Having a negative book value is an indicator of impairment, but does not directly impact the goodwill impairment test calculation. With the issuance of ASU 2017-04, there are no longer any special considerations for reporting units that have negative book value and the test is the same for all reporting units regardless of book value. In this case, there will likely be no impairment as the fair value is most likely higher than zero.
A contemporaneous exchange of cash between the same debtor and creditor in connection with the issuance of a new debt instrument and satisfaction of an existing debt instrument by the debtor is accounted for under the debt modification guidance (ASC 470-50). You would need to apply the 10% cash flow test to determine if the transaction should be accounted for as a debt extinguishment or a modification. If the difference is at least 10%, the instruments are considered “substantially different” and you would account for it as an extinguishment and issuance of new debt.
You would defer the issuance costs as an asset and reclass them as a discount to the debt when the proceeds are received.
Although there is no conventional interest to be recorded, the Company will record interest expense for the amortization of the discount related to the issuance costs (and embedded derivatives, if any) that will be recognized using the effective interest method. There is no need to impute anything.
Typically, legal form debt will be considered a debt host, whereas an equity-linked instrument may represent either an equity host or a debt host. To determine whether the host is debt or equity, all terms and features should be considered, and each feature weighed based on relevant facts and circumstances. Debt-like indicators include redemption provisions, cumulative/mandatory fixed dividends, collateral and liquidation preference. Equity-like indicators include conversion options, voting rights, discretionary dividends based on earnings and participation in residual equity.
Paid-in-kind interest helps the company conserve cash by delaying interest payments. However, the interest will be added to the then outstanding principal each year until maturity, thereby increasing the amount of interest due to the effects of compounding interest. Each year after the issuance of the note, the interest expense will be impacted by the initial principal amount plus the “rolled-up” interest. Dividends or interest on a convertible instrument that are PIK should also be evaluated for a potential BCF.
If the costs were incurred by the company as part of its obligations to the customer, and the company is the principal, then the reimbursement would be considered revenue and should be presented gross. If the company paid a 3rd party on behalf of the customer (acted as an agent), it shouldn’t present the reimbursement as revenue.
An administrative task or set-up activity does not transfer control of a separate service to a customer from which they can benefit. Examples of set-up activities are things like putting processes in place and training employees. Examples of administrative tasks include credit checks and setting up the client’s account. When another entity can provide similar services to customers on a stand-alone basis or the customer could perform the tasks, it is a strong indicator the particular service is a promised service rather than a set-up activity.
Based on Example 12 in ASC 350-30-55, any cash flows from tradenames or offshoots underlying the original tradename may be combined with the tradename as a single unit of accounting for purposes of impairment testing. This is because they are simply a variation of the original trademark and are typically managed by a single brand manager.
If goodwill and other assets are assessed for impairment at the same time, the following is the order of assets to be assessed for impairment:
1) Other assets (i.e. accounts receivables, inventory, investments) under applicable guidance
2) Indefinite-lived intangibles under ASC 350
3) Long-lived assets- under ASC 360
4) Goodwill- ASC 350
Goodwill is assessed for impairment last because it is tested at the reporting unit level, which includes all the aforementioned assets in the reporting unit’s carrying value.
In general, the BOD would not be considered the CODM. The CODM is the highest level of management in a company that decides how to allocate resources and assess performance. On rare occasion, the BOD and management may jointly be considered the CODM if the BOD has responsibilities for making decisions on allocating resources (i.e. the P/E investors on the BOD of an entity they acquired).
There are no brightlines for reassessment of segments. An acquisition, a disposition, or change in management could warrant a change in operating segments. A change in the way that management operates the business could indicate a different number of operating segments. You will need to determine if the management reporting and management structure has changed.
Pursuant to ASC 805, any reacquired rights should be measured using a valuation technique that considers cash flow payments after a royalty to the acquirer for the right that is being reacquired, as the acquirer is already entitled to this royalty. The reacquired rights are typically valued using the excess earnings method based on the remaining contractual term of the franchise agreement. In accordance with ASC 805-20-30-20, the value of the reacquired right is based on the estimated cash flows over the remaining contractual life, even if market participants would reflect expected renewals.
Substantial goodwill is an important indicator that it’s a business. However, it does not by itself determine whether you acquired a business. You still need to go through the analysis to determine if a substantive process is acquired. If you determine no substantive process is acquired, then you will need to determine the reason why there is so much goodwill.
In this case, there is no enforceable right to extend that the lessee can exercise. However, if the company definitely intends to re-sign, the lessor has also confirmed that they intend to re-sign the lease, and the company has a history of re-signing the lease, then it is reasonably certain that the lease term will include the length of the re-signed lease.