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(A6.1) If you were an accountant for Talbots, what specifically would be the relevant accounting research question relating to the case? (A6.2) What accounting standards must Talbots consider when...

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The Talbots, Inc., and Subsidiaries: Accounting for Goodwill
________________________________________________________________________________________________________________

Professor William J. Bruns prepared this case solely as a basis for class discussion and not as an endorsement, a source of primary data, or an
illustration of effective or ineffective management. This case was developed from published sources.

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write Harvard Business Publishing, Boston, MA 02163, or go to http:
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W I L L I A M J . B R U N S
The Talbots, Inc., and Subsidiaries:
Accounting for Goodwill
“This is what passes for good news at Talbots, Inc. these days: The bad news wasn’t as bad as most people
had feared.
Talbots, the women’s clothing retailer from Hingham [Massachusetts], told investors yesterday that it lost
$171 million in the final quarter of its fiscal year, when sales fell nearly 8 percent. The company’s stock climbed
more than 11 percent, its best day in over a month.
— Steven Syre, “Losing, but in a good way,” The Boston Globe, March 13, 2008, p. E1.
Talbots, Inc., was an international specialty retailer and direct marketer of women’s apparel,
shoes, and accessories. On May 3, 2006, the company acquired J. Jill, another multi-channel specialty
etailer of women’s apparel. Both companies operated stores under their
and names, and both
made extensive use of sales catalogs and websites. Both focused their selection and merchandising
on women 35 and older, but each had a different style.
Talbots
and merchandising promoted the “cu
ent classic look” emphasizing timeless cu
ent
styles and quality, a variety of key basic and fashion items, and a complementary assortment of
accessories and shoes to enable customers to assemble complete wardrobes. Consistency in color,
fa
ic, and fit of Talbots-
and merchandise allowed customers to create wardrobes across seasons
and years. The company believed that a majority of Talbots-
and customers were high-income,
college-educated, and employed primarily in professional and managerial occupations.
J. Jill merchandising strategy focused on offering easy sophistication for every day. The company
elieved that J. Jill
and merchandise reflected its core customers’ desires and needs—style, comfort,
individuality, artistic simplicity, a woman’s version of femininity and community. Customers were
thought to be mid- to high-income, well-educated, employed in a managerial or leadership role, and
attracted to the J. Jill
and by its unique aesthetic style, exceptional customer service, and quality of
well-priced merchandise.
J. Jill was purchased for $518 million in cash. Since the amount paid exceeded the fair market
value of the net physical assets acquired, Talbots was required to recognize goodwill, trademarks,
and other intangible assets included in the purchase price. The acquisition was detailed in the
Talbots annual report on the Form 10-K filed with the U.S. Securities and Exchange Commission for
fiscal year XXXXXXXXXXAn excerpt from that report is shown in Exhibit 1, which gives details of the
3254
O C T O B E R 1 0 , XXXXXXXXXX
This document is authorized for use only by Jennifer Robinson in ACCT-6140-1,Cu
ent Trends Acct Standards.2020 Summer Sem 05/04-08/23-PT2 at Laureate Education - Walden University,
2020.
3254 | The Talbots, Inc., and Subsidiaries: Accounting for Goodwill
2 BRIEFCASES | HARVARD BUSINESS SCHOOL
purchase and the allocation of the excess of the purchase price over the fair value of tangible and
identifiable intangible net assets and liabilities assumed by Talbots.
Accounting for Goodwill
Although goodwill generated internally is never recognized as an asset, when one business
purchases another, the amount paid would be equal to the fair market value of tangible assets only
y rare coincidence. Instead, any excess paid over the value of tangible and identifiable intangible
assets is recorded as goodwill. Companies often pay more to acquire another company than the fair
value of tangible assets purchased because of trademarks acquired, existing leases, assumed
customer loyalty, or other intangible assets such as reputation. Once goodwill is recognized and
ecorded, accountants have used various methods to account for goodwill in order to match its cost
with revenues in subsequent accounting periods. At least four possible treatments have been
proposed and used in recent years.
Estimated life amortization. Until January 2001, when the Financial Accounting Standards Board
issued Statement of Financial Accounting Standards No. 142, goodwill was amortized over its
estimated life, but not to exceed 40 years. Companies charged goodwill amortization as an expense
that reduced net income similar to the accounting treatment of depreciation. Intangible assets could
e separately identified, and they would be accounted for appropriately for their type. The required
amortization of goodwill, and the fact that internally created goodwill could not be capitalized to
offset the expense of goodwill amortization, promoted the use of a method of accounting for mergers
known as “pooling of interests” which recognized no goodwill. Pooling-of-interests accounting was
declared to be no longer part of generally accepted accounting principles (GAAP) in 2001 by the
Financial Accounting Standards Board.
Goodwill as a permanent asset. Another approach to accounting for goodwill would recognize
goodwill at the time of a purchase of one company by another, but not require any subsequent
amortization or adjustment. That approach seems unrealistic and flawed. The conditions and factors
that might lead to an acquiring company to pay more than the fair value for assets at one time would
change, and the changing value of goodwill would not be accurately reported in financial statements.
In considering this possibility the Financial Accounting Standards Board considered changing the
maximum amortization to 20 years or using some other test for goodwill reporting, but these
alternatives were rejected in 2001.
Eliminating goodwill at the time of acquisition. In some countries and situations, goodwill was
immediately written down to zero when it was acquired, using a direct write-off to retained earnings
or stockholders’ equity.
Using an impairment test to recognize changes in goodwill. The goodwill impairment test is a
two-step impairment test. First, the fair value of each reporting unit is determined using a
combination of a discounted cash flow and a market value approach. The evaluation of goodwill
equires the use of significant judgments and estimates. If the fair value of the reporting unit exceeds
the ca
ying value of the net assets of that reporting unit, goodwill is not impaired and no further
testing is required. If the ca
ying value of the net assets assigned to the reporting unit exceeds the
fair value of the reporting unit, then a second step is required to determine the implied fair value of
the reporting unit’s goodwill to be compared to the ca
ying value of the reporting unit’s goodwill.
The activities in the second step include valuing the tangible and intangible assets and liabilities of
the impaired reporting unit’s goodwill based on the residual of the summed identified tangible and
intangible assets and liabilities. If the fair value is less than the ca
ying value, goodwill is considered
impaired and its ca
ying amount must be reduced by reducing income for that period. When the
This document is authorized for use only by Jennifer Robinson in ACCT-6140-1,Cu
ent Trends Acct Standards.2020 Summer Sem 05/04-08/23-PT2 at Laureate Education - Walden University,
2020.
The Talbots, Inc., and Subsidiaries: Accounting for Goodwill | 3254
HARVARD BUSINESS SCHOOL | BRIEFCASES 3
ca
ying amount of any long-lived asset is no longer recoverable, a company is required to write off
the cost that no longer has value.
In 2001, Statement of Financial Accounting Standards No. 142 mandated that accounting for
goodwill be based on the impairment model using the two-step process. Once goodwill is impaired
and written off, it can never be restored to its original ca
ying amount.
International Financial Reporting Standards also use impairment tests for assets and goodwill. If
an impairment of goodwill is recognized, that loss cannot be reversed. However, for other assets,
impairment losses can be reversed (and recognized in the income statement) so long as the ca
ying
amounts do not exceed the depreciated historical cost if the impairment had not been recognized.
Goodwill and Intangible Assets at Talbots
A summary of accounting for goodwill and intangible assets for Talbots in 2006 is shown in
Exhibit 2. In its 2006 Form 10-K filed with the Securities and Exchange Commission, the Company
explained its accounting policies for impairments of long-term assets, goodwill, and other intangible
assets as follows:
Impairment of Long-lived Assets. The Company periodically reviews the period of depreciation or
amortization for long-lived assets in accordance with SFAS No. 144, Accounting for the Impairment or
Disposal of Long-lived Assets, to determine whether cu
ent circumstances wa
ant revised estimates of
useful lives. The Company monitors the ca
ying value of its assets for potential impairment based
primarily on projected future cash flows. If an impairment is identified, the ca
ying value of the asset is
compared to its estimated fair value, and provisions for impairment is recorded as appropriate.
Impairment losses are significantly impacted by estimates of future operating cash flows and
estimates of fair value. While the Company believes that its estimates are reasonable, different
assumptions regarding items such as future cash flows could affect the Company’s evaluations and result
in impairment charges against the ca
ying value of those assets.
Impairment of Goodwill and Other Intangible Assets. The Company applies the provisions of
SFAS No. 142, Goodwill and Other Intangible Assets, to goodwill and trademarks and reviews annually for
impairment or more frequently if impairment indicators arise. The Company has elected the first day of
each fiscal year as its annual measurement date. No impairment charges were recorded during the fiscal
years ending Fe
uary 3, 2007, January 28, 2006, and January 29, 2005. In assessing impairment for
goodwill and trademarks
Answered Same Day Jun 13, 2021

