Information regarding the impairment of goodwill that specifically concerns Simo
ID: 2572276 • Letter: I
Question
Information regarding the impairment of goodwill that specifically concerns Simon is related to the acquisition of Pizazz, Inc., (the leading manufacturer of hair color products in the U.S.) that occurred in 2016 and resulted Salon Solutions recording $125 million in goodwill related to this acquisition in 2016. After acquisition, Pizazz Inc. continues to operate as a separate company and is considered a reporting unit. At the end of 2017, events and circumstances indicated that it is “more likely than not” that the fair value of Pizazz is less than book value. Simon determined the following information pertaining to Pizazz: As of 12/31/17 the book value of Pizazz’s net assets is $560 million, including the $125 million in goodwill. Pizazz’s estimated fair value as of 12/31/17 is $445 million, and the fair value of all its identifiable tangible and intangible assets, excluding goodwill, is estimated to be $425 million. These estimates were based on prices of comparable businesses. Your firm has delegated to you the task of determining the treatment of goodwill impairment.works cited page)
1. What is the current standards that govern US GAAP treatment of goodwill?
2. What is the current standards that govern US GAAP treatment of goodwill impairment and how to determine the amount of the goodwill impairment loss using the data pertaining to Salon Solutions given above.
3. Prepare the journal entry to record the impairment loss and explain how this loss is reported on the income statement (ignore income tax effects). In addition, if an impairment loss is recorded, indicate the amount of goodwill to be reported on the statement of financial position as of 12/31/17.
3. Whether early adoption of the Financial Accounting Standards Board Accounting Standards Update (FASB ASU) 2017-04 is allowed, and if so, how to determine the amount of the goodwill impairment loss based on early adoption of FASB ASU 2017-04 using the goodwill data pertaining to Salon Solutions given above. Also, if applicable, prepare the journal entry to record the impairment loss per FASB ASU 2017-04 should Salon Solution’s owner elect to adopt FASB ASU 2017-04 early. In addition, if an impairment loss is recorded, indicate the amount of goodwill to be reported on the statement of financial position as of 12/31/17.
4. The required financial statement note disclosures regarding goodwill impairment assuming Salon Solution’s President elects to adopt FASB ASU 2017-04 early (ignore income tax effects).
Explanation / Answer
1. Under US GAAP, goodwill is accounted for in the books of accounts as per ASC 350, "Goodwill and other Intangiible assets". As per ASC-350, if an enterprise has purchased another enterprise and in the course of such transactions acquiring enterprise has paid any amount in excess of the fair market value of the assets reported in the financials of acquired enterprise, then then such excess amount is required to be recorded as goodwill in the books of acquiring company. And such goodwill purchase is not amortised over the period instead is subject to impairment testing at least annually.
2. As per IFRS, Impairment loss on goodwill is carried by following steps:
1. Goodwill is allocated to a reporting unit, which is defined as an operating segment or one level below an operating segment (component). In the given case, Pizzaz is a separate operating unit and is therefore treated as a separate cash generating unit.
2. A recoverability test to be performed first at the reporting unit level (carrying amount of the reporting unit is compared with the reporting unit fair value). If the carrying amount of the reporting unit exceeds its fair value, then impairment testing must be performed. In the given case, Carrying amount of Pizzaz is $560 million and fair value of unit is $445 million. Since Carrying amount is more than fair value impairment loss is required to be booked.
3. Amount of Loss - The amount by which the carrying amount of goodwill exceeds the implied fair value of the goodwill within its reporting unit. Implied Fair value of goodwill is :
Implied Fair Value = Fair value of all assets including goodwill - Fair Value of assets excluding Goodwill
= $445 million - $425 million = $20 million.
Impairment Loss = $125 Million - $20 Million = $105 Million.
3. Journal Entry for Impairment Loss
Date
Particulars
Dr. Amount
Cr. Amount
Dec 31
Impairment Loss on goodwill
TO Goodwill
(Being Impairment booked)
105
105
Amount of Goodwill to be reported in Balance SHeet = $20 Million.
Date
Particulars
Dr. Amount
Cr. Amount
Dec 31
Impairment Loss on goodwill
TO Goodwill
(Being Impairment booked)
105
105