Codification To Research A Complex Accounting Issue: The Cas

Codification to Research a Complex Accounting Issue: The Case of Goodw

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?

With respect to 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?

Prepare a memo detailing the issues involved, the judgments you made in connection with the authoritative literature, and your recommendation for the direction of the goodwill valuation as it relates to Dynamic and ZD (i.e., does the evidence suggest further action is required in determining the appropriate valuation of goodwill? If so, what steps need to be taken?)

Paper For Above instruction

Introduction

Goodwill impairment testing presents an intricate challenge in financial reporting, especially considering the significant judgments involved and the evolving standards laid out by the FASB. Jackson Enterprises (JE), with its holdings in Dynamic Technologies and ZD Systems, faces critical decisions regarding the valuation and impairment of goodwill recorded for these subsidiaries. This paper examines the relevant accounting standards, evaluates qualitative and quantitative evidence, and offers recommendations for proper goodwill assessment as of December 31, 2014.

Relevant Topics from the FASB Codification

The primary authoritative guidance for goodwill impairment at JE includes ASC 350-20, "Intangibles—Goodwill and Other"—Subtopic 20, which discusses the recognition, measurement, and impairment assessment procedures for goodwill. Notably, the two-step impairment test, formerly required under US GAAP, is found under ASC 350-20-35, describing the identification of a reporting unit and the measurement of impairment (FASB, 2014). Furthermore, ASC 350-20-25-1 emphasizes the qualitative assessment option introduced in 2011, allowing companies to consider whether performing the full two-step test is necessary based on qualitative factors. Although recent standards have simplified the impairment process by eliminating Step 2, the case uses the former two-step method, which remains relevant as of December 31, 2014.

Initial Accounting Issue for JE

The core issue revolves around whether the carrying amount of goodwill for Dynamic and ZD exceeds their respective fair values, necessitating impairment testing. Specifically, the question is whether JE should undertake the two-step impairment test for each reporting unit considering recent qualitative assessments and current economic and operational conditions, or whether impairment has already been implied or fully recognized. The uncertainty pertains to whether the existing goodwill balances accurately reflect the subsidiaries' economic realities as of year-end 2014.

Qualitative Evidence and the Need for Impairment Testing

The qualitative factors, such as industry dynamics, technological innovations, competitive pressures, and recent valuation estimates, suggest that JE must consider whether the goodwill is impaired. For Dynamic, the significant decline in its stock price from $27 to $23 per share and its independent valuation of $830 million imply a potential diminution in value. Industry competitive changes, such as increased competitors and regulatory scrutiny, intensify the need for impairment assessment. These factors align with ASC 350-20-35-18, which indicates that external qualitative evidence, including market value declines or adverse economic conditions, can trigger the need for detailed impairment testing.

Additional Evidence Beyond Qualitative Factors

Beyond qualitative considerations, comprehensive quantitative analyses should include fair value assessments derived from market-based and income-based approaches. For Dynamic, the independent appraisal of $830 million, contrasted against its book value, provides a starting point. Market capitalization, adjusted for the decline in share price, and discounted cash flow models based on forecasted earnings, can offer corroborating evidence. For ZD, the valuation of $1.1 billion, relative to its book value, also presents a basis for comparison. These methods enable an analytical cross-check to determine if the recorded goodwill exceeds recoverable amounts, aligning with ASC 350-20-35-17.

Fair Value Estimation for Dynamic

The most appropriate fair value for Dynamic should incorporate the independent valuation figure of $830 million, adjusted for recent financial and market developments. Considering the declining stock price, industry competitive pressures, and internal forecasts, a conservative estimate—potentially in the $800-$830 million range—appears prudent. This valuation is critical because it directly influences whether an impairment exists. If the fair value falls below the carrying amount, a loss must be recognized, impacting the company's financial statements and stakeholder perceptions.

Separation or Combination of Dynamic and ZD for Goodwill Analysis

The decision to combine or separate the subsidiaries hinges on their operational independence and the distinct nature of their businesses. Despite being within the same segment, Dynamic and ZD serve different markets, employ different manufacturing processes, and possess unique technological assets and regulatory environments (ASC 350-20-35-7). Therefore, analyzing them separately aligns with the FASB’s guidance. Combining them could mask specific impairments related to individual units, leading to inaccurate valuation and impairment recognition, thus affecting the reliability and relevance of the financial statements.

Assessment of the Existing Goodwill Balance

The combined goodwill of $200 million—$150 million for Dynamic and $50 million for ZD—must be evaluated against updated fair value estimates. Given the independent valuation of Dynamic at approximately $830 million and considering its recent operational challenges, a goodwill impairment might be necessary if the fair value estimate is below the book value. For ZD, the valuation at $1.1 billion suggests that the current $50 million goodwill may be appropriate if no adverse indicators are present. However, a detailed impairment test is essential since market fluctuations and operational changes could impact the measurement.

Recommendations and Next Steps

Based on the qualitative and quantitative evidence, JE should initially perform a qualitative assessment for both subsidiaries, considering recent industry changes, market conditions, and internal forecasts. If qualitative factors suggest potential impairment, then the two-step impairment test should be executed as per ASC 350-20-35. This involves comparing the carrying amount of each reporting unit, including goodwill, against its estimated fair value. For Dynamic, the fair value likely hovers near the independent appraisal figure; if this discloses a significant impairment, JE must recognize an impairment loss accordingly.

Given the substantial decline in Dynamic’s stock price and the industry challenges, it is advisable to conduct a detailed fair value analysis, perhaps including discounted cash flow models, to corroborate the independent appraisal. For ZD, similar assessments should be performed, factoring in recent technological innovations and market position. If the impairments are confirmed, JE should adjust the goodwill balances downward, which will be reflected in the financial statements, ensuring compliance with GAAP and providing transparent reporting to investors.

In conclusion, the evidence indicates that further action is necessary beyond initial qualitative assessments. The steps include detailed fair value estimations, impairment testing at the reporting unit level, and possible goodwill reductions. These actions will safeguard JE’s financial integrity and adherence to authoritative standards, providing a more accurate picture of its financial health as of December 31, 2014.

References

• Financial Accounting Standards Board (FASB). (2014). Accounting Standards Codification (ASC) 350-20, "Intangibles—Goodwill and Other."
• Heitzman, S., & Pantzalis, C. (2015). "Accounting for Goodwill and Business Combinations." Journal of Accounting and Economics, 60(2-3), 251-275.
• Johnson, R. E., & Sorescu, A. (2016). "Market-Based Methods for Valuing Intangible Assets." The Accounting Review, 91(4), 1061-1090.
• Katsaros, D., & Papadakis, V. (2019). "Implications of FASB Standards on Goodwill Impairment Testing." Journal of Financial Reporting, 45(2), 123-139.
• Lee, T. A., & Myers, L. K. (2018). "Goodwill Impairment: An Examination of Practice and Policy." Accounting Horizons, 32(3), 97-115.
• Revsine, L., Collins, D., & Johnson, W. (2015). "Financial Reporting and Analysis." Pearson Education.