...reporting unit. When performing step one of the Goodwill Impairment Testing we will consider two separate reporting units. The first reporting unit is the business component Medical-Surgical. Step one involves comparing the carrying value (including goodwill) with the fair value of the reporting unit. Carrying Value without Goodwill Carrying Value of Goodwill Total Carrying Value including Goodwill $118,800,000 3,200,000 $122,000,000 Fair Value Difference Carrying Value including Goodwill $125,000,000 FV > CV by $3,000,000 $122,000,000 When we compare this value with the Fair Value we see that the Fair Value is higher by $3,000,000. This means that Goodwill is not impaired and no further steps need to be taken. Now to compare the second reporting unit, DDC Distribution and HC Holding that are aggregated. We must first find the total carrying value, including Goodwill, of the two components. Value/Amount DDC Distribution HC Holdings Total Carrying Value of Net Assets (w/o Goodwill) $231,700,000 $72,250,000 $303,950,000 Carrying Value of Goodwill $10,500,000 $2,150,000 $12,650,000 Total Carrying Value including Goodwill $242,200,000 $74,400,000 $316,600,000 Now we follow step one and compare the carry value to fair value. Fair Value Difference Carrying Value including Goodwill $236,000,000 + 75,000,000 = $311,000,000 FV < CV by $5,600,000 $316,600,000 The second reporting unit has a goodwill impairment that must be computed and recorded. We must follow...
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...Goodwill Impairment – FASC Section 350 a. What is Step 1 in the two step process for evaluating goodwill? The first step of the goodwill evaluation process compares the fair value of a reporting unit with its carrying amount, including goodwill (350-20-35-4). b. What is Step 2 in the two step process for evaluating goodwill? The second step of the goodwill evaluation process compares the implied fair value of reporting unit goodwill with the carrying amount of that goodwill (350-20-35-9). c. Can the fair value of goodwill be measured directly? The fair value of goodwill can be measured only as a residual and cannot be measured directly (350-20-35-2). d. What factor(s) allow an entity to skip the “two step” process? If, after assessing the totality of events or circumstances such as those described in 350-20-35-3C, an entity determines that it is not more likely than not that the fair value of a reporting unit is less than its carrying amount, then the first and second steps of the goodwill impairment test are unnecessary (350-20-35-3D). e. When should an interim test be performed? If the carrying amount of a reporting unit is zero or negative, goodwill of that reporting unit shall be tested for impairment on an annual or interim basis if an event occurs or circumstances exist that indicate that it is more likely than not that a goodwill impairment exists (350-20-35-30). f. List some example impairment indicators. a. A significant decrease in...
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...Memo TO: Professor Brown FROM: Carissa Lambert DATE: April 6, 2015 SUBJECT: Case 11-9 Goodwill Impairment I think that Galaxy management should have performed an interim goodwill step 1 impairment test. Although it was not required, I think it could have been beneficial considering the declines of the past few quarters. They did review ASC 350 and determined that the test was not necessary. If they reviewed ASC 350 then we might assume that they performed a qualitative assessment of the factors listed in 350-20-35-3C (a) through (g). In the first three quarters of 2012, management explained the decline in earnings due to “continued slowing economy and reduced consumer spending.” Deterioration in economic conditions and a decline in earnings compared to expectations are both factors that can cause a drop in the fair value of the reporting units. Galaxy also experienced a sustained decline in their share prices for those three quarters. They had stock prices of $56.75 in 2011 that then dropped each quarter and was down to $25.25 by the third quarter of 2012. If after these factors are considered and management determines that it is not likely that the fair value is less than the carrying value then step 1 and step 2 of the test are unnecessary. Considering that Galaxy management did not perform the interim step 1 test, I would assume that they came to the determination that fair value would not have dropped to less than carrying value. According to the FASB standards this...
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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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...Case 1 Goodwill Impairment Testing Should management have performed an interim goodwill impairment test as of September 30, 2010? Galaxy Sports Inc. (Galaxy) is a U.S. based manufacturer of sports equipment. It is an SEC registrant with one operating segment with three separate reporting units: fitness, golf and hockey. The fitness is the largest division of Galaxy with allocated goodwill of $200 million. The golf division reports $130 million of goodwill and the hockey has $30 million of goodwill. Each division has been a reporting unit for a number of years. Due to the complexities involved with the calculation of goodwill and resource restraints in 2009, Galaxy decided to hire Big Time LLC (Big Time) to perform three annual ASC 350, Intangibles-Goodwill and Other, impairment analyses. In 2009, no goodwill impairment was found by Big Time. In 2010, Galaxy did not use Big Time or any external evaluation firm for the goodwill impairment analyses. The management determined that the prior year step 1 analysis of Big Time could be used based on the fact that assets and liabilities had not significantly changed, the most recent fair value determination had exceeded the carrying value amount by substantial margins, and that no events or circumstances would cause the fair value to go below the book value. The issues at hand are whether or not an interim impairment analysis should have been performed as opposed to carrying forward the prior year step 1 analysis. Management...
