ROBINSON Industries is a publicly traded company and files its annual financial statements with the SEC. ROBINSON produces and sells products in several sectors of the U.S. economy. One of ROBINSONs major segments, which meets the Financial Accounting Standards Board (FASB) definition of an operating segment, is its semiconductor business comprised of two subsidiary companies: DARDEN Technologies (80 percent owned and publicly traded), and ZEN Systems (wholly owned). DARDEN Technologies (hereafter, DARDEN) is headquartered in the northeastern section 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 2016, ROBINSON acquired 80 percent of DARDENs common stock, a transaction resulting in $150 million of recognized goodwill. ZEN Systems (hereafter, ZEN), 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 ZEN in early 2011, ROBINSON recorded $50 million of goodwill. While the two subsidiaries are classified within the same segment for segment reporting purposes, they are distinct entities and have no intercompany transactions.

DARDEN

Industry Information

The production of the electronic sensors and indicators sold by DARDEN and its competitors occurs in a highly structured, semi-automated environment. Accordingly, the industry has established consistent guidelines and best practices as they relate to manufacturing. Consistent with this high level of automation, a large labor union actively represents the employees of almost every company in the industry through a collective bargaining process. 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 percent in the past year.

While those within the industry view the new manufacturing advancements positively, the related practices used by the companies have faced scrutiny recently due to their extensive 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 DARDENs workforce.

Organizational Information

DARDENs strategic initiatives begin with the seven executives making up its senior management team. Overall, the company employs approximately 1,500 employees, 102 of which staff the accounting department. Recently, the employees of DARDEN successfully secured a collective bargaining agreement with the backing of the major union within the industry. The agreement becomes effective in the first quarter of calendar 2021.

DARDENs production process for sensors and indicators fits the standards and best practices of the industry. The company uses a mostly automated assembly line, which is staffed by a number of machine operators, quality control technicians, and supervisors. These employees receive extensive training through industry workshops, as well as industry training booklets. The production department performs two daily production runs six days a week for 50 weeks during each year. DARDEN has 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. During the current year, the typical cost of producing a sensor was approximately $800, and the company consistently applies a 25 percent markup on cost in establishing the sales price. DARDEN sells its finished sensors and indicators through a number of domestic and international distributors. The domestic distributors also engage in the distribution of replacement parts for computers and high-end medical equipment.

To address the government agencies recent scrutiny regarding industry practices pertaining to environment and workplace issues, DARDENs manufacturing personnel recently developed plans to institute compliance and reporting systems within the manufacturing department. The system involves the addition of employees whom will administer self-audits of the companys emissions, investigate working conditions, and design practices to better track the companys carbon emissions and activities aimed at enhancing workplace safety. No other companies in the industry have created such a monitoring mechanism. Management feels that such a system is necessary as part of its long-term objectives in order to respond to recent and future increases in regulatory activity.

DARDEN has experienced stable growth and profitability since its acquisition by ROBINSON. In 2019, the companys gross margin held steady at approximately 20 percent, three percentage points above the industry average for the year. In August 2019, ROBINSON executives ordered appraisals of all of its holdings as part of a strategic management initiative. The independent appraisal company valued DARDENs business at $830 million, based upon earnings multiples derived in conjunction with analysis of other companies within DARDENs industry. As of December 31, 2019, DARDEN had 30,000,000 shares of common stock issued and outstanding. The per share price of DARDENs common stock gradually decreased during 2019 from $27/share on January 1, 2019 to $23/share on December 31, 2019. A condensed summary of balance sheet information (in millions) for DARDEN as of December 31, 2019 is presented below.

DARDEN Technologies

Current Assets	$2,555
Non-Current Assets (including Goodwill)	$3,714
Current Liabilities	$2,161
Non-Current Liabilities	$3,335

ZEN Systems

Industry Information

ZEN operates in a loosely organized industry that includes only a few competitors. Each companys product contains technology distinctly different from that of the competition and thus a significant amount of variability exists between the manufacturing processes of competitors in the industry. As a result, the companies share very little information. Differences within the industry, including the uniqueness of the technologies employed, have made it virtually impossible for new potential competitors to carve a niche within this industry sector. In fact, in the past six years, the number of competitors has remained constant. Because of the role this industry plays in enhancing agricultural innovation and cultivation, federal and state government leaders have taken an interest in creating a business-friendly atmosphere for companies in this industry committed to enhancing the competitive advantage of our nations farmers and ranchers.

Organizational Information

ZEN is considered among customers and other industry participants as the driver of agricultural innovation, being the foremost competitor in the industry. Because of ZENs established reputation, the companys market share is dominant in this industry. ROBINSONs executives consider ZEN as one of its best enterprises. ZEN stands apart from its competitors because of the state-of-the-art manufacturing process management developed over the course of several years. The production system for the sensor devices involves specialized welding, fusing, assembly, and quality control. ZEN managers have worked diligently to develop a patent for the companys unique manufacturing process and methodology. As of December 31, 2019, the patent application was pending approval, but management remains optimistic the application will ultimately be approved by the United States Patent Office.

In addition, during the past two years, company scientists advanced some technology and created protocols substantially reducing the usage of precious metals and hazardous materials, allowing production operators to complete the welding and fusing of the materials at less-extreme machine temperatures. As a result, the company has reduced its utility costs by 15 percent each year for the past two years, pushing the companys gross profit margin to 35 percent. Due to these utility cost improvements, ZEN recently became eligible for a state-administered manufacturer energy savings incentive subsidy. This improvement in energy efficiency also caught the eye of environmental and sustainable business organizations, and the company recently won an industry award for its sustainable business practices.

The company produces one batch of sensors each weekday during 46 weeks of the calendar year. During 2019, the average cost of one sensor was $1,495 marked up by 53.85 percentin the market. ZEN runs an in-house distribution system, working directly with agricultural companies, as well as a few sizable farms/ranches to fill customer orders.

ZEN employs 1,200 individuals, including 12 members in executive management positions. The accounting and finance department is staffed with 86 employees. In general, management maintains a very good relationship with most of its individual employees, several of whom speak very highly of the family-like atmosphere surrounding the companys operations. As a result, employee turnover is minimal at ZEN.

During the round of August 2019 independent appraisals, ZEN was valued at $1.1 billion, a figure derived by using the same valuation methodology applied to ROBINSONs other subsidiaries, including DARDEN. A condensed summary of balance sheet information (in millions) for ZEN as of December 31, 2019 is presented below.

ZEN Systems

Current Assets	$3,000
Non-Current Assets (including Goodwill)	$1,346
Current Liabilities	$1,456
Non-Current Liabilities	$1,960

Requirements

Financial reporting personnel at ROBINSON are in the process of completing year-end activities, including necessary adjusting entries to the consolidated financial statements. While ROBINSON has not previously believed it necessary to adjust its recognized goodwill from the DARDEN and ZEN acquisitions, the valuation of goodwill is, nonetheless, a prominent concern in the closing process.

ROBINSON is your firms client. Your group is part of a larger audit team for the year-end audit. Your team has been assigned to this project by the audit partner, who has prepared a list of issues she wants to be examined and presented to the client. Your group has been asked to research the financial statement issues surrounding the goodwill recorded for the DARDEN and ZEN subsidiaries. You will address research and respond to the following questions/statements and present your research and recommendations to ROBINSONs accounting staff who do not have an in-depth knowledge of this area of accounting.

1. Beyond the assessment of qualitative factors, what other evidence should be considered for the purposes of the analysis? What does this information suggest? With respect to DARDEN, what do you think is the most appropriate fair value amount to use in assessing the fair value of this reporting unit? Explain. Why is this important?
2. Based upon your initial analysis, do you think the $200 million goodwill balance (i.e., the $150 million for DARDEN and the $50 million for ZEN) is the appropriate valuation for goodwill on the December 31, 2019 balance sheet of ROBINSON?