Recent change in goodwill accounting: Elimination of amortization of goodwill (Refer to Case, SFAS No. 142 in Canvas, and what you studied in ACCT 800 (or ACCT 301), and conduct own researc

1

Goodwill Accounting Paper

Goodwill Accounting Paper will be graded out of 100 points. Grading will be based on the

technical merit, completeness, professionalism, and clarity.

Goodwill is reported as part of intangible long-term assets on balance sheets. Recently, accounting

for Goodwill has gone through many changes. Among those, the most eye-catching one is

elimination of amortization of goodwill for public companies, while many other intangible assets

are amortized.

Goodwill Accounting Paper provides an opportunity to think about the effects of elimination

of amortization of goodwill on financial reporting. For Goodwill Accounting Paper, each team

will read the case (visit https://store.hbr.org/product/the-talbots-inc-and-subsidiaries-accounting-

for-goodwill/3254 and purchase the case), professional articles, and/or academic research papers.

Based on those readings and each team’s own further research, each team will write Goodwill

Accounting Paper using the structure given below. In addition to the reference papers available in

Canvas, each team should conduct own further research including but not limited to

professional articles, news articles and/or academic research papers, as needed. For reference,

I describe what should be included in each section.

Title of each section for the main body of Goodwill Accounting Paper:

1. Introduction • What is the objective of your team’s Goodwill Accounting Paper?

• How is your team’s Goodwill Accounting Paper structured to support the objective?

2. Recent change in goodwill accounting: Elimination of amortization of

goodwill (Refer to Case, SFAS No. 142 in Canvas, and what you studied

in ACCT 800 (or ACCT 301), and conduct own research) • Briefly explain when goodwill arises.

• (Address using the case) What was the fair market value of identifiable net assets

that Talbots, Inc. acquired from J. Jill?

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

market value of the identifiable net assets acquired from J. Jill?

• 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.

3. Consequences of elimination of amortization of goodwill (Refer to Case,

SFAS No. 142, and 4 Goodwill readings in Canvas, and conduct own

research) • (Address using the 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

2

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 (or ACCT 301) 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.

4. Elimination of amortization of goodwill and financial reporting (Refer to

Case and SFAS No. 142, and 4 Goodwill readings in Canvas, and conduct

own research) • (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). 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).

• ACCT 800 (or ACCT 301) and ACCT 801 (or ACCT 302) 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.

• 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)

5. Conclusion Describe and reiterate what your team’s Goodwill Accounting Paper is about and what the

main argument is.

Additional Notes:

(1) Include a cover page where title, last names, first names and IDs are clearly indicated.

(2) Create the title: Your team can choose any title that can highlight your team’s thoughts.

(3) Add “References” right after the main body where your team list up the articles,

academic research papers and other materials your team used.

(4) Double-spaced 15 pages or less (1″ margin for all sides) excluding cover page and

references.

(5) 12-point Time New Roman.

(6) First draft: Due April 22, 2024 (Mon) – NO LATE SUBMISSION: E-mail submission

only by 12:55pm.

(7) Final draft: Due May 6, 2024 (Mon) – NO LATE SUBMISSION: E-mail submission

only by 12:55pm.

(8) Your team must complete without taking help from any other fellow students or another

people.

1 All rights reserved by SFSU Spring 2024 ACCT 890 instructor.

Reproduction, distribution, and/or transmission of these slides and the presentation in any form and/or by any means including (but not limited to) photocopying, recording, and/or other electronic and/or mechanical methods, are strictly prohibited.

Goodwill Accounting Paper

2 All rights reserved by SFSU Spring 2024 ACCT 890 instructor.

Reproduction, distribution, and/or transmission of these slides and the presentation in any form and/or by any means including (but not limited to) photocopying, recording, and/or other electronic and/or mechanical methods, are strictly prohibited.

⚫ 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

3 All rights reserved by SFSU Spring 2024 ACCT 890 instructor.

Reproduction, distribution, and/or transmission of these slides and the presentation in any form and/or by any means including (but not limited to) photocopying, recording, and/or other electronic and/or mechanical methods, are strictly prohibited.

