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
…show more content…
| ASC 350-20-35-3C(a) | The stock price decreased from $27 to $23 in 2014. | ASC 350-20-35-3C(e) |
ZD Qualitative Factors | Citation | Because of the enhancement of the competitive advantage of our nation's farmers and ranchers, the government creates a business- friendly atmosphere for the company. This could decrease operation cost. The government may give some grants to help company. | ASC 350-20-35-3C(b) | ZD will dominate its competitors in manufacturing process management which results in a cost advantage, as long as the patent is approved for manufacturing process. | ASC 350-20-35-3C(c) | ZD has reduced its utility costs by 15% for two years. Due to these utility cost reduction, ZD earns a state-administered manufacturer energy savings incentive subsidy. | ASC 350-20-35-3C(c) |
According the above assessment of qualitative factors for both companies, I think that the goodwill impairment test is necessary for Dynamic because Dynamic has many negative impacts. Although the Dynamic has 3% of gross profit margins over competitors, it was not enough to offset the negative impacts; I think that the goodwill impairment test is not necessary for ZD. Due to ZD shows all positive impacts improving operation condition.
3. Based upon the information in the case, should Dynamic and ZD be combined or separated for
Goodwill is not amortised. Instead, goodwill is tested for impairment annually, or more frequently if events or changes in circumstances indicate that it might be impaired, and is carried at cost less accumulated impairment losses. Gains and losses on the disposal of an entity include the carrying amount of goodwill relating to the entity sold.For the purposes of impairment testing, goodwill is allocated to each of the Group 's cash-generating units (CGUs), or groups of CGUs, expected to benefit from the synergies of the business combination. CGUs (or groups of CGUs) to which goodwill has been allocated are tested for impairment annually, or more frequently if events or changes in circumstances indicate that goodwill might be impaired.If the recoverable amount of the CGU (or groups of CGUs) is less than the carrying amount of the CGU (or groups of CGUs), the impairment loss is allocated first to reduce the carrying amount of any goodwill allocated to the CGU (or groups
Although the company did show an increased gross profit of $8,255,000 with $6,358,000 less Net Sales in 2013 versus 2012, that increase is due to the reduction in product Cost of Goods Sold by $14,613,000. Since increases in product price will negatively affect sales, one of management’s primary goals is to keep prices stable. This objective is achieved through implementation of cost cutting programs, investing in more efficient equipment, and automation of more steps in the production process.
Another consideration is the citation ASC 350-20-35-4, which is related with the first step to accomplish goodwill impairment test. The memorandum stated only the (IAS 36.105) impairment losses.
We will discuss whether the Company’s approach for testing goodwill for impairment after recognizing an impairment charge related to a long-lived asset group classified as held-and-used is appropriate. This issue pertains to whether it is feasible to have a long-lived asset impairment without goodwill impairment.
The following are the required steps to identify, recognize and measure the impairment of a long-lived asset (group) to be held and used:
Based on ASC 320-10-35-34 I mentioned above, the other-than-temporary impairment should be recoded as $28 ($100-$72) as of December 31, 20X1. On January 31, 20X2, when the price of the stock went up to $75, the other-than-temporary impairment should be recoded as $25 ($100-$75). If the share price was $95 instead of $75 on January 31, 20X2, I think no other-than-temporary impairment needs to be recorded, because there is no material decrease occurred.
Gator has performed its annual goodwill impairment analysis as of December 31, 20X3, with the assistance of an external valuation specialist, Management’s Expert. Gator elected not to perform the qualitative assessment for determining whether it is more likely than not that the fair value of a reporting unit is less than its carrying amount and proceeded with Step 1 of the quantitative two-step goodwill impairment test for all reporting units.
IAS 36-2 states the Impairment of Assets rule shall be applied in accounting for the impairment of all
The following are the required steps to identify, recognize and measure the impairment of a long-lived asset (group) to be held and used:
In accordance with the ASC 360-10-35-21, several changes should be evaluated in testing for the recoverability of long-lived assets: decline in market value, adverse changes in way asset is used or physical change in asset, adverse changes in legal factors or business climate, accumulated costs in excess of the original expected acquisition or construction price, current period losses with history of operating or cash flow losses associated with asset, and sales or disposal before the end of useful life.
According to Section 360-10-35-21, examples of events that would cause an asset to be tested for impairment include a significant decrease in the market price of a long-lived asset, or a asset group, a significant adverse change in the extent or manner in which a long-lived asset or asset group is being used or in its physical condition, a significant adverse change in legal factors or in the business climate that could affect the value of a long-lived asset, or asset group, and a current period operating or cash flow loss combined with a history of operating or cash flow losses or a projection or forecast that demonstrates continuing losses associated with the use of a long-lived asset or asset group.
a. What is the authoritative guidance for asset impairment? Briefly discuss the scope of the standard (i.e., explain the types of transactions to which the standard applies)
If these estimated undiscounted future cash flows are less than the carrying value of the asset, an impairment charge is recognized for the excess, if any, of the asset’s carrying value over its estimated fair value.
Based on SFAS No.142 states goodwill and intangible assets that have indefinite useful life will not be
But more important question is whether this really led to better quality and transparency of accounting.