A major Fortune 500 company (nonregulated) acquired a small company for $1B three years ago. When the parent company purchased this organization, it paid a 50% premium (of the then stock price) and recorded about 35% of the purchase price as goodwill. The amount of goodwill remains a significant asset on the companys books and records.

The subsidiary company is about to announce in a press release that, because of competitive pressures in the market place, it needs to reduce its current year forecasted sales and net income by 30% and 40& respectively. The companys executives believe this decrease will continue in future years. The CEO of the company asked you to prepare a paper explaining to the board of directors and executive management what type of complications this would have on the companys books and records.

1. What promulgated accounting literature should the company follow? Explain your rationale.