Goodwill Impairment Testing
Galaxy Sports Inc. (Galaxy), a U.S.-based manufacturer of sports equipment, is a
calendar year-end SEC registrant with one operating segment and the following
three reporting units:
o Fitness Equipment.
o Golf Equipment.
o Hockey Equipment.
Galaxy is in a competitive industry with several publicly traded companies in
which growth and profitability are tied to the market and consumer demand.
Three reporting units are appropriate because discrete financial information is
available for each component, each component is a business, and each component
is managed separately.
The Fitness Equipment component is Galaxy’s ...view middle of the document...
Through early discussions with Galaxy’s management and Big Time, it was expected that
the entity was going to pass step 1 of the goodwill analysis for all three reporting units
with a significant cushion (i.e., the estimated fair value of each reporting unit
significantly exceeded the book value) for each reporting unit. This was also consistent
with the goodwill analysis that was performed internally by Galaxy in the previous year.
Copyright 2009 Deloitte Development LLC
All Rights Reserved.
Case 11-9: Goodwill Impairment Testing
Galaxy management indicated that the significant cushion was likely because 2009 Q4
sales were very strong, and strong sales were also expected for 2010 and beyond. Big
Time completed its analysis in late January 2010 and, as expected, Galaxy passed step 1
of the annual goodwill impairment test for each reporting unit. Galaxy’s common share
price was $56.75 as of December 31, 2009.
Galaxy December 31, 2009, ASC 350 Goodwill Impairment Analysis
Summary (Prepared by Big Time)
Step 1 Test
($US in thousands)
Implied control premium
Step 1 Passed?
Note: As of December 31, 2009, Galaxy’s share price was $56.75 and 46 million
shares were outstanding, indicating a market capitalization of $2.6 billion. The
implied control premium of 18 percent is viewed by management as reasonable.
First Quarter of 2010
Management released Q1 earnings, which were slightly below expectations. In a Q1 press
release, Galaxy attributed the lower earnings to the slowing economy and reduced
consumer spending on recreational activities. Galaxy’s common share price fell to $49.25
after the release of Q1 earnings.
Second Quarter of 2010
Management released Q2 earnings on July 15, 2010. As in Q1, Q2 earnings were also
below expectations because the slowing economy resulted in continuing reductions in
consumer spending. In Galaxy’s press release, management discussed the impact of the
slowing economy on its business. Further, the company experienced additional pressure
on its sales during the quarter as a result of an increase in sports equipment manufactured
in China that was being sold at large discount retailers. The equipment has a lower price
point, which is appealing to consumers during difficult economic times. Historically,
Galaxy has not experienced significant competition from imports because the quality of
the imports is inferior to the quality of the sports equipment manufactured by Galaxy.
Galaxy’s common share price fell to $45.25.
Third Quarter of 2010
During the financial close process, management considered performing an interim
goodwill impairment test but, after reviewing ASC 350, determined it was not...