Northrop Grumman Corporation is a global defense company headquartered in Los Angeles, California. Northrop Grumman provides a broad array of products and services related to defense electronics, information technology, advanced aircraft, shipbuilding, and space technology. The company has more than 125,000 employees. In December, Year 2, the company purchased 100 percent of the common stock of TRW, Inc. TRW operates in the space, electronics, and automotive parts businesses. (In Year 3, Northrop Grumman spun off the automotive parts segment of TRW to a private investment firm. The investment firm, in turn, took TRW Automotive public in Year 4.) Northrop Grumman issued 69.4 million shares of its common stock at an exchange ratio of .5357 for each TRW share. These shares were valued at $107.31 per share for purchase accounting purposes. The acquisition of TRW, which was valued at approximately $12.5 billion, was accounted for using the purchase method of accounting.
Northrop Grumman stated in a recent annual report:
Under the purchase method of accounting, the purchase price is allocated to the underlying tangible and intangible assets acquired and liabilities assumed based on their respective fair market values, with the excess recorded as goodwill. The financial statements as of December 31, Year 2, reflect preliminary estimates of the fair market value for purchased intangibles. As of December 31, Year 3, the company completed the fair market value evaluation process for TRW and recorded an aggregate increase to goodwill of $1.6 billion.
Northrop Grumman reported goodwill of $17.3 billion on its balance sheet dated December 31, Year 3. The firm's statement of cash flows, under investing activities, reported only a minor amount for businesses acquired in Year 2.
Required
a. Northrop Grumman allocated the purchase price to tangible and intangible assets acquired in the TRW acquisition before allocating an excess amount to goodwill. Describe the type of assets - both tangible and intangible - that Northrop Grumman might have acquired from TRW.
b. TRW, Inc. was valued at $12.5 billion at the time of the acquisition and yet the firms' statement of cash flows reported no significant amounts for investing activities. Explain how this is possible.
c. Northrop Grumman recorded goodwill of $1.6 billion related to the TRW acquisition, and yet the balance sheet reported an ending balance for goodwill at December 31, Year 3, of $17.3 billion. What accounts for this large difference?
d. Describe the procedures followed by Northrop Grumman to arrive at the value for goodwill of $1.6 billion.
e. Statement No. 142 requires Northrop Grumman to assess goodwill for impairment. The firm has made many acquisitions over the years, in addition to the TRW acquisition. Review Northrop Grumman's web site (www.northropgrumman.com) and describe what disclosures the firm provides regarding its annual test of goodwill impairment.