that the parent has given, with the interest that the parent acquires in the net assets of the subsidiary, to give the goodwill of the subsidiary that is attributable to the parent. Parent’s cost of investment at the fair value of consideration given $500 Less the parent’s share of the fair value of the net assets of the subsidiary acquired (80% x $400) ($320) Goodwill attributable to the parent $180 2 The gross goodwill arising is calculated by matching the fair value of the whole business with the whole fair value of the net assets of the subsidiary to give the whole goodwill of the subsidiary, attributable to both the parent and to the NCI. Parent’s cost of investment at the fair value of consideration given $500 Fair value of the NCI $100 Less the fair value of the net assets of the subsidiary acquired (100% x $400) ($400) Gross goodwill $200 Given a gross goodwill of $200 and a goodwill attributable to the parent of $180, the goodwill attributable to the NCI is the difference...
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...IMPAIRMENT Depreciation, depletion, and amortization reflect a gradual consumption of the benefits inherent in an operational asset. An implicit assumption in allocating the cost of an asset over its useful life is that there has been no significant reduction in the anticipated total benefits or service potential of the asset. Situations can arise, however, that cause a significant decline or impairment of those benefits or service potentials. An extreme case would be the destruction of a plant asset—say a building destroyed by fire—before the asset is fully depreciated. The remaining carrying value of the asset in that case should be written off as a loss. Sometimes, though, the impairment of future value is subtler. The way we recognize and measure an impairment loss differs depending on whether the operational assets are to be held and used or are being held to be sold. Accounting is different, too, for operational assets with finite lives and those with indefinite lives. We consider those differences now. Operational Assets to Be Held and Used An increasingly common occurrence in practice is the partial write-down of operational assets that remain in use. For example, in the second quarter of 2001, American Airlines reduced the carrying value (book value) of certain aircraft by $685 million. The write-down reflected the significant reduction in demand for air travel that occurred even before the September 11, 2001, terrorist attacks on the World Trade Center and...
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...Goodwill has long been a controversial subject. Wines and Ferguson (1993) and McCarthy and Schneider (1995) documented the fact that the controversy regarding the accounting for goodwill in US and abroad had existed since the early 1900s. The controversy focused on the recognition of goodwill as an asset, on its treatment and its link to the income statement. A search of the accounting literature yields two definitions of goodwill. One is that goodwill is the excess of purchase price over fair value of the net assets acquired. Alternatively, goodwill is defined as the price paid for excess earnings where excess earnings are defined as the difference between the earnings of the acquired asset over the normal earnings for a similar business. Historically, there are three views on the treatment of goodwill. The first suggests that goodwill should be written off immediately against retained earnings. The second view holds that goodwill is a wasting asset and it should be amortized over a useful life. Further, the amount of goodwill amortized should be allocated to periods where it contributes to company’s earnings. Goodwill arises is calculated as the difference between the value of the business as a whole and the aggregate of the fair values of its various identifiable assets both tangible and intangible. As outlined in Financial Accounting Standards Board Accounting Standards Codification 350: Intangibles - Goodwill and Other (formerly Statement of Financial...
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...Senior Reviewed by: Manager XWZ CPA Adam Smith ISSUE: Grouping of long-lived assets to be held and used for impairment testing purposes. BRIEF BACKGROUND OF HISTORY A2 Auto Corporation (“A2 Auto”) is one of the world’s largest manufacturers and distributors of automobiles and automobile ancillary parts. In its Form 10-K, filed with the U.S. Securities and Exchange Commission (“SEC”), A2 Auto has disclosed within Note 24, Segment Information, that it has four operating segments: (1) A2 Americas, (2) A2 Asia Pacific, (3) A2 Others, and (4) Financial Services. Note 12, Goodwill and Other Intangibles, disclose that A2 Auto has the same four reporting units. ACCOUNTING QUESTIONS 1. What are the appropriate criteria for the grouping of long-lived assets to be held and used for impairment testing purposes? 2. On the basis of the information in A2 Auto’s 2010 Form 10-K, what is the appropriate grouping for purposes of recognizing and measuring an impairment loss? 3. What audit considerations should be made when testing the appropriate grouping of long-lived assets for purposes of recognition and measurement of an impairment loss? 4. Is A2 Auto’s approach for testing goodwill for impairment after recognizing an impairment charge related to a long-lived asset group classified as held-and-used appropriate? 5. After the A2 Americas $1.76 billion impairment loss was recognized, strategy refocus effort began which has resulted in an improved forecast for the Americas...
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...IFRS Who cares about goodwill impairment? A collection of stakeholder views April 2014 kpmg.com/ifrs Contents 01 02 03 04 06 08 10 12 14 16 17 18 20 21 Time to engage Exploring the issues Key themes The academic research Is goodwill impairment testing relevant? Is goodwill impairment testing effective? What are the difficulties? Do we need all of these disclosures? What are some of the alternatives? We have three unanswered questions A call to action Appendix 1: The interviewees Appendix 2: References and notes Acknowledgements © 2014 KPMG IFRG Limited, a UK company, limited by guarantee. All rights reserved. Who cares about goodwill impairment? | 1 TIME TO ENGAGE On 30 January 2014, the IASB launched the public phase of its post-implementation review of business combinations accounting when it released a Request for Information.1 We believe that a key aspect of the review is the impairment-only accounting model for goodwill, which was introduced in 2004. Comments are due to the IASB by 30 May 2014, so now is the time for all stakeholders to provide their feedback on this emotive topic. The Request for Information essentially asks three questions in relation to goodwill impairment testing. • How useful have you found the information obtained from annually assessing goodwill for impairment? • Do you think that improvements are needed regarding the information provided by the impairment test? • What are the main implementation, auditing or enforcement challenges...
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