Sony is a Japanese multinational company that decided to expand its entertainmen

Question

Sony is a Japanese multinational company that decided to expand its entertainment business in the United States. Sony purchased CBS Records and Columbia Pictures to form Sony Music and Sony Pictures. Because of these acquisitions, Sony assumed debt of $1.2 billion and allocated $3.8 billion to goodwill. On Sony’s Annual Report filed with the SEC, Sony reported only two industry segments: electronics and entertainment. Although Sony Music was profitable, Sony Pictures produced continued losses of approximately $1 billion. When Sony purchased the motion pictures operations, it projected a loss for only five years because it assumed that the motion pictures entertainment would become profitable. However, Sony suffered a significant loss after amortization and the costs of financing the acquisition for the past four years.

In the current year, Sony Pictures sustained a loss of nearly $450 million, double the amount that Sony had planned. To date, Sony Pictures has had total net losses of nearly $1billion. Early in the year, Sony declared that it had written down $2.7 billion in goodwill associated with the acquisition of Sony Pictures. Sony combined the results of Sony Music and Sony Pictures and reported them as Sony Entertainment. Little profit was shown in Sony Entertainment. Sony’s consolidated financial statements did not disclose the losses from Sony Pictures.

REQUIRED

1. How should the write down of goodwill be reported? What information (if any) should be disclosed related to goodwill?

2. Since Sony has two businesses with different financial trends, should the consolidated financial statements provide specific segment disclosure information? What should the company disclose?

3. Reporting insufficient information or excluding required disclosures can be misleading or perceived as unethical. What ethical standards applicable to Sony’s reporting?

You may respond to each requirement separately, i.e. your response does not have to flow as a single paper.

NOTE: Please support your discussion with FASB Codification and reputable sources (NOT Wikipedia, Investopedia or Blogs) where applicable.

Explanation / Answer

1. When the value of goodwill goes down, it is generally due to decreased brand value, negative market information about the company or the need to adjust for overpaying for the company. Now, if the value declines, an impairment charge is recorded (reduced) from the income statement and results in a decrease from net income and earnings.

2.  Sony combined the results of Sony Music and Sony Pictures and reported them as Sony Entertainment. Little profit was shown in Sony Entertainment. Sony’s consolidated financial statements did not disclose the losses from Sony Pictures. - This is totally against the IFRS.

Information is material if its omission or misstatement could influence the economic decisions of users taken on the basis of the financial statements (IASB Framework).

3. The objective of IFRS 10 is to establish principles for the presentation and preparation of consolidated financial statements when an entity controls one or more other entities. Thus they should show Loss from subsidiary clearly.

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