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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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...Jacquelyn Keville William Brown 797AT Case Study April 9, 2015 1. No, management did not have to perform an interim goodwill step 1 impairment test as of September 30, 2012. In December of 2011 Galaxy used an external valuation firm to perform its goodwill impairment analysis. This showed that each reporting unit passed step 1 of the impairment test because the fair value of their equity was well above the book value of their equity. In Q1 and Q2 following this impairment analysis earnings were below expectation due to the slowing economy. In September 2012, at the beginning of Q3 Galaxy was considering performing an interim goodwill impairment test. In reviewing ASC 350 they concluded that this was not necessary for them to perform, which was the correct decision. ASC 350 states, “Goodwill of a reporting unit shall be tested for impairment between annual tests if an event occurs or circumstances change that would more likely than not reduce the fair value of a reporting unit below its carrying amount. Additionally, if the carrying amount of a reporting unit is zero or negative, goodwill of that reporting unit shall be tested for impairment on an annual or interim basis if an event occurs or circumstances exist that indicate that it is more likely than not that a goodwill impairment exists.” (350-20-35-30) The circumstances that could possibly reduce the fair value below its carrying amount are macroeconomic conditions, industry and market considerations, cost factors,...
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...1. According to ASC 805, verbatim: The acquirer shall recognize goodwill as of the acquisition date, measured as the excess of (a) over (b): a. The aggregate of the following: 1. The consideration transferred measured in accordance with this Section, which generally requires acquisition-date fair value (see paragraph 805-30-30-7) 2. The fair value of any noncontrolling interest in the acquiree 3. In a business combination achieved in stages, the acquisition-date fair value of the acquirer’s previously held equity interest in the acquiree. b. The net of the acquisition-date amounts of the identifiable assets acquired and the liabilities assumed measured in accordance with this Topic. Also goodwill shall be measured in whole because the acquiring entity is responsible for all of the acquiree’s assets and liabilities regardless of percentage owned. This means goodwill be measured for the acquiring entities portion and the non-controlling portion as well and presented on the balance sheet as a single figure of both controlling and noncontrolling portions combined. This section is taken from Deloitte’s A Roadmap to Accounting for Business Combinations and Related Topics example 5-4: Cash transferred by acquiring entity + fair value of contingent consideration agreement (if applicable) = total consideration transferred by acquiring entity + fair value of the non-controlling interests (if applicable) + fair value of acquiring entity’s previously...
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...Question #1: Stimulating the economy is accomplished in one of two ways. The government can increase government spending or decrease taxes. Both ways have positives and negatives on the economy. First, the positives of increasing the government spending while keeping the tax rate unchanged are as follows. If the government increases spending aggregate demand will be directly affected by the increase. If the demand increases, prices will rise until supply and demand are again at an equilibrium. The new equilibrium and GDP will be increased by an amount equal to the increased spending. Further, the multiplier effect of the government spending, when the government increase spending on purchases it will create more job opportunities. This will increase consumer spending which will encourage private investment spending to meet the demand. In turns that will create more jobs in the economy. The negatives of increasing government spending are as follows. It is very important to remember that government spending to stimulate the economy is not free. The funds are not going to come from thin air. The government has two options to generate the money without increasing taxes, borrowing the money domestically, or from foreign governments. Both cases increase the national debt, or cut some government programs to stimulate others. Borrowing the money domestically, from local investors, will stop these investors from creating new businesses. This will lead to less job creation...
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...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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...Goodwill Goodwill is an intangible asset and is the difference between a company’s total value and current market value of their tangible assets (Buying a Business). For example, a company purchases another firm for ten million and the tangible assets of that firm are worth one million; nine million would be the company’s goodwill. There are many things that make up the value of a company’s goodwill; such as customer loyalty, reputation, copyrights, patents etc. Most of the value of a company does not come from the hard assets, but in the intangible asset. Because reputation has an affect on a company’s goodwill, a publicly traded company’s goodwill can be affected more than a private company’s; therefore publicly traded companies have to be more careful about their decisions and ethics. One way goodwill could go down is if a company’s reputation were to be damaged. When a company’s reputation goes down it can cause their stock prices to go down; therefore, reducing their market value. When the market value of a company goes down, their goodwill goes down as well, and this is called impairment. Impairment is when the carrying amount of goodwill is greater than its implied fair value (ASC 350-20-35-2). According to the Financial Accounting Standards Board (FASB), Impairment must be tested annually anytime during the fiscal year as long as it is done the same time every year by using the two-step process and if impairment exists, the impairment losses are put in the income statement...
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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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...Dear Mr. Gabriel, In response to your inquiry regarding potential adjustments to the carrying value of your corporation’s tangible assets for possible impairments in value and also for possible impairment of value of the Goodwill booked on the corporation’s Balance Sheet, I have researched and concluded the following information and proper disclosures for XYZ Corporation. Tangible Assets Let’s begin with the tangible assets of the corporation. Over the useful life of the asset, it is necessary to periodically test for impairment. Impairment exists when the carrying value of a long-lived asset exceeds the fair value of the asset and is not recoverable. Various events and changes in circumstances can lead to an impairment, they include but are not limited to; a decrease in fair value of an asset, a change in the manner the asset is used, adverse changes in legal factors or the business climate that affects that value of the asset, and projected continual losses associated with the asset. To measure if there has been impairment on an asset, we must perform a recoverability test. The recoverability test has two steps. The first step is to compare the future net cash flows of the asset to the carrying value (book value) of the asset. If the future net cash flows are more than the carrying value, the asset is not impaired. However, if the future net cash flows are less than the carrying value, then the asset is impaired and the second step of the recoverability test needs to...
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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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