Codification to Research a Complex Accounting Issue: The Case of Goodwill Impairment at Jackson Enterprises
Note: The two-step impairment test was US GAAP at December 31, 2014, which is the key date for this case study. The FASB has since issued Accounting Standards Update (ASU) 2017-04, which eliminate Step 2 of the impairment test. However, for answer the requirements of this case study below, please perform the two-step impairment text which was US GAAP at December 31, 2014. For your information, today, the quantitative impairment test now includes only one step, which is the comparison of the carrying value to the fair market value of the reporting unit, with the difference representing the recognized goodwill impairment. While the quantitative aspect of the test has changed under ASU 2017-04, the FASB did not remove the preliminary, qualitative assessment option to determine the appropriateness of the quantitative test.
Read the Case of Goodwill Impairment at Jackson Enterprises attached below. After reading the case study, answer the questions provided.
Financial reporting personnel at Jackson Enterprises (JE) are in the process of completing year-end activities, including necessary adjusting of entries to the consolidated financial statements. While JE has not previously believed it necessary to adjust its recognized goodwill from the Dynamic and ZD acquisitions, the valuation of goodwill is, nonetheless, a prominent concern in the closing process. Assume you are asked to research the financial statement issues surrounding the goodwill recorded for the Dynamic and ZD subsidiaries.
Prepare a paper to address the questions below. In memorandum format, detail the issues involved, the judgements you made based on authoritative literature, and your recommendations for the direction of the goodwill valuation as it relates to Dynamic and ZA. In other words, does the evidence suggest further action is required in determining the appropriate valuation of good will? If so, what steps need to be taken?
Note: Remember that textbooks are not considered authoritative guidance in accounting research.
- Identify and cite the relevant topics/subtopics from the FASB Accounting Standards Codification for this case.
- Identify the specific accounting issue that you believe needs to be initially addressed for JE’s consideration of goodwill regarding both Dynamic and ZD.
- What does the qualitative evidence from the case indicate about whether JE should perform the two-step impairment test? In your response, identify specific factors discussed in the Codification and relate them to the information provided to you in the case.
- Beyond the assessment of qualitative factors, what other evidence should be considered for the purpose of the analysis? What does this information suggest? For Dynamic, what do you think is the most appropriate fair value amount to use in assessing the fair value of this reporting unit? Explain. Why is this important?
- Based upon the information provided above, should Dynamic and ZD be combined or separated for the purposes of the goodwill analysis? Explain. Why is this important?
- Based upon your initial analysis, do you think the $200 million goodwill balance (i.e., the $150 million for Dynamic and the $50 million for ZD) is the appropriate valuation for goodwill on the December 31, 2014 balance sheet of JE?
- Be sure to discuss and reference concepts taken from the Required and Recommended Readings throughout the course, and from your own relevant research.
- Include a cover sheet and reference page.
Your paper should be a minimum of 10 in length, not including a cover sheet and reference page. Submissions in excess of 10 pages in length are acceptable.
- Also submit a separate Excel file to support your findings or include exhibits as part of your paper.
- Include a minimum of 8 credible, academic, or professional references beyond the course text, Required and Recommended Readings, or other course materials.
- Format according to the Strict APA format only.
- 10 pages not including Cover sheet and reference page (which you must include).
- Excel also attached separately.
Notes and Clarifications:
1. The primary issue in the case is the determination of whether there is potential impairment of goodwill based on a qualitative assessment (Step 0) and a quantitative assessment (Step 1 of the two-step impairment test).
2. Note that ASC 350-20-35-3E states the following: If, after assessing the totality of events or circumstances (qualitative assessment) such as those described in 350- 20-35-3C(a) through (g), an entity determines that it is more likely than not that the fair value of a reporting unit is less than its carrying amount (book value of net assets), then the entity shall perform the first step of the two-step goodwill impairment test.
3. You need to perform the qualitative assessment to determine if there is potential impairment. Which factors should be considered (cite the relevant ASC) in the qualitative assessment?
4. For the quantitative assessment (Step 1), you need to decide which valuation (market capitalization or appraised value) for Dynamic and ZD is most appropriate to use together with the qualitative factors in developing conclusions about potential impairment. Note that the carrying value (book value of net assets) for each subsidiary can be determined from the condensed summary of balance sheet information provided in the case.
3. You need not calculate Step 2 (including implied fair value of goodwill) of the impairment test. Note that the case does not provide the information necessary for the calculation of implied goodwill.
4. For the quantitative assessment (Step 1 of impairment test), you need to determine whether the analysis of carrying value vs. fair value of reporting unit should be performed at the level of the entire operating segment (i.e., the semiconductor segment) or a component of a segment (i.e., each individual subsidiary). Note that the reporting unit could be an entire operating segment (i.e., the semiconductor segment) or a component of a segment (i.e., each individual subsidiary).
5. Note that according to ASC 350-20-35-35, “two or more components of an operating segment shall be aggregated and deemed a single reporting unit if the components have similar economic characteristics.” It is thus important to determine if Dynamic and ZD have similar economic characteristics and can be aggregated and deemed a single reporting unit.
6. Note that a goodwill value may not be appropriate if the qualitative and quantitative assessment indicate there is potential impairment. In that case, goodwill impairment loss is calculated in Step 2 of the impairment test. However, if the qualitative and quantitative assessment indicate there is no potential impairment, the goodwill value is appropriate, and there is no need to proceed to Step 2.