⚫ 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

4 All rights reserved by SFSU Spring 2024 ACCT 890 instructor.

Reproduction, distribution, and/or transmission of these slides and the presentation in any form and/or by any means including (but not limited to) photocopying, recording, and/or other electronic and/or mechanical methods, are strictly prohibited.

⚫ 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

5 All rights reserved by SFSU Spring 2024 ACCT 890 instructor.

Reproduction, distribution, and/or transmission of these slides and the presentation in any form and/or by any means including (but not limited to) photocopying, recording, and/or other electronic and/or mechanical methods, are strictly prohibited.

⚫ (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)

6 All rights reserved by SFSU Spring 2024 ACCT 890 instructor.

Reproduction, distribution, and/or transmission of these slides and the presentation in any form and/or by any means including (but not limited to) photocopying, recording, and/or other electronic and/or mechanical methods, are strictly prohibited.

⚫ (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)

7 All rights reserved by SFSU Spring 2024 ACCT 890 instructor.

Reproduction, distribution, and/or transmission of these slides and the presentation in any form and/or by any means including (but not limited to) photocopying, recording, and/or other electronic and/or mechanical methods, are strictly prohibited.

⚫ 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)

8 All rights reserved by SFSU Spring 2024 ACCT 890 instructor.

Reproduction, distribution, and/or transmission of these slides and the presentation in any form and/or by any means including (but not limited to) photocopying, recording, and/or other electronic and/or mechanical methods, are strictly prohibited.

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

Statement of Financial Accounting Standards No. 142

Goodwill and Other Intangible Assets

Financial Accounting Standards Board

ORIGINAL

PRONOUNCEMENTS

AS AMENDED

Copyright © 2010 by Financial Accounting Foundation. All rights reserved. Content copyrighted by Financial Accounting Foundation may not be repro- duced, stored in a retrieval system, or transmitted, in any form or by any means, electronic, mechanical, photocopying, recording, or otherwise, with- out the prior written permission of the Financial Accounting Foundation.

Statement of Financial Accounting Standards No. 142 Goodwill and Other Intangible Assets

STATUS

Issued: June 2001

Effective Date: For fiscal years beginning after December 31, 2001; goodwill acquired in business combinations after June 30, 2001, shall not be amortized

Affects: Deletes ARB 43, Chapter 5 Supersedes APB 17 Amends APB 18, paragraphs 19(m) and 19(n) Replaces APB 18, footnote 9 Deletes APB 18, footnote 12 Supersedes AIN-APB 17, Interpretations No. 1 and 2 Amends FAS 2, paragraph 11(c) Amends FAS 44, paragraphs 3, 4, and 7 Amends FAS 51, paragraphs 13 and 14 Amends FAS 52, paragraph 48 Amends FAS 68, footnote 3 Replaces FAS 71, paragraphs 29 and 30 Amends FAS 72, paragraphs 4, 6, and 7 Deletes FAS 72, footnotes 5 and 6 Amends FAS 121, paragraphs 3, 4, 6, 27, and 147 Deletes FAS 121, paragraph 12

Affected by: Summary amended by FAS 141(R), paragraph E4(c) Paragraph 1 amended by FAS 141(R), paragraph E27(a), and FAS 164, paragraph E12(a) Paragraphs 2, 10, 30, 32, 34, 39, 42, 43, 47(b), 54, and 61 amended by FAS 164, paragraphs E12(b), E12(f), E12(j), E12(k), E12(l), E12(n), E12(p), E12(q), E12(s), E12(w), and E12(y), respectively

Paragraph 3 amended by FAS 157, paragraph E22(a) Paragraph 4 amended by FAS 141(R), paragraph E4(b), and FAS 164, paragraph E12(c) Paragraph 6 amended by FAS 141(R), paragraph E27(b); FAS 160, paragraph C10(a); and FAS 164, paragraph E12(d)

