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Goodwill Accounting Paper

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⚫ Each team will need to address all points based on reading the SFAS

No. 142, the case, 4 articles in Canvas, what was covered in ACCT 800

and 801, reading and researching additional information and/or

materials, and team discussions.

⚫ The case needs to be purchased.

⚫ For tasks where opinions are asked and/or discussions are needed,

there is NO right or wrong answer. However, each team should clearly

and logically provide team’s arguments and/or opinions based on

reading, research and analyses (NOT simply based one’s thoughts)

⚫ Goodwill Accounting Paper is an opportunity to study effects of

change in accounting rules on financial statements

– Focus only on Goodwill, not Trademark and Other Intangible Assets

General

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⚫ Goodwill arises when “Purchase price exceeds fair value of identifiable net assets

of acquired company”

⚫ (Address using case) Purchase price – Fair value of identifiable net assets = Goodwill.

Hence,

Fair value of identifiable net assets

= Purchase price (i.e., Total consideration) – Goodwill

* For “Total consideration” and “Goodwill”, refer to Exhibit 1

⚫ (Address using case) Why was Talbots, Inc. willing to pay more than the fair market

value of the identifiable net assets acquired from J. Jill?
– General reasons are provided in case and also ACCT 800 and ACCT 801 textbook

– In addition, think about (or research) reasons specific to Talbot

⚫ Based on SFAS No. 142 and your team’s own research, summarize recent elimination

of amortization of goodwill including (but not limited to) rationale behind elimination of

amortization of goodwill.
– Elimination of amortization of goodwill

– Impairment test

– SFAS No. 142 provides background of new goodwill accounting

Recent Change in Goodwill Accounting

B/S

Assets

Liabilities

Net assets ≈

Shareholders’ equity

Identifiable

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⚫ At the bottom of page of case, there is section “Using an impairment

test to recognize changes in goodwill”

– Goodwill accounting changed once again after the case had been

written

– Ignore that section in case but recall what you learned in ACCT 800

– Now, impairment test for Goodwill is one-step process as covered in

ACCT 800

Correction for Bottom of Page 2 of Case

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⚫ (Address using case) For Fiscal Year 2008 (ending February 2, 2008), make an estimate of the

amortization of goodwill if SFAS No. 142 had not changed accounting for goodwill in 2001 and Talbots,

Inc. had chosen to amortize goodwill recognized in the purchase of J. Jill over the allowed period of 40

years based on the straight-line method with zero salvage value. Then, compare the amortization of

goodwill with the impairment of goodwill actually reported in income statement for Fiscal Year 2008

(ending February 2, 2008).

⚫ As learned in ACCT 800 and stated in SFAS No. 142, goodwill still needs to be tested annually for

impairment, although it is not subject to amortization any more. Discuss effects of elimination of

amortization of goodwill on impairment of goodwill.

– Address based on team’s research and discussion, focusing on “Amount” and “Frequency” of

impairment loss when goodwill is NOT amortized relative to when goodwill is amortized.

Consequences of Elimination of Goodwill Amortization

Amortization No Amortization

Fiscal year 2007

(ending Feb 3, 2007)

Amortization expense of approximately $3,975,000

(= $211,977,000 / 40 years x (9 months / 12 months))
* 9 months: May 3, 2006 – Feb 3, 2007

NONE

Fiscal year 2008

(ending Feb 2, 2008)

Amortization expense of approximately $5,300,000

(= $211,977,000 / 40 years)

Impairment loss of $134,000,000

(as reported in Exhibit 3)

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⚫ (Address using the case) Estimate Talbots, Inc,’s net income for Fiscal Year 2008

(ending February 2, 2008) if goodwill had been amortized as in 3 above without the

impairment test. Then, compare re-calculated net income or net loss to the net loss

actually reported after the impairment of goodwill of $134 millions for Fiscal Year 2008

(ending February 2, 2008).

⚫ (Continue from previous bullet point) Then, discuss effects of addition of impairment

test after elimination of amortization of goodwill on income statements by comparing

income statements between before and after SFAS No. 142 (i.e., addition of impairment

test after elimination of amortization of Goodwill).

– Address based on research, analyses, discussion, and observation from above comparison of net income, focusing

on “amount”, “frequency” and “location” of Amortization expense and Impairment loss on “income statement”.

– Also, address trend of net income across different periods based on the discussion of “amount”, “frequency” and

“location” of Amortization expense and Impairment loss on “income statement”.

Elimination of Goodwill Amortization and Financial
Reporting (1/2)

Amortization No Amortization

Net Income for Fiscal

year 2007 (ending

Feb 3, 2007)

$27,601,000

(= $31,576,000 (from Exhibit 3)

– $3,975,000 (from calculated amortization expense))

$31,576,000

(as reported in Exhibit 3)

Net Income for Fiscal

year 2008 (ending

Feb 2, 2008)

($60,141,000)

(= ($188,841,000) (from Exhibit 3)

+ 134,000,000 (Add back impairment loss from

Exhibit 3)

– $5,300,000 (from calculated amortization expense))

($188,841,000)

(as reported in Exhibit 3)

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⚫ ACCT 800 and ACCT 801 textbook defines earnings quality as “ability to predict future

earnings and cash flows based on current earnings”. Discuss how addition of impairment

test after elimination of amortization of goodwill would affect earnings quality.

– Answer based on previous answers, and team’s research and discussion, focusing on whether

earnings including impairment loss would improve predictability of future earnings (or not)

– Note that there are different definitions of earnings quality and we focus on one of those

(i.e., ability to predict future earnings and cash flows based on current earnings) in this

paper so please adhere to the earnings quality definition in the textbook

⚫ Discuss whether elimination of amortization of goodwill has made financial statements

more useful or less useful. (In addition to the reference papers in Canvas, your team

should conduct own research)

– Reference papers posted in Canvas provide conflicting views on SFAS No. 142

– Hence, each team should conduct more research and discuss in own words whether elimination of

goodwill amortization and addition of impairment test (based on SFAS No. 142) have made

financial statements more or less useful

– MUST use reference papers posted in Canvas in the paper

– Your team is supposed to take one side (i.e., more useful vs. less useful) based on

compelling argument, examples, and/or evidence

– Writing MUST be based on compelling argument based on supporting research and

analyses, NOT simply based on one’s thoughts

Elimination of Goodwill Amortization and Financial
Reporting (2/2)

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Assume readers are people with basic
knowledge about accounting

1st draft should be near completion since
there will be ONLY 1 week until final draft
submission after meeting with instructor