Finance Case study

Ride Along

1. Adoption of ASU 2014-02 allows a private company to amortize its existing and new goodwill on a straight-line basis over a maximum of 10 years. Further, ASU 2014-18 eliminates the need for identifying certain intangible assets acquired in a business combination and the value of such assets are attributed to goodwill. Non-compete agreements and customer-related assets are such intangibles that are not capable of being sold or licensed independently of other business assets.

Before deciding whether to adopt the private-company alternative in ASU 2014-02, Ride along must take into account

· That if Ride along goes public or is acquired by a public company, the company must discontinue the use of ASU 2014-02 and must retroactively restate its previously issued financial statements utilizing U.S. GAAP applicable to public companies. Hence, Ride Along would have to recognise need to reverse previously amortized goodwill, while recognizing intangibles previously subsumed into goodwill. This process of valuing customer-related and noncompetition assets is pricey and challenging because the value of these assets will be determined as on the original acquisition date of business combination.

· That such alternative tends to result in companies reporting lower profits and total asset balances due to goodwill amortization.

2. Post selection of ASU 2014-02, Ride Along subsequently become a public company or is subject to Public company reporting (as user of financial statements, including regulators, lenders or other creditors, require a private company to continue to apply traditional GAAP accounting standards), it is required to recast prior periods as if it hadn’t elected the alternative.

· Ride Along must retroactively restate its previously issued financial statements utilizing U.S. GAAP applicable to public companies. Hence, Ride Along would have to recognise intangibles previously subsumed into goodwill and remove amortization impact.

· Further it will have to test for goodwill impairment annually.

3. Upon selection of ASU 2014-02, an entity must further make a accounting policy election to test goodwill for impairment at either the entity level or the reporting unit level.

Goodwill should be tested for impairment when a triggering event occurs instead of performing annually. In such event, the entity has the option to first assess qualitative factors to determine whether the quantitative impairment test is necessary. If that qualitative assessment indicates that it is more likely than not (about 50%) that goodwill is impaired, the entity must perform the quantitative test to compare the entity’s fair value with its carrying amount. If the qualitative assessment indicates that it is not more likely than not that goodwill is impaired, further testing is unnecessary.

Impairment is measured as the difference between the carrying value of the entity or reporting unit and its fair value, assuming the carrying value is higher. This amount is then written off of currently recorded goodwill. The disclosures required under this alternative are similar to existing U.S. GAAP.

	Goodwill	Impairment
Mini (Feb 2012)	8	0.9 (45% of 2 mn is impaired on departure of Mini)
Retail (June 2013)	10

At entity level, the impairment to be accounted for is 0.9 Mn

	Bicycle	Tyre	Retail stores
Fair value	115.5	21	73.5
Carrying value	65	20	60

At the reporting unit levels i.e. bicycle/tyre and retail stores, there is no impairment.

4. The goodwill of reporting units with zero or negative carrying values will not be impaired, even when conditions underlying the reporting unit indicate that goodwill is impaired. Entities will, however, be required to disclose any reporting units with zero or negative carrying amounts and the respective amounts of goodwill allocated to those reporting units

Case study 2 Quality Waste Removal

Ans A

Yes

Management can apply a step zero analysis to both reporting units as of Dec 31 2013,current year measurement date

Ans B

The fair value of an asset (or liability) is the amount at which that asset (or liability) could be bought (or incurred) or sold (or settled) in a current transaction between willing parties, that is, other than in a forced or liquidation sale. Thus, the fair value of a reporting unit refers to the amount at which the unit as a whole could be bought or sold in a current transaction between willing parties. Quoted market prices in active markets are the best evidence of fair value and shall be used as the basis for the measurement, if available. However, the market price of an individual equity security (and thus the market capitalization of a reporting unit with publicly traded equity securities) may not be representative of the fair value of the reporting unit as a whole. The quoted market price of an individual equity security, therefore, need not be the sole measurement basis of the fair value of a reporting unit.

If quoted market prices are not available, the estimate of fair value shall be based on the best information available, including prices for similar assets and liabilities and the results of using other valuation techniques. A present value technique is often the best available technique with which to estimate the fair value of a group of net assets (such as a reporting unit). If a present value technique is used to measure fair value, estimates of future cash flows used in that technique shall be consistent with the objective of measuring fair value. Those cash flow estimates shall incorporate assumptions that marketplace participants would use in their estimates of fair value. If that information is not available without undue cost and effort, an entity may use its own assumptions. Those cash flow estimates shall be based on reasonable and supportable assumptions and shall consider all available evidence. The weight given to the evidence shall be commensurate with the extent to which the evidence can be verified objectively. If a range is estimated for the amounts or timing of possible cash flows, the likelihood of possible outcomes shall be considered. Concepts Statement 7 discusses the essential elements of a present value measurement provides examples of circumstances in which an entity’s cash flows might differ from the market cash flows , and discusses the use of present value techniques in measuring the fair value of an asset or a liability In estimating the fair value of a reporting unit, a valuation technique based on multiples of earnings or revenue or a similar performance measure may be used if that technique is consistent with the objective of measuring fair value. Use of multiples of earnings or revenue in determining the fair value of a reporting unit may be appropriate, for example, when the fair value of an entity that has comparable operations and economic characteristics is observable and the relevant multiples of the comparable entity are known. Conversely, use of multiples would not be appropriate in situations in which the operations or activities of an entity for which the multiples are known are not of a comparable nature, scope, or size as the reporting unit for which fair value is being estimated

Ans C

The newly acquired reporting unit will most likely have a very low cushion; what affect would this have on the conclusions of the qualitative assessment?  

This will contradict the conclusions of the qualitative assesement.