Mark Hess Professor Preslar ACCT 523 Dec 1, 2012 Research Cases In advising Jonas Tech Corporation on the

acceptability of immediately writing off the intangibles, it is simple. An intangible asset has no reason to be written off or down in the period in which it is acquired unless it would become impaired during the period in which it was acquired. To account for a recognized intangible asset, the useful life is very important to the reporting entity. An intangible asset with an indefinite useful life is not amortized while an intangible asset with a finite useful life is amortized. The useful life of an intangible asset to an entity is the period over which the asset is expected to contribute directly or indirectly to the future cash flows of the entity. Along with that, there are other factors that also need to be considered. Things such as legal, regulatory, or contractual provisions, effects of obsolescence, demand, competition, and other economic factors, and the level of maintenance expenditures required to obtain the expected future cash flows from the asset. The way Jonas would like to treat the goodwill is not acceptable. To ensure that goodwill increases in one reporting unit do not offset decreases in others, goodwill

acquired in a business combination is allocated across business units that benefit from goodwill. According to the FASB ASC, for the purpose of testing goodwill for impairment, all goodwill acquired in a business combination shall be assigned to one or more reporting units as of the acquisition date. Goodwill should be assigned to reporting units of the acquiring entity that are expected to benefit from the synergies of the combination even though other assets or liabilities of the acquired entity may not be assigned to that reporting unit. The total amount of acquired goodwill may be divided among a number of reporting units. The methodology used to determine the amount of goodwill to assign to a reporting until shall be a reasonable and supportable and shall be applied in a consistent manner. The way Jonas would like to minimize the possibility of goodwill impairment should not change the way goodwill is allocated to reporting units. In 2009, Nike reported $199 million in goodwill impairment. As a result of the adverse conditions in the markets in which Umbro, a subsidiary of Nike, operates, Nike wrote down goodwill. Some things that may be indicators for goodwill impairment include: a significant adverse change in legal factors or in the business climate, an adverse action or assessment by a regulator, unanticipated competition, loss of key personnel, a more-likely-than-not expectation that a reporting unit or a significant portion of a reporting unit will be sold or otherwise disposed of, testing for recoverability under Statement 121 of a significant asset group within a

reporting unit, and recognition of a goodwill impairment loss in the financial statements of a subsidiary that is a component of a reporting unit. In the third quarter of the fiscal year 2009, Nike recognized a $401.3 million pre-tax non-cash impairment charge to reduce the carrying value of Umbros goodwill, intangible, and other assets. According to Nike: In accordance with SFAS No. 142 Goodwill and Other Intangible Assets (FAS 142), the Company performs annual impairment tests on goodwill and intangible assets with indefinite lives in the fourth quarter of each fiscal year, or when events occur or circumstances change that would, more likely than not, reduce the fair value of a reporting unit or an intangible asset with an indefinite life below its carrying value. Events or changes in circumstances that may trigger interim impairment reviews include significant changes in business climate, operating results, planned investments in the reporting unit, or an expectation that the carrying amount may not be recoverable, among other factors. The impairment test requires the Company to estimate the fair value of its reporting units. If the carrying value of a reporting unit exceeds its fair value, the goodwill of that reporting unit is potentially impaired and the Company proceeds to step two of the impairment analysis. In step two of the analysis, the Company measures and records an impairment loss equal to the excess of the carrying value of the reporting units goodwill over its implied fair value should such a circumstance arise. The Company generally bases its measurement of fair value of a reporting unit on a blended analysis of the present value of future discounted cash flows and the market valuation approach. The discounted cash flows model indicates

the fair value of the reporting unit based on the present value of the cash flows that the Company expects the reporting unit to generate in the future. The Companys significant estimates in the discounted cash flows model include: its weighted average cost of capital; long-term rate of growth and profitability of the reporting units business; and working capital effects. The market valuation approach indicates the fair value of the business based on a comparison of the reporting unit to comparable publicly traded companies in similar lines of business. Significant estimates in the market valuation approach model include identifying similar companies with comparable business factors such as size, growth, profitability, risk and return on investment and assessing comparable revenue and operating income multiples in estimating the fair value of the reporting unit. The Company believes the weighted use of discounted cash flows and the market valuation approach is the best method for determining the fair value of its reporting units because these are the most common valuation methodologies used within its industry; and the blended use of both models compensates for the inherent risks associated with either model if used on a standalone basis. Nike did not incur any other impairment charges in 2009. According to a statement released by Nike, they test indefinite-lived intangibles and other long-lived assets as follows: Goodwill and intangible assets with indefinite lives are not amortized but instead are measured for impairment at least annually in the fourth quarter, or when events indicate that an impairment exists. As required by Statement of Financial Accounting Standards (SFAS) No. 142, Goodwill and other Intangible Assets (FAS

142), in the Companys impairment test of goodwill, the Company compares the fair value of the applicable reporting unit to its carrying value. The Company estimates the fair value of its reporting units by using a combination of discounted cash flow analysis and comparisons with the market values of similar publicly traded companies. If the carrying value of the reporting unit exceeds the estimate of fair value, the Company calculates the impairment as the excess of the carrying value of goodwill over its implied fair value. In the impairment tests for indefinite-lived intangible assets, the Company compares the estimated fair value of the indefinite-lived intangible assets to the carrying value. The Company estimates the fair value of indefinite-lived intangible assets and trademarks using the relief from royalty approach, which is a standard form of discounted cash flow analysis used for the valuation of trademarks. If the carrying value exceeds the estimate of fair value, the Company calculates impairment as the excess of the carrying value over the estimate of fair value. Intangible assets that are determined to have definite lives are amortized over their useful lives and are measured for impairment only when events or circumstances indicate the carrying value may be impaired. Under U.S. GAAP, revisions can be made to the goodwill calculation up to 12 months from the date of the acquisition only with respect to outstanding known contingencies at the date of acquisition. According to IAS 36.124, Reversal of an impairment loss for goodwill is prohibited. Testing of goodwill impairment is different under IFRS and U.S. GAAP. Under U.S. GAAP, there are two steps. The first step includes the fair value and the carrying

amount of the reporting unit, including goodwill being compared. If the fair value of the reporting unit is less than the carrying amount, Step 2 is completed to determine the amount of the goodwill impairment loss, if any. Step 2 is where the goodwill impairment is measured as the excess of the carrying amount of goodwill over its implied value. The implied fair value of goodwill is the difference between the fair value of the reporting unit and the fair value of the various assets and liabilities included in the reporting unit. Under IFRS, goodwill is assigned to a cash-generating unit (CGU) or a group of CGUs. The goodwill impairment test is a one-step approach. The recoverable amount of the CGU or group of CGUs is compared with its carrying amount. Any impairment loss is recognized in operating results as the excess of the carrying amount over the recoverable amount. The impairment loss is allocated first to goodwill and then on a pro rata basis to other assets of the CGU or group of CGUs to the extent that the impairment loss exceeds the book value of goodwill.