Reference no: EM132930476
Question - Gator Electronics Inc. (Gator), an SEC registrant, is an electronics manufacturer that sells electronic products to third-party retail centers in approximately 100 countries. Gator has identified its reporting units as geographical regions in which it operates, and the chief decision makers manage and review operating results and performance. The reporting units are:
United States.
South America.
Canada.
Asia.
Europe, Africa, and the Middle East.
You are planning to audit the current-year goodwill impairment analysis of Gator. Gator's total assets as of December 31, 20X3, (X3 is after 12/15/19) are approximately $1.6 billion. Revenue and net income for the year ended December 31, 20X3, are approximately $1.7 billion and $100 million, respectively.
Gator has performed its annual goodwill impairment analysis as of December 31, 20X3, with the assistance of an external valuation specialist, Management's Expert. Gator elected not to perform the qualitative assessment for determining whether it is more likely than not that the fair value of a reporting unit is less than the carrying amount; it proceeded with a quantitative goodwill impairment test for all reporting units.
On the basis of the valuation prepared by Management's Expert, Gator estimated that the fair value of all the reporting units exceeded their respective carrying values, however, Under ASU 2017-04 companies must record goodwill impairment charges if a reporting unit carrying value exceeds its fair value.
The focus of this case study will be on the U.S. reporting unit.
The engagement partner has asked you to review Gator's discounted cash flow analysis (part of determining fair value of the reporting unit) to determine what audit procedures should be performed. Gator management has also provided the valuation schedules and a memo documenting its strategy. All the data is included in the information packet.
Required -
1. What are some of the key assumptions within Gator's discounted cash flow analysis?
2. What questions or concerns do you have for management on some of these key assumptions?
3. What audit procedures could you perform on some of the significant business assumptions within Gator's discounted cash flow analysis?