Goodwill Impairment Testing Essay

galax Sports Inc. (galax), a U.S.-based manufacturer of sports equipment, is a calendar year-end dry registrant with one operating segment and the following triple insurance coverage unit of measurementsseaworthiness Equipment.Golf Equipment. field hockey Equipment. galaxy is in a competitive industry with several publicly traded companies in which growth and profitability argon tied to the market and consumer demandThree inform units are appropriate because discrete financial study is available for each component, each component is a business, and each component is managed sepa localisely.The Fitness Equipment component is beetleweeds broadst reporting unit. Over the years, various acquisitions dupe resulted in recorded grace of $200 zillion assigned 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, galax recorded $130 million of goodwill that was assigned entire ly to this reporting unit.The Hockey Equipment component is a sm totally hockey equipment manufacturer acquired in 2003 to gain entry into the very useful hockey equipment market. Galaxy recorded $30 million of goodwill related to this acquisition, which was assigned entirely to this reporting unit.Galaxy has elected an one-year goodwill impediment scrutiny date of celestial latitude 31 for all three reporting units.In declination 2010, Galaxy care engaged Big Time LLC (Big Time), a reputable external valuation firm, to perform three annual ASC 350, Intangibles Goodwill and Other, impairment analyses (one for each reporting unit) on the $360 million of goodwill recorded by Galaxy as of declination 31, 2010. Previously, management had performed the annual goodwill impairment analysis internally. However, given the increasing complexities involved in the calculation and resource constraints at Galaxy, the community decided to use a third party.Through early discussions with G alaxys management and Big Time, it was evaluate that the entity was going to pass step 1 of the goodwill analysis for all three reporting units with a significant cushion (i.e., the estimated fair value of each reporting unit importantly exceeded the book 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 Development LLCAll Rights Reserved. parapraxis 11-9 Goodwill Impairment T estingGalaxy management indicated that the significant cushion was likely because2010 Q4 sales 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 cat valium parcel out harm was $56.75 as of December 31, 2010.Note As of December 31, 2010, Galaxys share price was $56.75 and 46 million shares were outstandi ng, indicating a market capitalization of $2.6 billion. The implied control premium of 18 part is viewed by management as reasonable.First Quarter of 2011 wariness released Q1 earnings, which were slightly below expectations. In a Q1 weigh release, Galaxy attributed the lower earnings to the slowing parsimony and reduced consumer spending on recreational activities. Galaxys commonalty share price fell to $49.25 afterward the release of Q1 earnings.Second Quarter of 2011Management released Q2 earnings on July 15, 2011. As in Q1, Q2 earnings were also below expectations because the slowing 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 undergo 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 poi nt, which is appealing to consumers during difficult economic 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 holiday shopping season. Historically, Q4 has been the strongest quarter for Galaxy with Q4 sales representing more than 50 percent of the companys an nual 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 guidance in ASC 350-202 on testing goodwill for impairment. Under the revised guidance, entities testing goodwill for impairment have the option of performing a qualitative assessment before calculating the fair value of the reporting unit (i.e., step 1 of the goodwill impairment test). The bestowforward 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. Early 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 inclined(p) for its annual goodwill impairment test, management determined that (1) assets and liabilities of the Fitness Equipm ent 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 shiping amounts by substantial margins, and (3) on the arse of its analyses, therehave been no significant events or circumstances that would cause the fair value to spill below book value for both reporting units. As a result, management decided 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 outlive 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 analysis, 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 firm 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. RequiredShould management have performed an interim goodwill impairment tes t as of September 30, 2011?Assume 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?