Solution

Tanmoy answered on Jun 14 2021
150 Votes
The Talbots Inc. & subsidiaries: Accounting for Goodwill
(A6.1) If you were an accountant for Talbots, what specifically would be the relevant accounting research question relating to the case?
As per the case study, as an accountant there relevant accounting research questions that will arise is firstly, although of the sales declined by 8% compared to the previous year and the stock price have climbed by 11%, how can the fall in sales boost the shareholders sentiments in future. This will definitely impact the dividend of the investors as the earnings of the company have decreased.
Secondly, it is stated that the goodwill impairment charges were not recorded for the fiscal year Fe
uary 3rd 2007, January 28th 2006 and January 29th 2005. This could result in overestimation of the net worth or the company value. Goodwill consists of a large part of the Talbots Company’s value. Hence, it needs to be confirmed for impairment annually. It cannot be only amortized just like any other assets.
(A6.2) What accounting standards must Talbots consider when answering the question?
Talbot Inc should take into account the following accounting standards while answering the questions. They are: accounting and impairment for Goodwill, SFAS No. 142, FASB and other Intangible assets.
As per the accounting standards 2001, it has been mandatory to impair goodwill based on a two step model. The first is that once the goodwill has been impaired and charged it can never be re-established to the original book value or ca
ying cost. If goodwill has been charged to impairment and the goodwill incurs a loss then the loss cannot be reversed. Therefore, IFRS uses the test of impairment for accounting of goodwill and other intangible assets. For other asset accounting, the loss on impairment can be reversed and will be recognised in the books of income statement. This can only be done until the ca
ying costs do not surpass the deflated historical value when the cost of impairment is unrecognised.
Apart from that, as per SFAS No. 142 there have been two modifications related to the accounting of goodwill which are as...
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