| Deloitte & Touche LLC1 |
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 ...view middle of the document...
It is reasonable to say that fair value of reporting units have fallen significantly in pace with market capitalization, and it has possibly fallen below book value of the reporting units. Therefore, above analysis raises substantial doubt on management’s action to carry forward the 09 fair values of Fitness and Hockey. They should not carry forward the previous fair value estimates and should revalue Fitness and Hockey for 2010.
Another argument refuting the decision to carry forward 2009 values finds its root in the ASC. According to ASC 350-20-35-29, only when all of the three criteria below are met may a company carry forward fair value determinations. The criteria are: a) assets and liabilities of the unit should not have changed significantly. Hockey and Fitness seem to meet this criterion. b) The last fair value determination of the unit should be substantially larger than their carrying amount at the time. Hockey and Fitness meet this criterion. c) The likelihood that the current fair value is less than the carrying amount should be low4. Hockey and Fitness’s current fair value is possibly less than their carrying amount, not meeting this criterion. Because not all of the criteria for a fair value carry forward are met, the fair value of Hockey and Fitness may not be carried forward from 09.