Galaxy Sports Inc.: Case Study
U. S. Based manufacturer of sports equipment.
It is an SEC registrant with one operating segment with three separate reporting units: fitness, golf and hockey. The fitness is the largest division of Galaxy with allocated goodwill of $200 million. The golf division reports $130 million of goodwill and the hockey has $30 million of goodwill. Each division has been a reporting unit for a number of years.
Due to the complexities Involved with the calculation of goodwill ND resource restraints in 2011, Galaxy decided to hire Big Time LLC (Big Time) to perform three annual SAC 350, Intangibles-Goodwill and Other, Impairment analyses. Management decided not to perform an Interim test.
An example to support this decision Is that “write down can trigger a violation of bank covenants (as debt to equity rises after the equity Is reduced). Further, It can hurt valuation ratios such as price to book value”.
Further, a salary affect to the bank obligations would be management not wanting to record a loss which negatively affects financial statements and in turn management compensation. Sac 350-20-35-29 states that the fair value of a reporting unit may be carried forward from one year to the next if all of the following criteria have been met: a) the assets and liabilities that make up the reporting unit have not changed significantly since the most recent fair value determination.
An example is a recent significant acquisition or a reorganization of n entity’s segment reporting structure that might significantly change the composition of a reporting unit, b) the most recent fair value determination resulted in an amount that exceeded the carrying amount of the reporting unit by a substantial margin, and c) based on an analysis of events that have occurred and circumstances that have changed since the most recent fair value determination, the likelihood that a current fair value determination would be less than the current carrying amount of the reporting unit is remote.