...the equity method of accounting for investments Chapter Outline I. Three methods are principally used to account for an investment in equity securities along with a fair value option. A. Fair value method: applied by an investor when only a small percentage of a company’s voting stock is held. 1. Income is recognized when dividends are declared. 2. Portfolios are reported at fair value. If fair values are unavailable, investment is reported at cost. A. Consolidation: when one firm controls another (e.g., when a parent has a majority interest in the voting stock of a subsidiary or control through variable interests, their financial statements are consolidated and reported for the combined entity. A. Equity method: applied when the investor has the ability to exercise significant influence over operating and financial policies of the investee. 1. Ability to significantly influence investee is indicated by several factors including representation on the board of directors, participation in policy-making, etc. 2. According to GAAP guidelines, the equity method is presumed to be applicable if 20 to 50 percent of the outstanding voting stock of the investee is held by the investor. Current financial reporting standards allow firms to elect to use fair value for any investment in equity shares including those where the equity method would otherwise apply. However, the option, once taken, is irrevocable. After 2008, an entity can make...
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...one reporting unit. When performing step one of the Goodwill Impairment Testing we will consider two separate reporting units. The first reporting unit is the business component Medical-Surgical. Step one involves comparing the carrying value (including goodwill) with the fair value of the reporting unit. Carrying Value without Goodwill Carrying Value of Goodwill Total Carrying Value including Goodwill $118,800,000 3,200,000 $122,000,000 Fair Value Difference Carrying Value including Goodwill $125,000,000 FV > CV by $3,000,000 $122,000,000 When we compare this value with the Fair Value we see that the Fair Value is higher by $3,000,000. This means that Goodwill is not impaired and no further steps need to be taken. Now to compare the second reporting unit, DDC Distribution and HC Holding that are aggregated. We must first find the total carrying value, including Goodwill, of the two components. Value/Amount DDC Distribution HC Holdings Total Carrying Value of Net Assets (w/o Goodwill) $231,700,000 $72,250,000 $303,950,000 Carrying Value of Goodwill $10,500,000 $2,150,000 $12,650,000 Total Carrying Value including Goodwill $242,200,000 $74,400,000 $316,600,000 Now we follow step one and compare the carry value to fair value. Fair Value Difference Carrying Value including Goodwill $236,000,000 + 75,000,000 = $311,000,000 FV < CV by $5,600,000 $316,600,000 The second reporting unit has a goodwill impairment that must be computed and recorded. We must...
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...Intangible Assets A. Classification--intangible assets are assets that derive their value from the rights and privileges granted to their owner, are long-term in nature, and lack physical substance B. Valuation 1. Cost--cost is the cash or cash equivalent price of obtaining the intangible asset and making it ready for its intended use a. Purchased Intangibles--the cost of a purchased intangible asset is determined in essentially the same way as the cost of property, plant, and equipment b. Internally-created Intangibles--the cost of an internally-created intangible asset includes only the direct costs incurred in obtaining the intangible asset, such as legal fees, registration fees, etc. 1) Research and Development Costs--all research and development costs are expensed when incurred 2. Special Considerations a. Marketing-related Intangible Assets--marketing-related intangible assets are those intangible assets that are used in the marketing or promotion of products or services (such as trademarks or trade names, newspaper mastheads, internet domain names, and noncompetition agreements) 1) Purchased Intangibles--the capitalizable cost of a purchased marketing-related intangible asset is its purchase price plus any...
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...ABACUS, Vol. 45, No. 3, 2009 doi: 10.1111/j.1467-6281.2009.00295.x MARTIN BLOOM Accounting For Goodwill abac_295 379..389 This article provides a means of resolving one of accounting’s ongoing problems—how to account for goodwill in an era where the unidentifiable intangible asset is often an entity’s largest value component. Despite the general recognition that, in practice, the two classes of goodwill are indistinguishable in terms of their ability to generate streams of revenue, a distinction is traditionally drawn between internally generated and purchased goodwill. The former should not be brought to account because it is impossible to do so within the accepted rules of double entry bookkeeping and historical cost based accounting. On the other hand, there is no difficulty in bringing purchased goodwill to account, but controversy has always existed as to how to treat the amount once recognized. It can confidently be expected that, as anomalies and practical difficulties manifest themselves in practice, the current impairment regime will, in its turn, be abandoned. Key words: Accounting; Double account; Goodwill, internally generated, purchased. Controversy on how to account for goodwill has continued over many decades. It is certainly an example of Sterling’s (1975) lament that because of the way we conceive of issues ‘accountants do not resolve issues, we abandon them’ (quoted in Chambers, 1995). The ideas proposed here are based on redefining the problem. They...
