Professional judgment framework

Goodwill impairment

Part 1

Background

Company AKScommon shares are publicly traded and it files with the SEC. AKS has a single reporting unit, which sells high-end consumer electronics. AKS has a March 31 fiscal year-end.

Fiscal 2021 data

On April 1, 2020, AKS acquired a competitor, BMN,for $20.0 million. The purchase price was approximately 10 times BMNs projected fiscal 2022 income. After completing the purchase price allocation, the goodwill from this acquisition was recorded at $10.0 million.

In compliance with ASC 350, AKS was required to perform a goodwill impairment test. The goodwill impairment test identifies potential impairment by comparing the fair value of a reporting unit with its carrying amount, including goodwill. AKS decided they would perform this test annually in January.The company determined that there was one reporting unit (AKS in total) at which the goodwill would be tested for impairment

In January2021, as directed by the CFO, the controller of AKS initiated the process to determine whether there was any impairment of the goodwill. Because this was a new process, the controller decided to hire a certified specialist in the valuation business to prepare the valuation. Below is information available regarding the valuation process:

• The valuation specialist used the income approach using a discounted cash flow model to derive the fair value.
• The weighted-average cost of capital (WACC) to AKS was 7%.
• Revenue growth attributed to BMN in the cash flow model was 10% in fiscal 2022 and 15% in fiscal 2023.
• Income projections prepared as part of the acquisition work indicated expected growthin AKS consolidated income of 10%,to $22.0 million, in fiscal 2022 and 15%, to $25.3 million, in fiscal 2023 from BMN.
• Expenses other than for cost of goods sold were budgeted to remain flat for the next two years.

Based on the valuation, the fair value of the reporting unit exceededits carrying amount by 20%. AKS concluded that based on this quantitative analysis; there was no goodwill impairment in fiscal 2021.

Fiscal 2022 data

In January 2017, ASU 2017-04,Intangibles Goodwill and Other (Topic 350) Simplifying the Test forGoodwill Impairment, was issued. This ASU was issued in response to concerns about the cost and complexity of performing the twostep goodwill impairment test. Topic 350still provides management the option to first assess qualitative factors to make a determination of whether it is more likely than not that the fair value of a reporting unit is less thanits carrying amount. If, after a full qualitative assessment, an entity determines it is more likely than not that the fair value of a reporting unit is more than its carrying amount, then performing the quantitative assessment is unnecessary.

In January 2022, you have assumed the role of the controller. You are now responsible for performing the annual impairment testing for goodwill. The CFO believes that there is no impairment issue given that a valuation was just performed in the prior year, which indicated a fair value 20% over carrying value and also because the fiscal results for 2022 have remained stable so far. He has advised you to take advantage of the option to use the qualitative approach in an effort to eliminate the $100,000 appraisal fee incurred in the prior year. The CFO believes this approach will be simple and should reduce the accounting departments workload.

You had discussions with the AKS executive team early this month and have gained the following insights:

• The BMN acquisition has been successful and there are no intentions to sell any portion of the business. The BMN management team remains intact and is still operating under a non-compete agreement for another year. The executive team for AKS is also expected to remain consistent.
• The price of AKS stock has been stable this year and is not expected to change significantly in the fourth quarter. The stock prices of AKS public competitors have also been fairly stable.

At December 31, 2021, AKS had total assets of $100 million and net equity of $10.0 million. The following additional financial information is based on actual results for the first three quarters of fiscal 2022,ended December 31, 2021,and projected results for the fourth quarter ended March 31, 2022. Auditors of AKS have performed reviews of quarterly results to date for fiscal 2022. There have been no restatements.

• Revenues are projected to increase by 18%. This increase isprimarily driven by the acquisition of BMN (approximately 11% of the increase); the addition of three large customers, which were taken away from competitors(approximately 5% of the increase);and the balance is the result of increased demand for AKSproducts.
• The demand for AKSproducts was very strong in the first six months. During the second half of the year, the economy softened and the demand for AKSproducts began to drop. The forecasted decrease in units sold for the last six months is estimated to be 3% to 4%.
• In the fourth quarter, AKS began offering pricing concessions to maintain sales. The price concessions offered so far in the fourth quarter have been in the range of 2% to 3%, and have helped mitigate the decline in units sold.
• Income for the year is forecasted to be $24.0 million.
• The WACC for AKS is expected to remain at 7%.
• Expenses other than for cost of goods sold increased by 1%.
• The S&P 500 index has dropped 5% since the prior year. The S&P index for public companies within AKS industry are down on average 1%.

Required

• Reference the professional judgment frameworkhandout and application template separatelyprovided.
• For fiscal 2022,perform the qualitative assessment. Using the professional judgment framework, complete the application template.
  • As an additional documentation tool to supplement the application template, use the table template provided to you on the following page (guidance table) to document the applicable guidance, information and your analysis for:
    • The process step of gather the facts addressing the specific consideration of what is the applicable guidance?
    • The process step of perform the analysisaddressing the specific consideration of how does the guidance apply to the issue?
• Using the information you documented regarding the overarching considerations and specific considerations for each process step in the framework, document your judgment in a draft memorandum format that you will provide to the CFO (not to exceed three pages). Be sure to include specific references and quotes to applicable guidance. Upon completing your documentation, make certain that you are able to answer the following questions:
  • Is the documentation sufficient to support your judgment?
  • Can another professional understand how you reached your conclusion (including why reasonable outcomes and possible alternatives identified were not selected)?

Tool to document the judgment

DRAFT memorandum

Goodwill qualitative assessment

January 2022

Prepared by:

Reviewed and approved by:

Issue

Facts

Analysis

Judgment

Guidance	Information	Analysis

Please answer the required part separately.