Sprint Nextel Case
Sprint Nextel Case Analysis 1. How much goodwill impairment charge did Sprint Nextel report in 2007?
During 2007, Sprint Nextel recorded a non-cash impairment charge of $29.7 billion in accordance with Statement of Financial Accounting Standards, or SFAS, No. 142 Goodwill and Other Intangible Assets. 2. Why did Sprint Nextel write down their goodwill in 2007? What are some other indicators for goodwill impairment in general?
Sprint Nextel wrote down their goodwill in 2007 primarily due to the company’s acquisition of Nextel in 2005 and reflects the reduction in estimated fair value of Sprint’s wireless reporting unit subsequent to the acquisition resulting from, among other factors, net losses of post-paid subscribers. Some other …show more content…
factors may include a sustained, significant decline in share price and market capitalization, a decline in our expected future cash flows, a significant adverse change in legal factors or in the business climate, unanticipated competition, the testing for recoverability of our long-lived wireless assets, and/or slower growth rates, among others.
3. How did Sprint Nextel reflect this impairment in financial statements?
During 2007, Sprint Nextel recognized a $29.7 billion non-cash impairment charge to goodwill related to the Wireless segment. This charge is presented separately in the 2007 statement of operations.
4. How often does Sprint Nextel test its goodwill for impairment and what are the testing steps?
Sprint Nextel reviews their goodwill for impairment annually in the fourth quarter, or more frequently if indicators of impairment exist. To assess goodwill for impairment: First, they compare the fair value of the wireless reporting unit with its net book value. They estimate the fair value of the wireless reporting unit using discounted expected future cash flows, supported by the results of various market approach valuation models. If the fair value of the wireless reporting unit exceeds its net book value, goodwill is not impaired, and no further testing is necessary. If the net book value of the wireless reporting unit exceeds its fair value, they perform a second test to measure the amount of impairment loss, if any. To measure the amount of any impairment loss, they determine the implied fair value of goodwill in the same manner as if the wireless reporting unit were being acquired in a business combination. Specifically, they allocate the fair value of the wireless reporting unit to all of the assets and liabilities of that unit, including any unrecognized intangible assets, in a hypothetical calculation that would yield the implied fair value of goodwill. If the implied fair value of goodwill is less than the goodwill recorded on the balance sheet, they record an impairment charge for the difference.
5. Certain Other indefinite-lived intangibles and other long-lived assets (including intangible assets with a finite life) are also subject to impairment assessment. Did Sprint Nextel incur any of these impairment charges in 2007? Explain briefly when and how Sprint Nextel tests these assets for impairment.
No, Sprint Nextel did not incur any of these impairment charges in 2007. During the fourth quarter 2007, Sprint Nextel performed their annual goodwill and other indefinite lived intangible asset impairment analyses. As a result, they recorded a non-cash impairment charge to goodwill of $29.7 billion.
In fourth quarter 2007, Sprint Nextel tested other indefinite lived intangibles for impairment by comparing the asset’s respective net book value to estimates of fair value, determined using the direct value method, and concluded that no impairment was necessary for these assets.
In conjunction with their annual assessment of goodwill for impairment, they performed a recoverability test of the wireless long-lived assets in accordance with SFAS No.
144, Accounting for the Impairment or Disposal of Long-Lived Assets. They included cash flow projections from their wireless operations along with cash flows associated with the eventual disposition of the long-lived assets, which included estimated proceeds from the sale of FCC licenses, trade names, and customer relationships. The undiscounted future cash flows of the wireless long-lived assets exceeded their net book value. As a result, no impairment charge was recorded. Sprint Nextel reviews their long-lived intangible asset groups for impairment under the same policy for property, plant and equipment, that is, whenever events or changes in circumstances indicate that the carrying amount may not be recoverable. Impairment analyses, when performed, are based on their current business and technology strategy, their views of growth rates for the business, anticipated future economic and regulatory conditions and expected technological availability. In addition, when their annual goodwill test requires them to determine the implied fair value of goodwill, they also evaluate the recorded value of our long-lived assets for …show more content…
impairment.