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...Accounting Regulation and Treatment of Patents XYZ Research Company Case Study You have been hired as a consultant for XYZ Research Co. XYZ Research Co. incorporated in 2010. XYZ ‘s business centers on developing new technology for interplanetary exploration. The company has many patents and has historically expensed all of the costs associated with obtaining their patents. The owners of XYZ Labs are unsure whether or not if any or all of its patent costs can be capitalized. They also are unsure if any impairment testing should be done periodically on their patents. You have been asked by the owners to look into these issues and provide the appropriate accounting treatment for patents. 2014 Accounting Regulation and Treatment of Patents XYZ Research Company Case Study You have been hired as a consultant for XYZ Research Co. XYZ Research Co. incorporated in 2010. XYZ ‘s business centers on developing new technology for interplanetary exploration. The company has many patents and has historically expensed all of the costs associated with obtaining their patents. The owners of XYZ Labs are unsure whether or not if any or all of its patent costs can be capitalized. They also are unsure if any impairment testing should be done periodically on their patents. You have been asked by the owners to look into these issues and provide the appropriate accounting treatment for patents. 2014 Research Memorandum To: XYZ Research Company From: Christine Quiñones Date: August...
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...Client Understanding Paper ACC/541 January 30, 2012 Client Understanding Paper Dear Sir: In order to ensure that your organization is following the FASB’s generally accepted accounting principles (GAAP) it is necessary that I review the current practices being used by your organization with regards to lower of cost or market valuation, capitalizing interest on building construction, recording gain or loss on asset disposal, and adjusting for goodwill impairment. It is important for me to know that you and your organization understand the importance of understanding how these issues affect the reliability of your financial statements. I will briefly explain the impact and shortcomings that each of the listed items have on your financial statements and the importance of ensuring that these items are correctly accounted for. GAAP maintains that when the value of inventories go down so does the future selling price and the anticipated losses should be reported in the same period as the inventory value decline. The lower of cost or market (LCM) should be used by your organization to value inventories. The AICPA has stated that market (current replacement cost) should not be greater than the net realizable value and market should not be less than net realizable value reduced by an allowance for an approximately normal profit margin. In other words, reducing the value of inventory to market value when its cost exceeds its expected benefit gives a better measure of its expected...
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...Table of Contents Table of Contents…………………………………………………………………………………..page 2 Introduction…………………………………………………………………………………………..page 3 Amortization and Depreciation………………………………………………….…………..page 3-4 Intangible Assets………………………………………………………………………..………….page 4-5 Goodwill……………………………………………………………………………………………..….page 5-6 Impairment…………………………………………………………………………………………….page 6 Liabilities………………………………………………………………………………………………..page 6-7 Interest and Bonds…………………………………………………………………………………page 7-8 Leases…………………………………………………………………………………………………….page 8 Works Cited……………………………………………………………………………………………page 9 Dell Inc: A Major Competitor in the Computer Business Introduction Dell is a global information technology company that offers its customers a broad range of solutions and services delivered directly by Dell and through other distribution channels. They are focused on providing technology solutions that are more efficient, more accessible, and easier to manage. Dell built its reputation as a leading technology provider through listening to customers and developing solutions that meet customer needs. A few years ago, they initiated a broad transformation of the company to become an end-to-end technology solutions company. Amortization and Depreciation In 2010, Dell’s Property, Plant, and Equipment (PP&E) was $2,181 million; the following year it plummeted to $1,953 million and then rebounded back to $2,124 million in 2012. With having PP&E, Dell has to account for the PP&E’s...
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...1. How is goodwill measured in a business combination? ASC 805-30-30-1 Measurement of Goodwill Currently Viewing: 805 Business Combinations 30 Goodwill or Gain from Bargain Purchase, Including Consideration Transferred 30 Initial Measurement General > Measurement of Goodwill 30-1 The acquirer shall recognize goodwill as of the acquisition date, measured as the excess of (a) over (b): * a. The aggregate of the following: * 1. The consideration transferred measured in accordance with this Section, which generally requires acquisition-date fair value (see paragraph 805-30-30-7) * 2. The fair value of any noncontrolling interest in the acquiree * 3. In a business combination achieved in stages, the acquisition-date fair value of the acquirer’s previously held equity interest in the acquiree. * 30-2 In a business combination in which the acquirer and the acquiree (or its former owners) exchange only equity interests, the acquisition-date fair value of the acquiree’s equity interests may be more reliably measurable than the acquisition-date fair value of the acquirer’s equity interests. If so, the acquirer shall determine the amount of goodwill by using the acquisition-date fair value of the acquiree’s equity interests instead of the acquisition-date fair value of the equity interests transferred. * Currently Viewing: * 805 Business Combinations * 30 Goodwill or Gain from Bargain Purchase, Including Consideration...
