Goodwill Impairment Testing Essay

wandflower Sports Inc. (Galaxy), a U.S.-based manufacturer of sports equipment, is a calendar year-end SEC registrant with one operate segment and the following three describe unitsFitness Equipment.Golf Equipment. hockey Equipment.Galaxy is in a competitive industry with several in public traded companies in which maturement and profitability are tied to the commercialise and consumer c solely forThree report units are appropriate because discrete financial culture is available for each fortune, each component is a business, and each component is managed separately.The Fitness Equipment component is Galaxys adultst reporting unit. Over the years, mixed acquisitions withdraw resulted in recorded good will of $200 one million million designate entirely to this reporting unit.The Golf Equipment component is a large golf equipment manufacturer that was acquired in 2004. Upon acquisition of the business, Galaxy recorded $130 million of grace of God that was assigned entir ely to this reporting unit.The Hockey Equipment component is a small hockey equipment manufacturer acquired in 2003 to gain entry into the genuinely profitable hockey equipment market. Galaxy recorded $30 million of saving grace related to this acquisition, which was assigned entirely to this reporting unit.Galaxy has elected an annual thanksgiving handicap testing date of celestial latitude 31 for all three reporting units.In declination 2010, Galaxy instruction pursue Big Time LLC (Big Time), a reputable external valuation firm, to actualize three annual ASC 350, Intangibles Goodwill and Other, disablement analyses (one for each reporting unit) on the $360 million of goodwill recorded by Galaxy as of declination 31, 2010. Previously, counseling had performed the annual goodwill deterrent summary internally. However, given the change magnitude complexities involved in the calculation and resource constraints at Galaxy, the company refractory to use a third party.Th rough early discussions with Galaxys management and Big Time, it was expected that the entity was going to pass footmark 1 of the goodwill analysis for all three reporting units with a prodigious cushion (i.e., the estimated carnival measure out of each reporting unit significantly exceeded the script value) for each reporting unit. This was also consistent with the goodwill analysis that was performed internally by Galaxy in the previous year. Copyright 2009 Deloitte phylogenesis LLCAll Rights Reserved.Case 11-9 Goodwill loss T estingGalaxy management indicated that the significant cushion was likely because2010 Q4 gross revenue were very strong, and strong sales were also expected for 2011and beyond. Big Time completed its analysis in late January 2011 and, as expected, Galaxy passed step 1 of the annual goodwill impairment test for each reporting unit. Galaxys frequent handle price was $56.75 as of December 31, 2010.Note As of December 31, 2010, Galaxys care price was $56.75 and 46 million grapples were outstanding, indicating a market capitalization of $2.6 billion. The implied control premium of 18 portion is viewed by management as reasonable.First Quarter of 2011Management released Q1 meshwork, which were slightly to a lower place expectations. In a Q1 press release, Galaxy attributed the lower lolly to the mental retardation economy and cut back consumer spending on recreational activities. Galaxys common share price fell to $49.25 after the release of Q1 winnings. hour Quarter of 2011Management released Q2 loot on July 15, 2011. As in Q1, Q2 earnings were also below expectations because the retard economy resulted in continuing reductions in consumer spending. In Galaxys press release, management discussed the impact of the slowing economy on its business. Further, the company experienced additional pressure on its sales during the quarter as a result of an increase in sports equipment manufactured in China that was being sold at large discount retailers. The equipment has a lower price point, which is appealing to consumers during difficult scotch times. Historically, Galaxy has not experienced significant competition from imports because the quality of the imports is inferior to the quality of the sports equipment manufactured by Galaxy. Galaxys common share price fell to $45.25.Third Quarter of 2011During the financial close process, management considered performing aninterim goodwill impairment test but, after reviewing ASC 350, determined it was not necessary.Copyright 2009 Deloitte Development LLCAll Rights Reserved.Case 11-9 Goodwill Impairment T estingPage 3Management released earnings on October 15, 2011, and indicated that although Q3 earnings were significantly below expectations because of a continued slowing economy and reduced consumer spending, revenue would rebound in Q4 as retailers stocked up for the pass shopping season. Historically, Q4 has been the strongest quarter for Galaxy with Q4 sales embodying more than 50 percent of the companys annual sales. Galaxys common share price fell to $31.50 after the earnings release. On September 15, 2011, the FASB issued ASU 2011-08, testing Goodwill for Impairment, which amends the pleader in ASC 350-202 on testing goodwill for impairment. Under the revised guidance, entities testing goodwill for impairment have the weft of performing a qualitative assessment before calculating the fair value of the reporting unit (i.e., step 1 of the goodwill impairment test). The carry onward option permitted in ASC 350-20-35-29 was removed. The amendments are effective for annual and interim goodwill impairment tests performed for fiscal years beginning after December 15, 2011. beforehand(predicate) adoption is permitted however, Galaxy elected NOT to early adopt this guidance when performing their annual goodwill impairment test as of December 31, 2011. Year-End 2011As Galaxy prepared for its annual goodwill impairment test, manag ement determined that (1) assets and liabilities of the Fitness Equipment and Hockey Equipment reporting units had not significantly changed, (2) the most recent fair value determinations (the 2010 analysis prepared by Big Time) for both reporting units resulted in an amount that exceeded the carrying amounts by existent margins, and (3) on the basis of its analyses, therehave been no significant events or circumstances that would cause the fair value to fall below book value for both reporting units. As a result, management clear-cut to carry forward the prior-year step 1 analyses for the Fitness Equipment and Hockey Equipment reporting units. Management believed that ASC 350 supported its determination to carry forward these analyses. For the Golf Equipment reporting unit, management used the analysis created by Big Time stick out year and updated it as of December 31, 2011, by using the same growth rate and discount rate as in the prior year. On the basis of this updated analy sis, management concluded that the Golf Equipment reporting unit passed step 1. A summary of Galaxys 2011 annual goodwill impairment test follows* We have elected to carry forward the fair value as of December 31, 2010. Note On December 31, 2011, Galaxys share price was $27.50 and 50 million shares were outstanding, indicating a market capitalization of $1.375 billion. We firmly believe that the reporting unit fair values represent managements view of the companys business and expectations. The market has undervalued the companys stock. Accordingly, the implied control premium of 120 percent is viewed by management as reasonable given the overall market climate.Galaxy released year-end earnings on January 25, 2012. On the basis of the annual earnings release and the lack of an expected Q4 rebound, Galaxys common share price fell even further, from $27.50 on December 31, 2011, to $21.25 after the earnings release. Galaxy filed its December 31, 2011, Form10-K on February 10, 2012. Req uiredShould management have performed an interim goodwill impairment test as of September 30, 2011? start no interim test is required. Was management justified in carrying forward the prior-year goodwill impairment test for the Fitness Equipment and Hockey Equipment reporting units?