6. Is impairment of goodwill and other intangible assets reversible under U.S. GAAP? How about under IFRS? (Refer to FASB Topic 350 Intangibles—Goodwill and Other, and IAS 36 Impairment of Assets)
U.S. GAAP does not allow the reversal of impairment to goodwill or other intangible assets according to the standards set by FASB Topic 350. Reversal of losses is prohibited for all assets to be held and used.
According to code IAS 36.124, the IFRS does allow for impairments of finite assets to be reversed. The reversal limit in these scenarios is the original value recorded had the impairment not existed. However, under IFRS, goodwill impairments are prohibited to be reversed.
7.
Is goodwill impaired in the same way under IFRS? Does IFRS also employ a two-step approach for goodwill impairment testing? If not, how is goodwill tested for impairment under IFRS? (Refer to IAS 36 Impairment of Assets.)
Both U.S. GAAP and IFRS require goodwill to be written down when impaired. There are some differences between U.S. GAAP and IFRS in recognizing and recording impairment, but in principle, the ultimate goal is the same. Both standards require entities to test impairment for goodwill if there appears to be any indication that impairment may exist. Goodwill, along with any other indefinite lived assets, must be tested annually for impairment.
U.S. GAAP impairment testing process involves determining the level of impairment based on a valuation of the entire entities tangible and intangible assets. Under IFRS, however, the impairment is equal to the difference between the carrying value and the fair value of the entire entity.
There are also differences in testing for goodwill. U.S. GAAP uses a two-step process for determining and measuring the impairment. Step one compares the fair value to the carrying value. If the carrying value exceeds the fair value, the goodwill is impaired. To measure impairment, we must compare the fair value of all assets in which goodwill is measured using a residual
approach.
Under IFRS, the determination of impairment and the calculation of impairment are determined in one step. The recoverable value, which is the higher of the present value of future cash flows, is compared to the book value. Any impairment, which is the amount by which carrying values exceeds the recoverable value, is then allocated first to goodwill and then to the other intangible assets on a pro-rata basis.
During 2007, Sprint Nextel recorded a non-cash impairment charge of $29.7 billion in accordance with Statement of Financial Accounting Standards, or SFAS, No. 142 Goodwill and Other Intangible Assets. 2. Why did Sprint Nextel write down their goodwill in 2007? What are some other indicators for goodwill impairment in general?
Sprint Nextel wrote down their goodwill in 2007 primarily due to the company’s acquisition of Nextel in 2005 and reflects the reduction in estimated fair value of Sprint’s wireless reporting unit subsequent to the acquisition resulting from, among other factors, net losses of post-paid subscribers. Some other …show more content…
factors may include a sustained, significant decline in share price and market capitalization, a decline in our expected future cash flows, a significant adverse change in legal factors or in the business climate, unanticipated competition, the testing for recoverability of our long-lived wireless assets, and/or slower growth rates, among others.
3. How did Sprint Nextel reflect this impairment in financial statements?
During 2007, Sprint Nextel recognized a $29.7 billion non-cash impairment charge to goodwill related to the Wireless segment. This charge is presented separately in the 2007 statement of operations.
4. How often does Sprint Nextel test its goodwill for impairment and what are the testing steps?
Sprint Nextel reviews their goodwill for impairment annually in the fourth quarter, or more frequently if indicators of impairment exist. To assess goodwill for impairment: First, they compare the fair value of the wireless reporting unit with its net book value. They estimate the fair value of the wireless reporting unit using discounted expected future cash flows, supported by the results of various market approach valuation models. If the fair value of the wireless reporting unit exceeds its net book value, goodwill is not impaired, and no further testing is necessary. If the net book value of the wireless reporting unit exceeds its fair value, they perform a second test to measure the amount of impairment loss, if any. To measure the amount of any impairment loss, they determine the implied fair value of goodwill in the same manner as if the wireless reporting unit were being acquired in a business combination. Specifically, they allocate the fair value of the wireless reporting unit to all of the assets and liabilities of that unit, including any unrecognized intangible assets, in a hypothetical calculation that would yield the implied fair value of goodwill. If the implied fair value of goodwill is less than the goodwill recorded on the balance sheet, they record an impairment charge for the difference.
