In July 2001, the FASB issued SFAS 142, which changed the accounting for goodwill and intangible assets. Upon adoption of SFAS 142, many companies recognized large goodwill impairment losses. For example, in 2002, AOL Time Warner (now Time Warner) recorded a $99 billion reduction in the carrying value of its goodwill—still one of the largest goodwill impairments. The SFAS 142 requirements continue under ASC Topic 350, Intangibles—Goodwill and Other.
Use the AOL Time Warner, Inc., 2002 SEC Form 10-K Annual Report and SFAS 142 to address the following issues and questions.
1. How did AOL determine the initial amount of goodwill to recognize in its merger with Time Warner?
2. How did AOL Time Warner determine the $99 billion 2002 impairment charge to its goodwill? What procedures will Time Warner follow in the future to assess the value of its goodwill?
3. What business areas did AOL Time Warner designate as its reporting units? Why is it important to define the reporting units?
4. What effects did SFAS 142 have on AOL Time Warner’s earnings performance both in the short term and in the long term?
5. What is the rationale behind the accounting treatment for goodwill (initial recognition and subsequent allocation to income)?