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Copy of The Talbots, Inc., and Subsidiaries:

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Lee Alex

on 29 September 2014

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Transcript of Copy of The Talbots, Inc., and Subsidiaries:

Estimate the amount of impairment of goodwill associated with J. Jill for Fiscal Year 2008 if Talbots had chosen to amortize goodwill recognized in the purchase of J. Jill over the allowed period of 40 years?
Compare your estimates of income for Fiscal Year 2008 to the net loss actually
reported after the impairments and reorganization charges taken in FY 2008.
Suppose one half of the goodwill recognized had instead been allocated to fixed assets. How might this have affected income and cash flows in future years?
Use data in Exhibit 1 to understand the purchase on May 3, 2006, of J. Jill by Talbots

What journal entry(s) was required when Talbots recorded the purchase of J. Jill?
On May 3, 2006 Talbots acquired J. Jill
Talbots: an international specialty retailer and direct marketer of women’s apparel, shoes, and accessories
J. Jill: multi-channel specialty retailer of women’s apparel
J. Jill was purchased for $518mln in cash
Amount paid exceeded the fair market value of the net physical assets acquired, hence, Talbots was required to recognize goodwill, trademarks, and other intangible assets included in the purchase price
The Talbots, Inc., and Subsidiaries:
Accounting for Goodwill

For Fiscal Year 2007, make an estimate of the amortization of goodwill and other intangible assets planned by Talbots when it purchased J. Jill on May 3, 2006?
How much cash was paid to shareholders of J. Jill?
$ 518,320,000
($24.05 per share)
How many shares of J. Jill were purchased by Talbots?

What was the fair market value of assets that Talbots acquired from J. Jill?

$ 687,572,000
($296,310,000 in tangible assets, $391,262,000 in intangible assets)
Why was Talbots willing to pay more than the fair value of the tangible assets acquired
from J. Jill?

J. Jill’s intangible assets were worth a lot of money. Moreover, the excess of the purchase price over the fair value of tangible and identifiable net assets was allocated to goodwill, which is non-deductible for tax purposes.

What were the liabilities assumed by Talbots in the acquisition of J. Jill?

Goodwill in fiscal year 2007:

Impairment in fiscal year 2008:
$247,490,000 / 40 = $6,187,250
Reported loss: $186,392,000
Reported impairment of goodwill: $134,000,000

Estimated impairment of goodwill: $6,187,250
Estimated loss: $58,579,250
Trademarks & Goodwill
not amortized, periodically reviewed for impairment
Customer Relationships
discounted cash flow method, weighted average life of 12 years

Amortization every year during the average life: $84,200,000/12=$7,016,666.67

Amortization for the fiscal year of 2007: $7,016,666.67*(9/12)= $5,262,500
Leasehold Interest
Straight-line, weighted average life of 8 years

Amortization for every year during the average life: $11,085,000/8= $1,385,625

Amortization for the fiscal year of 2007: $1,385,625*(9/12)= $1,039,218.75
Non-compete Agreements
Straight-line method, useful life of 20 months

Amortization for every year during the average life: $4,900,000/20=$245,000

Amortization for the fiscal year of 2007: $245,000*9=$2,205,000
*9 months = time period between May 3, 2006 and February 3, 2007
depreciation is tax deductible and goodwill impairments are not
hence, in this case, net income would be higher
both depreciation and goodwill impairment are non-cash charges
no direct effect on cash flows
however, indirectly, due to a reduced tax burden, cash flows would increase
How does this compare with the effects of the impairments recognized in FY 2008 which are not deductible for income tax purposes?
Pardis Hamzei, 28896
Charity Shamboko, 23817
Karolina Skorulska, 28174
Pola Opalka, 23222

In your opinion does the use of unverifiable fair values in financial reporting improve the usefulness of financial reports, or does it merely provide another variable for managements to use opportunistically in their financial reporting processes?
the use of periodic evaluations of impairments can lead to large swings in net income in years when impairments are recognized (such as FY 2008)
depreciation charges are evenly distributed over an asset's useful life, which leads to more stable incomes over the years
since depreciation is tax-deductible, net income would be higher
the use of an impairment test to recognize changes in goodwill requires estimating future cash flows
these estimates are likely to be highly subjective and will depend on actions of future management as well as external influences
estimates are prone to manipulation, which can directly affect asset valuations, income and cash-flows
caution is advised when dealing with estimates
NET ASSETS = $687,572,000 - $163,181,000 = $524,391,000
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