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...test. Step one, requires a company to estimate the future undiscounted cash flows expected from the use of that asset and its eventual disposition. If impairment has occurred, step two would determine the loss by subtracting the fair value from the carrying amount of the asset. 3. Ida should record $500,000 impairment loss on the U.S. commercial building when reporting to its parent as of December 31, 2012. Since the recoverability test is needed under IFRSs, Ida needs to figure out the amount of impairment (if any) which should record on the commercial building and report to its parent as of December 31, 2012. An impairment loss is the amount by which the carrying amount of an asset exceeds its recoverable amount. The carrying amount of Ida's building is $4,500,000, and in order to calculate the impairment loss, its recoverable amount is required. 4. A. After the impairment testing, goodwill associated with the Spanish operations impairs under GAAP as of 12/31/2010. The impairment loss is $200,000. Under U.S.GAAP, goodwill impairment test is taken annually, or when there is impairment indicator. B. After the impairment testing, goodwill associated with the Spanish operations impairs under IFRSs as of 12/31/2012. The impairment loss is $400,000. The new carrying value of the assets is $3.1 million. The new carrying value of the CGU is $1.8 million. Goodwill acquired in a business combination shall be allocated to each of the acquirer’s cash-generating units, or groups...
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...Module 9 Intercorporate Entities DISCUSSION QUESTIONS Q9-1. (a) Trading securities are reported at their fair value in the balance sheet. (b) Available-for-sale securities are reported at their fair value in the balance sheet. (c) Held-to-maturity securities are reported at their amortized cost in the balance sheet. For marketable securities, fair value and market value are usually synonymous. Thus, trading and available-for-sale securities are recorded on the balance sheet at market value. Q9-2. An unrealized holding gain (loss) is an increase (decrease) in the fair value of an investment security that is still owned. Q9-3. Unrealized holding gains and losses related to trading securities are reported in the current-year income statement (which flows to retained earnings). Unrealized holding gains and losses related to available-for-sale securities are reported as part of a separate component of stockholders' equity called Accumulated Other Comprehensive Income (AOCI). Q9-4. Significant influence gives the owner of the stock the ability to significantly influence the operating and financing activities of the company whose stock is owned. Normally, a 20% through 50% ownership of the company's voting stock provides evidence of significant influence. The equity method is used to account for investments with significant influence. Such an investment is initially recorded at cost; the investment is increased by the proportionate share of the...
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...Case 1 Goodwill Impairment Testing Should management have performed an interim goodwill impairment test as of September 30, 2010? Galaxy Sports Inc. (Galaxy) is a U.S. based manufacturer of sports equipment. It is an SEC registrant with one operating segment with three separate reporting units: fitness, golf and hockey. The fitness is the largest division of Galaxy with allocated goodwill of $200 million. The golf division reports $130 million of goodwill and the hockey has $30 million of goodwill. Each division has been a reporting unit for a number of years. Due to the complexities involved with the calculation of goodwill and resource restraints in 2009, Galaxy decided to hire Big Time LLC (Big Time) to perform three annual ASC 350, Intangibles-Goodwill and Other, impairment analyses. In 2009, no goodwill impairment was found by Big Time. In 2010, Galaxy did not use Big Time or any external evaluation firm for the goodwill impairment analyses. The management determined that the prior year step 1 analysis of Big Time could be used based on the fact that assets and liabilities had not significantly changed, the most recent fair value determination had exceeded the carrying value amount by substantial margins, and that no events or circumstances would cause the fair value to go below the book value. The issues at hand are whether or not an interim impairment analysis should have been performed as opposed to carrying forward the prior year step 1 analysis. Management...
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...Buffett Essays Summary Ch1 Corporate Governance 2 Ch2 Finance and Investing 5 Ch3 Investment alternatives 8 Ch4 Common stock 11 Ch5 Mergers and acquisitions 14 Ch6 Valuation and accounting 17 Ch7 Accounting shenanigans 19 Ch8 Accounting policy 21 Ch9 Tax matters 23 Ch1 Corporate Governance Mr. Buffett mentioned some problems existing in annual meetings and possible causes. In most situations, annual meetings are a kind of time waste for shareholders and management, because managers don’t want to express actual accounting conditions to others. Contrary to it, Berkshire’s meetings are different because many thoughtful questions would emerge and are valued to be answered. However, many people won’t be honest in these situations. Companies that provide information also hope to obtain information from other companies. There’s no doubt that people wish enough financial details to make some predictions. But more and more corporate choose “selective disclosure”, which is corrupt behavior about accepted by the whole America. Chairman Levitt cracked down on this kind of behavior. At the same time, Mr. Buffett doesn’t agree that CEO should make too many efforts to make too often predictions, which may cause trouble. For one thing, a much too high growth rate would spread unwarranted optimism. For another, announcing such a high rate might force companies to make some unwise decision. Three advices are provided to investors. Many occupations have their own standard...
