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

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Accounting rules have a substantial effect on financial statements. How do companies account for and apply goodwill? Consider the article "Talbots Inc. and Subsidiaries: Accounting for Goodwill" (Bruns, 2008). Next, using outside sources that you may seek and your professional experience, develop and write a 3 page paper concisely answering the following questions:

(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 answering the question?

(A6.3) What must be known, estimated, and assumed to answer the research question?

(A6.4) Do you believe Talbots' accounting for goodwill in the case was appropriate? Why or why not? Is it possible to arrive at an alternative accounting treatment of goodwill based on your analysis?

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Solution Summary

This solution explains the issues relating to accounting in the case study The Talbots, Inc., and Subsidiaries: Accounting for Goodwill. The sources used are also included in the solution.

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Step 1
The accounting research question is:
Was the recording of impairment of goodwill and trademarks of $149.6 million in 2007 equitable?

Step 2
The Talbots consider the accounting standard of $FAS No. 142 which requires that goodwill and other tangible assets should be reviewed annually for impairment or more frequently if impairment indicators arise.
The accounting standards that Talbots must consider are the US GAAP or GAAP. The FASB has expressed US GAAP in XBRL beginning in 2008. The development of the GAAP is influenced by the United States Securities and Exchange Commission, the American Institute of Certified Public Accountants, and the Financial Accounting Standards Board. Goodwill arises when one company acquires another but pays more than the fair market value of the net assets. This is an intangible asset and according to the International Financial Reporting Standards, goodwill should not be amortized. Before 2001 US companies used pooling of interest methods. However, FAS 141 has disallowed this method.
Under FAS 142, Goodwill cannot be amortized under the US GAAP. Under both IFRS and US GAAP Goodwill can only be impaired. Under these standards companies are required to determine the fair value of the reporting units, using present value of future cash flow and compare it to their carrying value. If the fair value is less than ...

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