Using the Codification to Research a Complex Accounting Issue: the Case of Goodwill Impairment at Jackson Enterprises

Memorandum

To: Jackson Enterprises

Date: 02/23/2016

Re: Using the Codification to Research a Complex Accounting Issue: The Case of Goodwill Impairment at Jackson Enterprises

Facts

Jackson Enterprises (JE) is a publicly traded company, that consists of two subsidiary companies: Dynamic Technologies and ZD Systems. Dynamic Technologies is 80 percent owned and publicly traded. The company is headquartered in the northeastern section of the U.S. and they manufacture electronic sensors and indicators used on automated production systems in North America, Europe, and Asia. ZD systems manufactures sensor-type devices used mainly for agricultural machines and systems in the U.S. ZD is headquartered in the mid-western section of the U.S. Jackson Enterprises acquired Dynamic Technologies in 2011, and recognized $150 million of goodwill. ZD was acquired by JE in 2006, and resulted in $50 million of goodwill. The two subsidiaries are classified in the same segment for reporting purposes, although they are separate entities and lack intercompany transactions.

Dynamic

Overall, Dynamic employs around 1,500 people, 102 of which make up the accounting department, and have seven executives making up the senior management team. A collective bargaining agreement with the backing of the main union within the industry has been secured, and becomes effective in the first quarter of calendar year 2015. The production department performs two daily production runs, six days a week, and fifty weeks during the year. Material costs have been kept low in comparison to competitors, in result to short-term purchase commitments with suppliers. The sensors are sold through domestic and international distributors at a 25% mark up.

Recently, the government has placed additional requirements pertaining to environment and workplace issues. To address these problems, a recent plan has been developed to institute compliance and reporting systems within the manufacturing department. The plan consists of self-audits, investigating working conditions, and keeping better track of carbon emissions and activities that have a goal of enhancing workplace safety. Dynamic is the only company in the industry that has created this sort of mechanism. An independent appraisal valued Dynamic at $830 million in 2014.

ZD

The number of competitors in this industry has remained constant for the last six years, due to the fact that each company’s product contains technology that is very different from another. Manufacturing processes of competitors differ so much that it’s almost impossible for a new competitor to enter the industry. This organization is considered to be a huge driver of agricultural innovation. This company has such a specialized process, that it’s considered one of the most dominant in the industry. The company produces one batch of sensors each day, and operates 46 weeks of the calendar year. The average markup for one sensor is 53.85%. The company employs 1,200 individuals, including twelve members that are in management positions. During 2014, ZD was valued at $1.1 billion.