Professional judgment framework Goodwill impairment Part 1 Background Company AKS’ common shares are publicly traded and
Posted: Thu May 05, 2022 7:53 am
Professional judgment framework
Goodwill impairment
Part 1
Background
Company AKS’ common shares are publicly traded and it files with
the SEC. AKS has a single reporting unit, which sells high-end
consumer electronics. AKS has a March 31 fiscal year-end.
Fiscal 2021 data
On April 1, 2020, AKS acquired a competitor, BMN, for $20.0
million. The purchase price was approximately 10 times BMN’s
projected fiscal 2022 income. After completing the purchase price
allocation, the goodwill from this acquisition was recorded at
$10.0 million.
In compliance with ASC 350, AKS was required to perform a
goodwill impairment test. The goodwill impairment test identifies
potential impairment by comparing the fair value of a reporting
unit with its carrying amount, including goodwill. AKS decided they
would perform this test annually in January. The company determined
that there was one reporting unit (AKS in total) at which the
goodwill would be tested for impairment
In January2021, as directed by the CFO, the controller of AKS
initiated the process to determine whether there was any impairment
of the goodwill. Because this was a new process, the controller
decided to hire a certified specialist in the valuation business to
prepare the valuation. Below is information available regarding the
valuation process:
Based on the valuation, the fair value of the reporting unit
exceeded its carrying amount by 20%. AKS concluded that based on
this quantitative analysis; there was no goodwill impairment in
fiscal 2021.
Fiscal 2022 data
In January 2017, ASU 2017-04, Intangibles – Goodwill
and Other (Topic 350) – Simplifying the Test for Goodwill
Impairment, was issued. This ASU was issued in response
to concerns about the cost and complexity of performing the twostep
goodwill impairment test. Topic 350still provides management the
option to first assess qualitative factors to make a determination
of whether it is more likely than not that the fair value of a
reporting unit is less than its carrying amount. If, after a full
qualitative assessment, an entity determines it is more likely than
not that the fair value of a reporting unit is more than its
carrying amount, then performing the quantitative assessment is
unnecessary.
In January 2022, you have assumed the role of the controller.
You are now responsible for performing the annual impairment
testing for goodwill. The CFO believes that there is no impairment
issue given that a valuation was just performed in the prior year,
which indicated a fair value 20% over carrying value and also
because the fiscal results for 2022 have remained stable so far. He
has advised you to take advantage of the option to use the
qualitative approach in an effort to eliminate the $100,000
appraisal fee incurred in the prior year. The CFO believes this
approach will be simple and should reduce the accounting
department’s workload.
You had discussions with the AKS executive team early this month
and have gained the following insights:
At December 31, 2021, AKS had total assets of $100 million and
net equity of $10.0 million. The following additional financial
information is based on actual results for the first three quarters
of fiscal 2022,ended December 31, 2021,and projected results for
the fourth quarter ended March 31, 2022. Auditors of AKS have
performed reviews of quarterly results to date for fiscal 2022.
There have been no restatements.
Required
Please use the information above, document your judgment
in a draft memorandum in IFAJ (Issue, Facts, Analysis, Judgment)
format that will be provided to the CFO. Please use
appropriate FASB codification under
Analysis.
Tool to document the judgment
DRAFT memorandum
Goodwill qualitative assessment
Prepared by:
Reviewed and approved by:
Issue:
Facts:
Analysis:
Judgment:
Goodwill impairment
Part 1
Background
Company AKS’ common shares are publicly traded and it files with
the SEC. AKS has a single reporting unit, which sells high-end
consumer electronics. AKS has a March 31 fiscal year-end.
Fiscal 2021 data
On April 1, 2020, AKS acquired a competitor, BMN, for $20.0
million. The purchase price was approximately 10 times BMN’s
projected fiscal 2022 income. After completing the purchase price
allocation, the goodwill from this acquisition was recorded at
$10.0 million.
In compliance with ASC 350, AKS was required to perform a
goodwill impairment test. The goodwill impairment test identifies
potential impairment by comparing the fair value of a reporting
unit with its carrying amount, including goodwill. AKS decided they
would perform this test annually in January. The company determined
that there was one reporting unit (AKS in total) at which the
goodwill would be tested for impairment
In January2021, as directed by the CFO, the controller of AKS
initiated the process to determine whether there was any impairment
of the goodwill. Because this was a new process, the controller
decided to hire a certified specialist in the valuation business to
prepare the valuation. Below is information available regarding the
valuation process:
Based on the valuation, the fair value of the reporting unit
exceeded its carrying amount by 20%. AKS concluded that based on
this quantitative analysis; there was no goodwill impairment in
fiscal 2021.
Fiscal 2022 data
In January 2017, ASU 2017-04, Intangibles – Goodwill
and Other (Topic 350) – Simplifying the Test for Goodwill
Impairment, was issued. This ASU was issued in response
to concerns about the cost and complexity of performing the twostep
goodwill impairment test. Topic 350still provides management the
option to first assess qualitative factors to make a determination
of whether it is more likely than not that the fair value of a
reporting unit is less than its carrying amount. If, after a full
qualitative assessment, an entity determines it is more likely than
not that the fair value of a reporting unit is more than its
carrying amount, then performing the quantitative assessment is
unnecessary.
In January 2022, you have assumed the role of the controller.
You are now responsible for performing the annual impairment
testing for goodwill. The CFO believes that there is no impairment
issue given that a valuation was just performed in the prior year,
which indicated a fair value 20% over carrying value and also
because the fiscal results for 2022 have remained stable so far. He
has advised you to take advantage of the option to use the
qualitative approach in an effort to eliminate the $100,000
appraisal fee incurred in the prior year. The CFO believes this
approach will be simple and should reduce the accounting
department’s workload.
You had discussions with the AKS executive team early this month
and have gained the following insights:
At December 31, 2021, AKS had total assets of $100 million and
net equity of $10.0 million. The following additional financial
information is based on actual results for the first three quarters
of fiscal 2022,ended December 31, 2021,and projected results for
the fourth quarter ended March 31, 2022. Auditors of AKS have
performed reviews of quarterly results to date for fiscal 2022.
There have been no restatements.
Required
Please use the information above, document your judgment
in a draft memorandum in IFAJ (Issue, Facts, Analysis, Judgment)
format that will be provided to the CFO. Please use
appropriate FASB codification under
Analysis.
Tool to document the judgment
DRAFT memorandum
Goodwill qualitative assessment
Prepared by:
Reviewed and approved by:
Issue:
Facts:
Analysis:
Judgment: