Jackson Enterprises

Jackson Enterprises (JE) is a publicly traded company following IFRS that produces and sells products in several sectors of the U.S. economy. One of JEs major segments is its semiconductor business and comprises two subsidiary companies: Dynamic Technologies (80% owned and publicly traded) and ZD Systems (wholly owned).

Dynamic is headquartered in the northwestern part of the U.S. and specializes in the manufacture of electronic sensors and indicators used on automated production systems in North America, Europe and Asia. In 2011, JE acquired 80% of Dynamics common stock, a transaction resulting in $150 million of recognized goodwill.

ZD, a company headquartered in the mid-western section of the U.S., manufactures sensor-type devices used solely for agricultural machines and systems in the U.S. At the time of the acquisition of ZD in early 2006, JE recorded $50 million of goodwill. The two subsidiaries are classified within the same segment for segment reporting purposes, but they are distinct entities and have no intercompany transactions.

The production of the electronic sensors and indicators sold by Dynamic and its competitors occurs in a highly structured, semi-automated environment. Recently, the industry experienced an influx of technological advancements to its standard manufacturing process. Such innovations allow the companies to better track raw materials throughout every production run, ultimately reducing the waste normally present in the manufacturing process. The technology is easily accessible to existing and potential industry participants; as a result, the number of competitors increased by 35% in the past year.

The recent advancements in technology have drawn attention to the prior and current practices used by companies and their environmental and workplace impacts. The average manufacturing plant in the industry emits carbon at higher rates than some automobile manufacturers. As a result, many companies have been subject to the close eye of federal and state environmental agencies. Both regulators and union representatives have claimed that pollution poses health hazards to Dynamics workforce.

Some companies in the industry have started to implement a monitoring, self-auditing mechanism for tracking carbon emissions and developing activities aimed at enhancing workplace safety. Dynamics top management has begun considering a course of action to address the government agencies recent scrutiny, but management and the board of directors cannot reach a consensus as to what exactly should be done. Their employees already receive extensive training through industry workshops, as well as industry training booklets, and the CFO agrees that employees are essential assets for the firm.

Dynamic has also been able to keep material costs low relative to its competitors due to some negotiated short-term purchase commitments with suppliers in the past three years. As a result, Dynamic has experienced stable growth and profitability since its acquisition by JE. In 2014, the companys gross margin held steady at approximately 20%, three percentage points above the industry average for the year. 1 Adapted from McNellis, Premuroso and Houmes (2015) Issues in Accounting Education.

In August 2014, JE executives ordered appraisals of all of its holdings as part of a strategic management initiative. The independent appraisal company valued Dynamics business at $830 million, based upon earnings multiples derived in conjunction with analysis of other companies within Dynamics industry. As of December 31, 2014, Dynamic had 30 million shares of common stock issued and outstanding. The per share price gradually decreased during 2014 from $27/share on January 1, 2014, to $23/share on December 31, 2014. A condensed summary of consolidated balance sheet information (in millions) that relates to Dynamic as of December 31, 2014 is presented below.

Dynamic

Current assets $2,555

Non-current assets (including Goodwill) $3,714

Current iabilities $2,161

Non-current liabilities $3,335

Required: Prepare a memo detailing the accounting/financial reporting issues involved and the judgments you believe that JE could make in relation to these issues. Do you think that the $200 million goodwill balance is appropriate on JEs consolidated financial statements?