Professional Documents
Culture Documents
Warranty Reserves
The warranty reserve represents expected future cost related to sales of a company's product; it is estimated and recorded when the product is sold The estimate is typically based on past experience of the company and adjusted for
Changes in the product, including those that change its quality
Pension Obligations
The amount of pension obligations are based on a number factors:
Projected lifetime of pensioners Nature of the pension plan Future earnings of employees prior to retiring Earnings rate on invested pension assets Long-term interest rates used to discount future costs Changes in pension plans
Mandatory redeemable preferred stock Stock options and warrants Stock options - employee stock compensation program
Auditor must assess likelihood of acquired entity meeting performance objectives - if highly likely, the full cost should be recognized at the time of acquisition
Valuation of Goodwill
Goodwill is the excess of purchase cost over the fair market value of tangible and intangible assets acquired in a purchase SFAS 142 requires goodwill be specifically identified with an operating or reporting unit
Important so goodwill can be tested for impairment on an yearly basis Valuation and testing of impairment is facilitated if company uses capital budgeting process
LO 4 Restructuring Charges
When companies restructure operations, GAAP requires companies recognize the cost of restructuring and associated liabilities The auditor should examine restructuring charges though these procedures:
Review FASB pronouncements and EITF statements Review how company estimated restructuring charges
The impairment is measured as the difference between the implied fair value of goodwill and its carrying amount.
The company must determine the fair market value of the reporting unit and compare it to the reporting unit's carrying value (including goodwill)
If fair market value is less than carrying value, it is inferred that goodwill has been impaired and must be written down
If fair market value is less than carrying value, it is inferred that goodwill has been impaired and must be written down The reporting unit may be the company or a sub-unit of the company
Audit tests for goodwill impairment will require considerable judgment and business knowledge