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Goodwill Impairment

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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 decided not to perform an interim test in 2010. An example to support this decision comes from Vulcan Materials which cited “write down can trigger a violation of bank covenants (as debt to equity rises after the equity is reduced). Further, it can hurt valuation ratios such as price to book value”. Further, a similar affect to the bank obligations would be management not wanting to

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