Posted: November 2nd, 2015

Case 13-04 Gator Electronics

Case 13-04
Gator Electronics
Gator Electronics Inc. (“Gator”) is an electronics manufacturer that sells electronic
products to third-party retail centers in approximately 100 countries. Gator is an SEC
registrant. Gator has identified its reporting units as geographical regions in which it
operates, and the chief decision makers manage and review operating results and
performance. The reporting units are:
• United States
• South America
• Canada
• Asia
• Europe, Africa, and the Middle East.
You are planning to audit the current-year goodwill impairment analysis of Gator.
Gator’s total assets as of December 31, 20X3, are approximately $1.6 billion. Revenue
and net income for the year ended December 31, 20X3, are approximately $1.7 billion
and $0.1 billion, respectively.
Gator has performed its annual goodwill impairment analysis as of December 31, 20X3,
with the assistance of an external valuation specialist, Management’s Expert. Gator
elected not to perform the qualitative assessment for determining whether it is more
likely than not that the fair value of a reporting unit is less than its carrying amount and
proceeded with Step 1 of the quantitative two-step goodwill impairment test for all
reporting units.
On the basis of the valuation prepared by Management’s Expert, Gator estimated that the
fair value of all of the reporting units exceeded their respective carrying values and no
Step 2 analysis was required or prepared.
The focus of this case study will be on the U.S. reporting unit.
The engagement partner has determined that goodwill for the U.S. reporting unit is a
material account balance as of December 31, 20X3, because it is quantitatively
significant ($280 million) and qualitatively significant because of its susceptibility to
misstatement arising primarily from recent market declines. The engagement partner has
asked you to review Gator’s discounted cash flow analysis (part of Step 1 test in
determining fair value of the reporting unit) to determine what audit procedures should be
performed. Gator management has also provided you the valuation schedules (Handout 1)
and a memo documenting its strategy (Handout 2).
Required:
1. What are some of the key assumptions within Gator’s discounted cash flow
analysis?
2. What questions or concerns do you have for management on some of these key
assumptions?
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Case 13-04c: Gator Electronics Page 2
3. What audit procedures could you perform on some of the significant business
assumptions within Gator’s discounted cash flow analysis? (Focus on the
substantive testing procedures and assume the control testing is addressed
elsewhere).