Paragraph 6A added by FAS 141(R), paragraph E27(c) Paragraph 7 and footnote 22 deleted by FAS 144, paragraphs C17(a) and C17(f), respectively Paragraph 8 amended by FAS 145, paragraph 9(m), and FAS 141(R), paragraph E27(d) Paragraph 8(c) effectively deleted by FAS 145, paragraph 6 Paragraph 8(i) amended by FAS 145, paragraph 9(m) Paragraph 9 amended by FAS 141(R), paragraph E27(e); FAS 164, paragraph E12(e); and Accounting Standards Update 2010-08, paragraph A10(b)

Paragraph 11 amended by FSP FAS 142-3, paragraph A1(a) Paragraph 11(b) amended by FSP FAS 141-1/142-1 and FAS 141(R), paragraph E44(a) Paragraphs 15, 17, 28(f), 29, and Appendix A (Examples 1 through 3, 5, and 9) amended by FAS 144, paragraphs C17(b) through C17(e) and C17(g), respectively

Paragraph 16 amended by FAS 141(R), paragraph E27(h), and FAS 164, paragraph E12(h) Paragraphs 19 and 23 amended by FAS 157, paragraphs E22(c) and E22(d), respectively Paragraph 21 amended by FAS 141(R), paragraph E27(i) Paragraph 22 amended by FAS 165, paragraph B10

FAS142

FAS142–1

Paragraphs 24 and E1 through E3 deleted by FAS 157, paragraphs E22(e) and E22(f), respectively

Paragraph 33 amended by FAS 141(R), paragraph E27(k) Paragraph 35 amended by FAS 141(R), paragraph E27(l); FAS 145, paragraph 9(m); and FAS 164, paragraph E12(m)

Paragraph 38 deleted by FAS 160, paragraph C10(b) Paragraph 39A added by FAS 160, paragraph C10(c), and amended by FAS 164, paragraph E12(o)

Paragraph 44 amended by FAS 141(R), paragraph E27(m); FSP FAS 142-3, paragraph A1(b); and FAS 164, paragraph E12(r)

Paragraph 45 amended by FSP FAS 142-3, paragraph A1(c) Paragraphs 45(c) and 48 amended by FAS 141(R), paragraphs E27(n) and E27(o), respectively Paragraph 48(b) replaced by FAS 164, paragraph E12(t) Paragraph 49 replaced by FAS 141(R), paragraph E27(p) Paragraph 49(b) amended by FAS 147, paragraph B3(a) Paragraphs 50 and 52 amended by FAS 141(R), paragraphs E27(q) and E27(r), respectively Paragraph 52 deleted by FAS 164, paragraph E12(u) Paragraphs 53A and 53B and 58A through 58D added by FAS 164, paragraphs E12(v) and E12(x), respectively

Paragraph A1 amended by FSP FAS 142-3, paragraph A1(d) Paragraph C2 amended by FAS 141(R), paragraph E27(s), and FSP FAS 142-3, paragraph A1(e) Paragraph D9(a) effectively deleted by FAS 147, paragraph 5 Paragraph D11 deleted by FAS 147, paragraph B3(b), and FAS 141(R), paragraph E44(b) Paragraph D11(a)(2) deleted by FAS 145, paragraph 9(m) Paragraph F1 amended by FAS 141(R), paragraph E27(t), and FAS 157, paragraph E22(g) Footnote 1 deleted by FAS 141(R), paragraph E27(a) Footnote 3 amended by FAS 141(R), paragraph E4(b), and FAS 164, paragraph E12(c) Footnotes 6 and 9 amended by FAS 141(R), paragraphs E27(c) and E27(f), respectively Footnote 5 deleted by FAS 141(R), paragraph E27(b) Footnote 5 replaced by FAS 160, paragraph C10(a) Footnote 5 amended by FAS 164, paragraph E12(d) Footnote 6 deleted by Accounting Standards Update 2010-08, paragraph A10(b) Footnotes 7, 11, 14, 18, and 21 amended by FAS 141(R), paragraphs E27(e), E27(g), E27(i), E27(j), and E27(l), respectively, and FAS 164, paragraphs E12(e), E12(g), E12(i), E12(j), and E12(m), respectively

