Galaxy Sports is a publicly traded U.S.-based manufacture of sports equipment with three reporting units, Fitness Equipment, Gold Equipment, and Hockey Equipment. They are in a competitive industry in which growth and profitability are tied to the market and consumer demand. All three components are managed separately therefore discrete financial information is available for each component. In December 2011, Galaxy engaged Big Time LLC to perform three annual ASC 350, Intangibles- Goodwill and Other, impairment analysis on the $360 million (composed of $200 million from Fitness Equipment, $130 million from Golf Equipment, and $30 million from Hockey Equipment) of goodwill ...view middle of the document...
Should management have performed an interim goodwill step 1 impairment test as of September 30, 2012? Was management justified in performing a qualitative impairment assessment for the Fitness Equipment and Hockey Equipment reporting units, assuming no interim step 1 test was required?
According to ASC 350-20-35-30, goodwill of a reporting unit shall be tested for impairment between annual tests if an event occurs or circumstances change that would more likely than not reduce the fair value of reporting unit below its carrying amount. ASC 350-20-35-3C, further provides examples of such events and circumstances, which include an increased competitive environment, a decline in earnings, and/or a continued decrease in share price. Furthermore, testing for goodwill impairment is composed of two steps. ASC 350-20-35-4, states that the first step of the goodwill impairment test, used to identify potential impairment, compares the fair value of a reporting unit with its carrying amount, including goodwill. If an impairment has occurred during the first step then the second test of impairment testing is necessary. The second step of the goodwill impairment test, used to measure the amount of impairment loss, compares the implied fair value of reporting unit goodwill with the carrying amount of that goodwill (ASC 350-20-35-9).
Since Galaxy had determined that the earnings and share price had decline during the first three quarter and they were also experiencing strong competition from China’s imports, they should have placed more weight on...