1.Go to page 676-677 of the text which is part of the Integrative Case 8.1. Read Note 2 and answer only question c of the requirements on page 677.

Excerpts from Note 2: Acquisitions

On July 3, 2012, we acquired 100% ownership interest in Bay Bread, LLC and its La Boulange bakery brand (collectively La Boulange), to elevate our core food offerings and build a premium, artisanal bakery brand. We acquired La Boulange for a purchase price of approximately$100 million in cash. The following table summarizes the allocation of the purchase price to the fair values of the assets acquired and liabilities assumed on the closing date (in millions):

Fair Value at July 3, 2012

Property, plant and equipment $18.1

Intangible assets 24.3

Goodwill 58.7

Other current and noncurrent assets 5.1

Current liabilities (6.4)

Total cash paid $99.8

The assets acquired and liabilities assumed are included in our Americas operating segment. Other current assets acquired primarily include cash, trade receivables, and inventory. In addition, we assumed various current liabilities primarily consisting of accounts payable and accrued payroll related liabilities. The intangible assets acquired as part of the transaction include the La Boulange trade name and proprietary recipes and processes. The La Boulange trade name was valued at$9.7 million and determined to have an indenite life while the intangible asset relating to the proprietary recipes and processes was valued at $14.6 million and will be amortized over a period of 10 years. The $58.7 million of goodwill is deductible for income tax purposes and was allocated to our Americas operating segment.

C. At the date of acquisition, it is likely that the La Boulange trade name and proprietary recipes and processes had book values near $0. One year later, what amounts will be shown in Bay Breads own nancial statements for:

Trade name

Proprietary recipes and processes

Goodwill

One year later, what amounts will be shown in Starbucks consolidated nancial statements for:

Trade name

Proprietary recipes and processes

Goodwill

Depreciation and amortization expense

2.Evaluate whether goodwill is an asset whose useful life and probable future benefits are indeterminate and, thus, should not be amortized or whether goodwill should be amortized over time, even if that time period is arbitrarily determined.

3.Companies tend to find goodwill to be impaired in periods when sales revenue is depressed or, for other reasons, operating income is depressed. Why would this situation make sense or not?

I also posted an article about goodwill .

Accounting for goodwill has long been controversial. Much of the controversy has revolved around the recognition and measurement of goodwill assets that arise from business combinations. Significant changes to ac- counting standards for such assets were made in the early 2000s, but preparers, auditors, and users of financial statements continue to press for change. In most cases, the change that those stakeholders are seeking is essentially a reversion to previous standards. This column will explore recent actions that standards setters have taken toward reinstating traditional accounting for goodwill.

Background

Unlike other assets, goodwill cant stand aloneit isnt separable or distinct from the reporting entity as a whole. Under U.S. Generally Accepted Accounting Principles (GAAP) and International Financial Reporting Standards (IFRS), goodwill is recognized only as a result of a business combination or similar transaction involving not-for-profit entities. In such transactions, goodwill reflects the extent to which the acquisition price paid for the acquired entity, as a whole, exceeds the sum of the individual fair values of the entitys net assets (i.e., assets less liabilities). That measurement approach has led to goodwill being described as the amount by which the whole is greater than the sum of its parts.

Both U.S. GAAP and IFRS con- sider goodwill to be an intangible asset that has an indefinite useful life. As such, it isnt systematically amortized to expense over time like other intangible assets, but it must be tested regularly for impairment. In practice, goodwill al- most always gets written down over time as a result of impairment testing, and it often becomes significantly impaired relatively soon after its initial recognition.

Investors, creditors, and other users of financial statements have questioned the usefulness of re- porting goodwill. Goodwill has no realizable value by itself. It cant be used as collateral for borrowing. And under current accounting standards, the measurement of goodwill subsequent to its initial recognition involves significant estimation and judgment. For all these reasons, financial-statement users often ignore goodwill when analyzing financial statements and make a corresponding mental deduction from the reporting entitys equity. Additionally, preparers and users of financial statements have expressed concerns about the cost and complexity of the goodwill-impairment testing that current accounting standards require.

Walking It Back

The current accounting treatment of goodwill is relatively new. Be- fore the Financial Accounting Standards Board (FASB) issued Statement of Financial Accounting Standards No. 142 (SFAS No. 142), Goodwill and Other Intangible Assets, in 2001 and the International Accounting Standards Board (IASB) issued IFRS 3, Business Combinations, in 2004, goodwill was amortized and not continually subject to costly and complex impairment testing.

In recent years, there have been several standards-setting initiatives that have effectively revived this older accounting treatment for goodwill. For example, in July 2009, the IASB published the International Financial Reporting Standard for Small and Medium- sized Entities (IFRS for SMEs). As I explained in my September 2009 column, A Game-Changer for Small-Business Accounting, the IFRS for SMEs is a complete set of country-neutral financial accounting and reporting standards for entities that lack public account- ability, which are typically smaller than entities that are publicly ac- countable. Under the IFRS for SMEs, goodwill must be amortized over its estimated useful life, with a maximum amortization period of 10 years.

More recently, on June 10, 2013, the FASB endorsed, for purposes of public exposure, a recommendation by its Private Company Council (PCC) to modify U.S. GAAP such that a private company could elect to amortize goodwill over a period not to exceed 10 years. The PCCs recommendation also included simplified impairment testing for goodwill.

On the same day, the American Institute of Certified Public Accountants (AICPA) released a new non-GAAP set of accounting standards called the Financial Reporting Framework for Small and Medium-Sized Entities (FRF for SMEs). The Framework requires that goodwill be amortized over the same period as that used for federal income tax purposesor, if not amortized for federal in- come tax purposes, then a period of 15 years. Furthermore, the Framework doesnt require goodwill to be tested for impairment.

Outlook

Debate and discussion about alter- natives to current goodwill ac- counting continue. On June 7, 2013, the European Financial Reporting Advisory Group (EFRAG) published a Feedback Statement that summarized responses the Group obtained from a questionnaire about the measurement of goodwill subsequent to its initial recognition. The Statement, available at www.efrag.org, does an excellent job of summarizing the thinking of diverse stakeholders on key issues related to goodwill accounting.

Will contemporary accounting standards for goodwill eventually be considered a failed experiment? Its too soon to say for sure. But based on the present sentiments of participants in the financial reporting supply chain, future goodwill-accounting standards may bear a greater resemblance to past standards.