Footnotes 8 and 25 deleted by FAS 141(R), paragraphs E27(e) and E27(p), respectively Footnotes 12 and 16 deleted by FAS 157, paragraphs E22(b) and E22(d), respectively Footnote 22 deleted by FAS 144, paragraph C17 Footnote 24 replaced by FAS 141(R), paragraph E27(o) Footnote 24 deleted by FAS 164, paragraph E12(t)

Other Interpretive Releases: FASB Staff Positions FAS 141-1/142-1 and FAS 142-2

AICPAAccounting Standards Executive Committee (AcSEC)

Related Pronouncements: SOP 88-1 SOP 90-7 SOP 93-7 SOP 94-6

Issues Discussed by FASB Emerging Issues Task Force (EITF)

Affects: Partially nullifies EITF Issues No. 85-8, 85-42, 88-20, and 90-6

Interpreted by: Paragraph 10 interpreted by EITF Issue No. 97-13 Paragraph 17 interpreted by EITF Issue No. 02-7

FAS142 FASB Statement of Standards

FAS142–2

Paragraph 19 interpreted by EITF Issue No. 02-13 Paragraph 20 interpreted by EITF Issues No. 02-7 and 02-13 Paragraph 21 interpreted by EITF Issue No. 02-13 and Topic No. D-10 Paragraph 30 interpreted by EITF Topic No. D-101 Paragraph 32 interpreted by EITF Issue No. 02-13 Paragraph 49(b) interpreted by EITF Topic No. D-100

Related Issues: EITF Issues No. 85-41, 88-19, 89-19, 92-9, 93-1, 98-11, 02-17, 03-9, 03-14, 03-17, 04-1, 04-2, 04-4, 08-7, and 09-2

SUMMARY

This Statement addresses financial accounting and reporting for acquired goodwill and other intangible assets and supersedes APB Opinion No. 17, Intangible Assets. It addresses how intangible assets that are acquired individually or with a group of other assets (but not those acquired in a business combination) should be accounted for in financial statements upon their acquisition. This Statement also addresses how goodwill and other intangible assets should be accounted for after they have been initially recognized in the financial statements.

Reasons for Issuing This Statement

Analysts and other users of financial statements, as well as company managements, noted that intangible assets are an increasingly important economic resource for many entities and are an increasing proportion of the assets acquired in many transactions. As a result, better information about intangible assets was needed. Financial statement users also indicated that they did not regard goodwill amortization expense as being useful information in analyzing investments.

Differences between This Statement and Opinion 17

This Statement changes the unit of account for goodwill and takes a very different approach to how good- will and other intangible assets are accounted for subsequent to their initial recognition. Because goodwill and some intangible assets will no longer be amortized, the reported amounts of goodwill and intangible assets (as well as total assets) will not decrease at the same time and in the same manner as under previous standards. There may be more volatility in reported income than under previous standards because impairment losses are likely to occur irregularly and in varying amounts.

This Statement changes the subsequent accounting for goodwill and other intangible assets in the following significant respects:

• Acquiring entities usually integrate acquired entities into their operations, and thus the acquirers’ expecta- tions of benefits from the resulting synergies usually are reflected in the premium that they pay to acquire those entities. However, the transaction-based approach to accounting for goodwill under Opinion 17 treated the acquired entity as if it remained a stand-alone entity rather than being integrated with the acquir- ing entity; as a result, the portion of the premium related to expected synergies (goodwill) was not ac- counted for appropriately. This Statement adopts a more aggregate view of goodwill and bases the account- ing for goodwill on the units of the combined entity into which an acquired entity is integrated (those units are referred to as reporting units).

• Opinion 17 presumed that goodwill and all other intangible assets were wasting assets (that is, finite lived), and thus the amounts assigned to them should be amortized in determining net income; Opinion 17 also mandated an arbitrary ceiling of 40 years for that amortization. This Statement does not presume that those assets are wasting assets. Instead, goodwill and intangible assets that have indefinite useful lives will not be amortized but rather will be test

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