Question

Research Case:

Sony is a Japanese multinational company that decided to expand its entertainment business in the United States. Sony purchased CBS Records and Columbia Pictures to form Sony Music and Sony Pictures. Because of these acquisitions, Sony assumed debt of $1.2 billion and allocated $3.8 billion to goodwill. On Sony’s Annual Report filed with the SEC, Sony reported only two industry segments: electronics and entertainment. Although Sony Music was profitable, Sony Pictures produced continued losses of approximately $1 billion. When Sony purchased the motion pictures operations, it projected a loss for only five years because it assumed that the motion pictures entertainment would become profitable. However, Sony suffered a significant loss after amortization and the costs of financing the acquisition for the past four years.

In the current year, Sony Pictures sustained a loss of nearly $450 million, double the amount that Sony had planned. To date, Sony Pictures has had total net losses of nearly $1billion. Early in the year, Sony declared that it had written down $2.7 billion in goodwill associated with the acquisition of Sony Pictures. Sony combined the results of Sony Music and Sony Pictures and reported them as Sony Entertainment. Little profit was shown in Sony Entertainment. Sony’s consolidated financial statements did not disclose the losses from Sony Pictures.

Questions

How should the write down of goodwill be reported? What information (if any) should be disclosed related to goodwill?

Since Sony has two businesses with different financial trends, should the consolidated financial statements provide specific segment disclosure information? What should the company disclose?

Reporting insufficient information or excluding required disclosures can be misleading or perceived as unethical. What ethical standards applicable to Sony’s reporting?

Answer 1

Answer

1.

The write down of goodwill be reported:

Particulars	Amount(in billion )
Carrying Amount	$3.8
Less: Impairment	($2.7)
The write down of Goodwill be reported	$1.1

The write down of goodwill should be done when the impairment test just that the recovarable amount will be less then the carrying amount. The goodwill writedown should be disclosed in the notes to account for the benefir of the investor. In balancesheet it should be presented as above.

2.

Yes, the consolidated financial statement should present the information segment wise.It should disclosed the operating performance of all the segment of the group so that investor can analyse which of its segments are in profit and which of its segment are in losses.

3.

The ethical standard is Sony should report all its major segments and also give additional information where there is major impairment/write down of business. This will help the investor to take prudent decision.