Panzer is a U.S. company.  It originated in the 1970s as a family-owned business that manufactures fine watches. The family continued to build the company by reinvesting profits into new and more efficient manufacturing technology.  The growth was done by acquiring individual assets rather than existing businesses.  In 2003, the family needed to cash out, so they sold the entire operations of Panzer to a German company.  To this day, Panzer remains a wholly-owned subsidiary of the German company.

Panzer has loans from a U.S. investor, and the investor demands audited U.S. GAAP financial statements.  Panzer's parent is publicly traded in Europe, so Panzer must also prepare financial results under IFRS which are then consolidated with the remaining results of its parent. 

In addition to its U.S. operations, Panzer acquired a smaller competing company located in Switzerland in 2009, and this acquisition resulted in $300,000 of goodwill being recorded on Panzer's books.

Panzer has a December 31 year-end.  No goodwill impairments were deemed necessary in 2009, 2010 and 2011.  Panzer's management has provided the following information regarding its operations as of December 31, 2012:

The Swiss subsidiary reported a profit of $320,000 in 2011, which was slightly higher than expected.  As of December 2012, the company expects profits to increase by 2%.

The following describe some of the conditions in late 2012:

The primary customers of Panzer's U.S. operations are in the U.S.  The crash of housing prices resulted in the U.S. economy slowing. GDP has declined slightly and no one is sure when more prosperous times will return.

The worldwide market for watches in reasonably strong in 2012, and forecasts suggest increased unit sales for the next few years.  However, the growth may not occur uniformly in all countries.

The Swiss manufacturing center had been run by Jon Tyme, a master watchmaker with over 20 years of experience in crafting watches and another 12 years of experience managing the center.  Panzer decided in November 2012 to transfer Mr. Tyme to head its U.S. operations.  Mr. Tyme's replacement has been making watches at the Swiss subsidiary for 10 years but does not have any managerial experience.

Part 1:

Issue 1: U.S. GAAP reporting

As of 12/31/2012, does Panzer need to perform a quantitative test for impairment of its goodwill?  Explain the U.S. GAAP guidance and the specific facts of the case that are most important in reaching your conclusion.

Part 2:

Additional information and issues:

Without prejudice to your answer to Issue 1, assume that Panzer has decided to undertake a quantitative test of whether its Swiss goodwill is impaired.  Panzer's management provides some additional information about the Swiss operations:

• The value in use of the Swiss operations is $1.8 million.
• The present value of future cash flows from the Swiss operations is $2.1 million. The $2.1 million represents the fair value of the Swiss operations.
• The cost to sell the Swiss operations would be $400,000.
• The fair value of the Swiss PP&E is $3.12 million. However, it is not possible to estimate the recoverable amounts or values in use of the individual PP&E assets. The recoverable amount for the land equals its carrying value. The fair values of the liabilities equal their carrying values.

Issue 2: U.S. GAAP reporting

As of 12/31/2012, is goodwill impaired under U.S. GAAP?  If so, determine the impairment loss.

Issue 3: IFRS reporting

As of 12/31/2012, is goodwill impaired under U.S. IFRS?  If so, determine the impairment loss.

Issue 4: both reporting regimes

Sometimes, circumstances leading to an impairment of goodwill reverse in the future, and as a result, the implied value of the goodwill exceeds its original (before impairment) cost.  If this happens to Panzer, can the company reverse its 2012 goodwill impairment (assuming some amount of impairment was recorded in 2012)?  Can Panzer write-up the value of goodwill on its books to an amount greater than its original cost basis? Answer separately for U.S. GAAP and IFRS.