1.

If you were an accountant for Talbots, what specifically would be the relevant
accounting research question relating to the case.
Answer
As an accountant of Talbots, Inc my research is to find the ways how Goodwill will not be
impaired. As it decreases the value of Assets furthermore decrease sales and increase operating
loss. Simultaneously, have an impact on the shareholders dividend and investors interest.
2. What accounting standards must Talbots consider when answering the question?
Answer
While answering the question Talbots must consider AS!, SAS "#$, Goodwill and %ther
Intangible Assets.
In $&&" it mandated that accounting for goodwill will be based on the impairment model
using the two 'step process. %nce goodwill is impaired and written off, it can never
restore to its original carrying amount. I(S use impairment test for assets and goodwill.
If an impairment of goodwill is recogni)ed, that loss cannot be reversed .*owever, for the
other assets, impairment losses can be reversed and recogni)ed in the income statement
so long as the carrying amounts do not e+ceed the depreciated historical cost if the
impairment had not been recogni)ed.
SAS "#$ made two ma,or changes to goodwill accounting-
Amorti)ation of all goodwill ceased, regardless of when it originated. Goodwill is now
carried as an asset without reduction for periodic amorti)ation.
.ompanies are to assess goodwill for impairment at least annually. If goodwill is
impaired, its carrying amount is reduced and an impairment loss is recogni)ed.
3 What must be known, estimated, and assumed to answer the research question
Answer
To answer the research question the accountant must
irstly, determine the fair value of each reporting unit using a combination of a discounted
cash flow and a mar/et value approach.
The evaluation of goodwill requires significant estimates,
If the fair value of the reporting unit e+ceeds the carrying value of the net assets of
that reporting unit, goodwill is not impaired and no further testing is required.
If the carrying value of the nets assets assigned to the reporting unit e+ceeds the fair
value of the reporting unit then a second step is required to determine the impaired
fair value of the reporting unit0s goodwill, to be compared to the carrying value of the
reporting unit0s goodwill.
Secondly, 1aluing the tangible and intangible assets and liabilities of the impaired reporting
unit0s goodwill based on the residual of the summed identified tangible and intangible assets and
liabilities if the fair value is less than the carrying value, goodwill is considered impaired and its
carrying amount must be reduced by reducing income for that period. When the carrying amount
of any long lives asset is no longer recoverable, a company is required to write off the cost that
no longer has value.
Thirdly, AS!, SAS "#$ 2egal, regulatory, or contractual provisions li/e if an impairment of
goodwill is recogni)ed, that loss cannot be reversed .*owever, for the other assets, impairment
losses can be reversed and recogni)ed in the income
ourthly, 3ffects of obsolescence, demand, competition, and other economic factors.
ifthly, 3+pected actions of competitors and others may restrict present competitive advantages.
. !o you believe Talbots" accounting for goodwill in the case was appropriate? Why
or why not? Is it possible to arrive at an alternative accounting treatment of
goodwill based on your analysis?
Answer
In Talbots0 case accounting for goodwill is not appropriate li/e the company reviewed its
goodwill and trademar/s for impairment during the fourth quarter of $&&4 in addition to its
annual measurement date due to the wea/ sales and operating performance of the company. As a
result of the goodwill and trademar/ impairment test the company concluded that the carrying
amounts of the stores and 5irect mar/eting reporting units of the 6.6ill brand e+ceed its fair
value. The goodwill impairment charge of 7 "8#.& million was determined by comparing the
carrying value of goodwill of the reporting units with the implied fair value of goodwill of the
reporting units. The trademar/ impairment charge of 7 $9.: million before an income ta+ benefit
7 9.; million was determined by comparing the carrying value of the trademar/ with the estimate
fair value of the trademar/. With that the company believes that 6.6ill have potential future
growth.
It is not possible to arrive at an alternative accounting treatment of goodwill as inancial
Accounting Standard !oard , SAS "#$ mandatory declared instead of deducting the value of
goodwill annually over a period of ma+imal #& years the companies are now required to
determine the fair value of the reporting unitsby using present value of future cash flow and
compare it to their carrying value I.e.boo/ value of assets plus goodwill minus liabilities. If the
fair value is less than carrying cost <impaired= the goodwill value needs to be reduced so the fair
value is equal to carrying value. In income statement, the impairment loss is reported as a
separate line item and in balance sheet ,new ad,usted value of goodwill is reported
When the business is threatened with insolvency investors will frequently deduct the goodwill
from anycomputation of residual equity because it will probable have no resale value.