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...Joshua Brooks ACCT-551 Intermediate Accounting II Week 1 Assignment: Intangible Assets 01/08/15 E12-1 (a) Indicated which items on the list above would generally be reported as intangible assets in the balance sheet. 1. Purchase cost of a franchise. 2. Goodwill acquired in the purchase of a business. 3. Cost of purchasing a patent from an inventor. 4. Legal costs incurred in securing a patent. 5. Unrecovered costs of a successful legal suit to protect the patent. 6. Cost of purchasing a copyright. 7. Cost of purchasing a trademark. (b) Indicate how, if at all, the items not reported as intangible assets would be reported in the financial statements. 1. Investment in a subsidiary company-On the Balance Sheet at Long-term investment 2. Timberland-On the Balance Sheet as Property, Plant and Equipment 3. Cost of engineering activity required to advance the design of a product to the manufacturing stage-On the Income Statement as R&D Expense 4. Lease prepayment (6 months’ rent paid in advance)-On the Balance Sheet as Current Asset 5. Cost of equipment obtained-On the Balance Sheet as Property, Plant and Equipment 6. Cost of searching for applications of new research findings-On the Income Statement as R&D Expense 7. Costs incurred in the formation of a corporation-On the Income Statement as Expense 8. Operating losses incurred in the start-up of a business-On the Income Statement as Operating...
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...• IMPAIRMENT OF ASSETS: A GUIDE TO APPLYING IAS 36 IN PRACTICE. • PUBLISHED IN MARCH 2014. Explanation of the basis of key assumptions and the valuation approach used to determine the recoverable amount (IAS 36.132(encouraged), 134(d)(i)-(v), (e)(i)-(v), 135(d)) • Key assumptions usually left out. • If discussed they were not sufficient. • Key assumptions include gross margin, government bond rates, exchange rate for the period, raw material price, inflation, market share, etc. • Comparative information is required Where goodwill or indefinite life intangibles have been allocated to a CGU (or group of CGUs), but no impairment has been recognized, reasonably possible changes in assumptions if such changes would cause the unit’s carrying amount to exceed its recoverable amount (IAS 36.134(f), IAS 36.135(e)) • Sensitivity Analysis is not provided. • If provided, it is not consistent. • If book value increases, investors would expect a clear sensitivity analysis. • sensitivity analysis should incorporate all key assumptions (beyond discount rate and growth rate) . Description of the entity’s CGU when it recognises or reverses an impairment loss for the CGU during the period (IAS 36.130(d)(i)) • Disclosures did not provide description. • If they did, they lacked substance. • Users did not have an idea of the impact of the impairment on the financial activities. Explanation of the events and circumstances that contributed to the impairment loss or reversal (IAS 36.130(a))...
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...| Deloitte & Touche LLC1 | Memo To: | Mary Stanford | From: | Ben Ji | Date: | September 26, 2012 | Re: | Goodwill Impairment Test | | | Galaxy Sports Inc. is a manufacturer of sports equipment. It is a public company with three reporting units: Fitness Equipment, Golf Equipment, and Hockey Equipment. During our audit, certain accounting treatments by Galaxy regarding goodwill impairment were found to possibly contradict with the Accounting Standard Codification. Based on my research of the ASC, my recommendations are that management should perform an interim goodwill impairment test at the end of third quarter of fiscal year 2009; and that management should not carry forward the 09 goodwill impairment test for Fitness and Hockey in 2010. Galaxy is in a competitive industry in which growth and profitability are tied to market and consumer demand. During 2010, as discussed in a press release by the management, Galaxy faced strong competition from Chinese imports that are sold at a lower price. Reduced consumer spending resulted from a slowing economy also hurt Galaxy’s sales. These “unanticipated competition” coming from affordable Chinese imports, and “significant adverse changes in the business climate” represented by a weak economy and reduced consumer spending are circumstances under which the ASC 350-20-35-30 mandates a goodwill impairment test between annual tests3. Therefore, an impairment test shall be carried out as of Sep 30, 2010. Figure 1 ...
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