Question

Assume that you are Tracy Roberts and you are preparing two reports to Morgan Mickelson or Household Goods, Inc.   You should answer the following questions. In one report, you assume that Morgan Mickelson is a CPA and will understand citations to the Accounting Standards Codification (ASC). In this first report, you should use appropriate citations to ASC. The second report covers similar information but the assumption is that Morgan Mickelson is not a CPA and will not understand citations to ASC. You must convey the same information but in language that any businessperson would understand.

1. What is the procedure for testing goodwill for impairment according to ASC standards?
2. Using ASC guidelines determine the goodwill valuation for ZD Corporation. Provide numbers to support your revaluation if necessary and explain your process.
3. Using ASC guidelines determine the goodwill valuation for Hope Industries. Provide numbers to support your revaluation if necessary and explain your process
4. How do the above answers effect Household Goods segment information and overall financial statements?
5. What disclosures need to be provided in Household Goods financial reports concerning goodwill according to ASC?

Assume that Household Goods will be an early adopter of the ASU 2017-04, scheduled to be adopted by publicly traded firms for fiscal years starting after Dec. 15, 2019. Also, assume that ZD and Hope are considered separate reporting units and Household Goods has not elected the Accounting alternative.

Hint: The carrying value of other asset and liability accounts must be determined before goodwill impairment is considered. You should decide what the carrying value of inventory, Property, plant and equipment, and bonds should be. After that, then you consider the valuation of goodwill.

The answers should be conveyed in a report, not just answering the questions, 1, 2, 3 etc.

You should be thorough in your answers, but as concise as possible. Each report should be around 2-3 pages. In the first report, you should use appropriate citations to ASC, but not to any other documents as other documents are not authoritative accounting guidance.

Answer 1

GOODWILL IS AN INTANGIBLE ASSET ARISING FROM THE ACQUISITION OF ONE COMPANY BY ANOTHER. WHEN AN ACQUIRING COMPANY PURCHASES A COMPANY FOR MORE THAN ITS BOOK VALUE, THE EXCESS OVER BOOK VALUE IS INCLUDED AS GOODWILL ON THE ACQUIRER'S BALANCE SHEET. MANY INVESTORS CONSIDER GOODWILL TO BE AMONG THE MOST DIFFICULT ASSETS TO VALUE. TO BEGIN WITH, THERE ARE MANY POSSIBLE JUSTIFICATIONS FOR GOODWILL: INTANGIBLE ASSETS SUCH AS STRONG CUSTOMER RELATIONS, INTELLECTUAL PROPERTY, OR A POPULAR BRAND ARE JUST SOME OF THE FACTORS THAT CAN CONTRIBUTE TO GOODWILL. AS SUCH, IT IS OFTEN DIFFICULT TO UNDERSTAND WHAT EXACTLY IS SUPPORTING ANY GIVEN GOODWILL ASSET. ONLY ADDING TO THE DIFFICULTY POSED BY GOODWILL IS THE FACT THAT—WHETHER DELIBERATELY OR INADVERTENTLY—GOODWILL IS OFTEN EXAGGERATED. SUCH EXAGGERATIONS CAN MISLEAD INVESTORS BY CAUSING COMPANIES’ ASSETS TO APPEAR ARTIFICIALLY ROBUST. IN THIS ARTICLE, WE EXAMINE HOW TO ACCURATELY QUANTIFY A COMPANY’S GOODWILL.

UNDER UNITED STATES GENERALLY ACCEPTED ACCOUNTING PRINCIPLES (GAAP​), THE ACQUIRING COMPANY MUST PERIODICALLY ADJUST THE STATED VALUE OF THE GOODWILL ASSET HELD ON ITS BALANCE SHEET AND CLAIM THE DIFFERENCE AS A LOSS. THIS LOSS ADJUSTMENT IS CALLED AN IMPAIRMENT CHARGE AND IT CAN HAVE A DEVASTATING EFFECT ON A COMPANY’S VALUE. REMEMBER THE $99.7 BILLION AOL TIME WARNER IMPAIRMENT CHARGE? IT WAS FOLLOWED BY A DEVASTATING DECLINE IN THE COMPANY’S STOCK VALUATION: A FALL FROM $226 BILLION TO $20 BILLION.

CONDUCTING GOODWILL IMPAIRMENT TESTS EVERY YEAR CAN BE EXPENSIVE AND TIME CONSUMING, PARTICULARLY FOR SMALLER BUSINESSES THAT MAY HAVE LIMITED INTERNAL EXPERTISE AND RESOURCES. IN ORDER TO REDUCE THE COST AND COMPLEXITY, THE FINANCIAL ACCOUNTING STANDARDS BOARD INTRODUCED AN ALTERNATIVE METHOD OF COMPLETING THE GOODWILL IMPAIRMENT TEST. THE CATCH IS ONLY PRIVATE COMPANIES CAN USE THE ALTERNATIVE.

IN CASE OF PRIVATE COMPANIES AS SET OUT IN ACCOUNTING STANDARDS UPDATE 2014-02, THE NEW METHOD STREAMLINES TEST PROCESSES. ONE OF THE MOST SIGNIFICANT CHANGES IS THAT PRIVATE BUSINESSES CAN PERFORM GOODWILL IMPAIRMENT TESTS ON AS AS-NEEDED BASIS INSTEAD OF EVERY YEAR. WHAT DOES AS-NEEDED MEAN? THE COMPANY NEED ONLY RUN A GOODWILL IMPAIRMENT TEST IF IT DEEMS THAT AN EVENT OR CHANGE HAS HAD A MATERIAL IMPACT ON THE FAIR VALUE OF ITS STATED GOODWILL. IN ADDITION, THIS UPDATE GRANTS PRIVATE BUSINESSES THE ABILITY TO AMORTIZE THEIR GOODWILL OVER A PERIOD OF 10 YEARS OR LESS