Introduction
Firstly, goodwill is an intangible asset that represents the excess of the acquisition price over the fair value of the net assets of the acquired company. Goodwill is recorded on the balance sheet and amortized over time as an expense in the income statement. The amortization of goodwill reduces the carrying value of the asset, which, in turn, reduces the net book value of the company. In this scenario, the 50% decline in revenue suffered by XYZ Company is a concern because it could lead to an impairment of goodwill, which would result in a non-cash charge to the company’s earnings. An impairment test is performed to determine if the fair value of the net assets of the acquired company has decreased below its carrying value (Kimmel & Weygandt, 2020). If the impairment test results in an impairment loss, the company must recognize the loss in its financial statements by reducing the carrying value of the acquired company’s net assets and reporting the loss in the income statement.
Recording the Impact of the Revenue Decline on the Acquisition
Secondly, the company should record the impact of the revenue decline on the acquisition by performing an impairment test. If the impairment test results in an impairment loss, the company should recognize the loss in its financial statements by reducing the carrying value of the acquired company’s net assets and reporting the loss in the income statement (Berk et al., 2021). This approach is consistent with Generally Accepted Accounting Principles (GAAP) and provides the financial statement users with an accurate representation of the company’s financial performance.
Promulgated Accounting Literature
Thirdly, the accounting literature that would support the recommendation is Accounting Standards Codification (ASC) 350, ‘Intangibles-Goodwill and Other,’ which provides guidance on accounting for goodwill and other intangible assets. It states that “an entity is required to monitor and evaluate goodwill impairment triggering events throughout the reporting period” (US Financial Accounting Standards Board, 2021, para. 4). ASC 350 requires companies to perform impairment tests and recognize any impairment losses in their financial statements.
Stakeholders Impacted by the Discussion
Fourthly, the stakeholders impacted by the discussion include the company’s shareholders, creditors, and lenders, who rely on the financial statements to assess the company’s financial health and performance. There may be conflicting or competing interests among these stakeholders, with some favoring the recognition of the loss to accurately reflect the financial performance of the company (Kimmel & Weygandt, 2020). Others may prefer to delay the recognition of the loss to avoid any negative impact on the company’s financial statements.
Recommended Course of Action
Fifthly, the recommended course of action regarding the accounting implications of the revenue decline is to perform an impairment test and recognize the loss, if any, in accordance with ASC 350. This approach is consistent with GAAP and provides the financial statement users with an accurate representation of the company’s financial performance (US Financial Accounting Standards Board, 2021). The advantage of this approach is that it provides transparency and credibility to the financial statements (US Financial Accounting Standards Board, 2021). However, the disadvantage is that it may result in a non-cash charge to earnings and a decrease in the company’s net assets. As an accountant in the acquiring company’s accounting department, it is important to understand the implications of this decline in revenue and the impact it will have on the financial statements.
References
Berk, J., Demarzo, B., & Hartford, O. (2021). Fundamentals of corporate finance. Pearson.
Kimmel, P. D., & Weygandt, J. J. (2020). Survey of accounting. Wiley.
US Financial Accounting Standards Board. (2021). Intangibles – Goodwill and other (Topic 350): Accounting alternative for evaluating triggering events. Price Waterhouse Coopers. Web.