5. Certain Other indefinite-lived intangibles and other long-lived assets (including intangible assets with a finite life) are also subject to impairment assessment. Did Sprint Nextel incur any of these impairment charges in 2007? Explain briefly when and how Sprint Nextel tests these assets for impairment.
No, Sprint Nextel did not incur any of these impairment charges in 2007. During the fourth quarter 2007, Sprint Nextel performed their annual goodwill and other indefinite lived intangible asset impairment analyses. As a result, they recorded a non-cash impairment charge to goodwill of $29.7 billion.
In fourth quarter 2007, Sprint Nextel tested other indefinite lived intangibles for impairment by comparing the asset’s respective net book value to estimates of fair value, determined using the direct value method, and concluded that no impairment was necessary for these assets.
In conjunction with their annual assessment of goodwill for impairment, they performed a recoverability test of the wireless long-lived assets in accordance with SFAS No.
144, Accounting for the Impairment or Disposal of Long-Lived Assets. They included cash flow projections from their wireless operations along with cash flows associated with the eventual disposition of the long-lived assets, which included estimated proceeds from the sale of FCC licenses, trade names, and customer relationships. The undiscounted future cash flows of the wireless long-lived assets exceeded their net book value. As a result, no impairment charge was recorded. Sprint Nextel reviews their long-lived intangible asset groups for impairment under the same policy for property, plant and equipment, that is, whenever events or changes in circumstances indicate that the carrying amount may not be recoverable. Impairment analyses, when performed, are based on their current business and technology strategy, their views of growth rates for the business, anticipated future economic and regulatory conditions and expected technological availability. In addition, when their annual goodwill test requires them to determine the implied fair value of goodwill, they also evaluate the recorded value of our long-lived assets for …show more content…
impairment.
6. Is impairment of goodwill and other intangible assets reversible under U.S. GAAP? How about under IFRS? (Refer to FASB Topic 350 Intangibles—Goodwill and Other, and IAS 36 Impairment of Assets)
U.S. GAAP does not allow the reversal of impairment to goodwill or other intangible assets according to the standards set by FASB Topic 350. Reversal of losses is prohibited for all assets to be held and used.
According to code IAS 36.124, the IFRS does allow for impairments of finite assets to be reversed. The reversal limit in these scenarios is the original value recorded had the impairment not existed. However, under IFRS, goodwill impairments are prohibited to be reversed.
7.
Is goodwill impaired in the same way under IFRS? Does IFRS also employ a two-step approach for goodwill impairment testing? If not, how is goodwill tested for impairment under IFRS? (Refer to IAS 36 Impairment of Assets.)
Both U.S. GAAP and IFRS require goodwill to be written down when impaired. There are some differences between U.S. GAAP and IFRS in recognizing and recording impairment, but in principle, the ultimate goal is the same. Both standards require entities to test impairment for goodwill if there appears to be any indication that impairment may exist. Goodwill, along with any other indefinite lived assets, must be tested annually for impairment.
U.S. GAAP impairment testing process involves determining the level of impairment based on a valuation of the entire entities tangible and intangible assets. Under IFRS, however, the impairment is equal to the difference between the carrying value and the fair value of the entire entity.
There are also differences in testing for goodwill. U.S. GAAP uses a two-step process for determining and measuring the impairment. Step one compares the fair value to the carrying value. If the carrying value exceeds the fair value, the goodwill is impaired. To measure impairment, we must compare the fair value of all assets in which goodwill is measured using a residual
approach.
Under IFRS, the determination of impairment and the calculation of impairment are determined in one step. The recoverable value, which is the higher of the present value of future cash flows, is compared to the book value. Any impairment, which is the amount by which carrying values exceeds the recoverable value, is then allocated first to goodwill and then to the other intangible assets on a pro-rata basis.