Merrill Publishing Company has operated primarily as a printer for catalogs, SEC filings, and phone books.

During the past few years, it has:

• Expanded into a new product line in magazine publishing through the purchase of Wausau Printing Company,

• Developed a professional web site that makes all the information in the printed documents available on a subscription basis to the companies that come to it for printing,

• Purchased St. Paul Labels, which makes labels for canned products

• Purchased Consumer Custom Design (CCD), which develops designs for cardboard food products, for example, Wheaties cereal, and other food products that are delivered in cardboard-type containers.

The designs are developed on the Web and are downloaded to companies for printing on their packaging products. The company recorded goodwill of $15 million, $12 million, and $8 million, respectively, for the Wausau, St. Paul Labels, and Consumer Customer Design purchases.

Required

a. Define an operating segment. Identify the criteria that Merrill might use to define an operating segment. Identify when the decision should be made to classify a purchase as part of an operating segment.

b. Assume that Merrill merges the operations of St. Paul Labels and Consumer Custom Design into one operating segment, which it has labeled as food product print design. The segment has been successful, but the operations relating to cardboard design, after three years, continues to fall below expectations. Because the operations are integrated, how would the client and the auditor measure the possible impairment of goodwill in the segment? In other words, it appears the operations generated from St. Paul Labels are strong while the operations integrated from CCD have been weak.

c. What are the problems associated with measuring the impairment of goodwill for the food product print design segment?

d. How would the auditor test for goodwill impairment for the purchase of Wausau Printing Company assuming that it remains an identifiable segment? Also assume that cash flow and profitability continue to exceed the budget utilized in determining a purchase price. Does the company still need to obtain an independent assessment of the fair market value of the total company and the operating entity on an annual basis? Discuss the rationale for your answer.