Discuss and compare the 4 major alternative cost flow assumptions for inventory (specific identification, first-in, first-out, weighted average, and last-in, last-out). From the article "Valuing goodwill: not for profits prepare for annual impairment testing" February 2011, by Heuer & Travers- What are goodwill and intangible assets? What might you want to value these items? What is impairment testing?

Valuing Goodwill: US Not-For-Profits Prepare for Annual Impairment Testing November 2011 By Christian Heuer, Senior Manager, Crowe Horwath US, and Mary Ann Travers, Partner, Crowe Horwath US Recently updated US accounting standards raise the bar for not-forprofit healthcare organizations. Accounting Standards Codification (ASC) 350 (Intangibles - Goodwill and Other) and ASC 360 (Property, Plant, and Equipment) no longer apply only to for-profit entities. This change is set to have a dramatic impact, especially in the healthcare sector, as not-forprofits gear up for annual testing of goodwill impairment. What do the changes mean? is likely to have recorded goodwill and intangible assets as part of that transaction. Under ASC 350, not-forprofit organizations are now required to test goodwill and certain intangible assets for impairment at least annually, and to determine their respective fair values.1 Fair value can be viewed as the market price for an asset, as determined by market participants, at the date of measurement, and thus may differ from the book value. Assets are no longer confined to tangible assets (such as land and buildings); they also include intangible assets such as patents, intellectual property, brand names, non-compete agreements, and licenses. Any not-for-profit entity that has made an acquisition since 1 January 2010 HYPOTHETICAL EXAMPLE OF TWO-STEP PROCESS FOR GOODWILL IMPAIRMENT TESTING Step 1: Determine fair value of entire reporting unit (the component of the entity that has recorded goodwill). Compare fair value of reporting unit to book value (net assets or equity) of reporting unit. Fair value of reporting unit exceeds book value >> No goodwill impairment is indicated. Fair value of reporting unit less than book value >> Potential goodwill impairment is indicated, and Step 2 is performed. Step 2: The impairment amount is not determined by comparing the book value ($160 in example) and fair value of reporting unit ($150 in example). First, determine separate fair values of each asset and liability other than goodwill. Next, determine implied value of goodwill by assigning amount that will cause net fair value of all assets and liabilities to equal fair value of reporting unit. The impairment amount is $15 in the example, or the difference between $20 (book value) and $5 (fair value) of goodwill. 1 Step 1 Book Value Step 2 Fair Values Other Than Goodwill Fair Values Current assets $115 $115 Tangible assets $50 $55 $55 Intangible assets $25 $30 $30 Goodwill $20 - Impairment $115 Other assets $5* $5 $5 $5 $215 $205 $210 Current liabilities $10 $10 $10 Long-term liabilities $45 $50 $15 $50 Total assets Total liabilities $55 $60 $60 Net assets (book value) $160 $145 $150 Fair value of reporting unit $150** $150 $150 * Implied value of goodwill to balance net fair value to fair value of reporting unit. ** Since fair value of reporting unit of $150 is less than book value of $160, there is potential impairment and Step 2 is required. ASC 350 includes the accounting guidance formerly known as Statement of Financial Accounting Standards (SFAS) Statement No. 142. Audit | Tax | Advisory 2011 Crowe Horwath International www.crowehorwath.net 1 November 2011 Historically, not-for-profit entities recorded assets gained in an acquisition or merger at book value. ASC 958 now requires that upon an acquisition, an organisation must allocate the purchase price to the assets of the acquired entity. The purchase price less the fair value of separately identifiable assets is recorded as goodwill. Next, the implied fair value of goodwill is determined by comparing the Step 1 fair value of the reporting unit with the total Step 2 fair value amounts assigned to all assets and liabilities (other than goodwill). The excess of the fair value of the reporting unit (Step 1) over the total fair value assigned to net assets and liabilities (Step 2) is the implied fair value of goodwill. Two-step process for goodwill impairment testing If the implied fair value of goodwill is less than the carrying amount of goodwill, the organization takes an impairment charge to reduce goodwill to the implied fair value. This adjusted carrying amount is the new accounting basis of goodwill, and the impairment loss may not be reversed in future periods. Impairment testing for goodwill is a two-step process, beginning with a thorough analysis that requires fair value estimates and a yes-or-no determination of impairment. If the answer to Step 1 is affirmative, the healthcare organization needs to proceed to Step 2 and determine the magnitude of the impairment. Step 1: initial analysis. Test for impairment of goodwill, using the fair value standard. Does fair value of the applicable reporting unit exceed the carrying (book) value? If so, there is no impairment and the annual testing process is complete. But if the book value of a reporting unit is greater than fair value, then the second step is necessary. Step 2: calculation of magnitude. After determining in Step 1 that impairment exists, a healthcare organization should determine the fair value of all its individual assets and liabilities, including tangible assets (such as land, buildings, and equipment), intangible assets, and any contingent liabilities. The process is similar to the valuation and accounting required in a purchase price allocation after an acquisition transaction is completed. In the case of impairment testing under Step 2, these fair values are not recorded in the financial statements; rather, the values are used only to determine the amount of goodwill. 2 3 The table on page 2 shows a hypothetical example of the two-step process for goodwill impairment testing. Two-step process for amortizable intangible assets Impairment testing for amortizable intangible assets is also a two-step process, but it differs from the process for goodwill. In contrast to ASC 350, where fair value is the sole standard for goodwill, ASC 360 also prescribes the use of undiscounted cash flows to test amortizable intangible assets (that is, assets with a finite life, such as a medical device patent or a covenant not to compete) for recoverability.2 Another significant difference is the use of market participant assumptions for purposes of ASC 350 and organization specific assumptions for the purposes of recoverability under ASC 360. Finally, rather than an annual impairment test, intangible assets are tested for impairment when an event or a change in circumstances indicates that the carrying amount might not be recoverable. To test intangible assets subject to amortization, organizations need to compare undiscounted cash flows expected to result from the use of the asset - or an asset group - with the carrying value. If the undiscounted cash flows exceed carrying value, no further steps are required. However, if the sum of undiscounted cash flows is less than carrying value, an impairment loss would be recorded to the extent that the carrying value exceeds the fair value of the asset or asset group. Thus, for amortizable intangible assets, the two-step process involves comparing both the undiscounted cash flows and the fair value to determine impairment. The table on the following page shows a hypothetical example of the two-step process for amortizable intangible assets. Most intangible assets can be amortized Most intangible assets have limited lives. A research institution, for example, might have patents that expire after a given time. Even in the case of unpatented proprietary technology, the asset typically has a limited economic life, especially in the medical field, where procedures are continually being improved. The valuation process requires wellreasoned judgment. A health system might have a well-known name but abandon this brand for other reasons. For example, in 2010, the Clarian Health system of Indiana in the US decided to realign with the Indiana University Health brand name. This change could considerably increase the market value of the Indiana University Health brand while diminishing the Clarian brand.3 ASC 360 includes the accounting guidance formerly known as SFAS No. 144. Wall, J. K., \"Clarian Hospital System to Adopt IU Name\