Galaxy Case

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| Deloitte & Touche LLC1|
To:| Mary Stanford |
From:| Ben Ji |
Date:| September 26, 2012|
Re:| Goodwill Impairment Test |
| |
Galaxy Sports Inc. is a manufacturer of sports equipment. It is a public company with three reporting units: Fitness Equipment, Golf Equipment, and Hockey Equipment. During our audit, certain accounting treatments by Galaxy regarding goodwill impairment were found to possibly contradict with the Accounting Standard Codification. Based on my research of the ASC, my recommendations are that management should perform an interim goodwill impairment test at the end of third quarter of fiscal year 2009; and that management should not carry forward the 09 goodwill impairment test for Fitness and Hockey in 2010. Galaxy is in a competitive industry in which growth and profitability are tied to market and consumer demand. During 2010, as discussed in a press release by the management, Galaxy faced strong competition from Chinese imports that are sold at a lower price. Reduced consumer spending resulted from a slowing economy also hurt Galaxy’s sales. These “unanticipated competition” coming from affordable Chinese imports, and “significant adverse changes in the business climate” represented by a weak economy and reduced consumer spending are circumstances under which the ASC 350-20-35-30 mandates a goodwill impairment test between annual tests3. Therefore, an impairment test shall be carried out as of Sep 30, 2010.

Figure 1
I also tracked the changes in control premium to gauge the accuracy of the fair value estimates assuming the 2009 fair values were carried forward. Control premium is the portion of fair value in excess of market capitalization. Control premium represents the added value that comes from controlling the entire business as opposed to a number of investors holding the company’s shares individually. As illustrated in figure 1, if fair value of the units were truly what the previous auditor had...
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