GOODWILL PREPARATION QUESTIONS:

1. Examine the disclosures for Facebook/Meta (META)

• Review META’s balance sheets in 2013 vs. 2014. What large account changes might
suggest an acquisition has occurred?

• What was the purchase price paid by META? How did META choose to structure the
acquisition (cash vs. stock)?

• What values did META assign to WhatsApp’s assets and liabilities?

• What motivation might META have to assign value to goodwill as opposed to other
types of intangible assets?

2. From “Goodwill Accounting Spurs Deep Divisions…,” what is the FASB’s proposal with respect to
treating goodwill? Do you believe this proposal is logical? From “FASB Scraps Project on
Goodwill Accounting Disclosure”, why did the FASB ultimately decide not to make any changes?

3. Review the excerpt from PwC’s auditor’s report and the SEC Comment letter to Disney. What
are some of the issues facing Disney with respect to its reported goodwill balance?

ACCT 610: Goodwill Handout Page 1

 FACEBOOK, INC.
CONSOLIDATED BALANCE SHEETS
(In millions, except for number of shares and par value)
December 31,
2014 2013
Assets
Current assets:
Cash and cash equivalents $ 4,315 $ 3,323
Marketable securities 6,884 8,126
Accounts receivable, net of allowances for doubtful accounts of $39
and $38 as of December 31, 2014 and December 31, 2013,
respectively 1,678 1,109
Prepaid expenses and other current assets 793 512
Total current assets 13,670 13,070
Property and equipment, net 3,967 2,882
Intangible assets, net 3,929 883
Goodwill 17,981 839
Other assets 637 221
Total assets $ 40,184 $ 17,895

Liabilities and stockholders' equity

Current liabilities:
Accounts payable $ 176 $ 87
Partners payable 202 181
Accrued expenses and other current liabilities 866 555
Deferred revenue and deposits 66 38
Current portion of capital lease obligations 114 239
Total current liabilities 1,424 1,100
Capital lease obligations, less current portion 119 237
Other liabilities 2,545 1,088
Total liabilities 4,088 2,425
Commitments and contingencies
Stockholders' equity:
Common stock, $0.000006 par value; 5,000 million Class A shares
authorized, 2,234 million and 1,970 million shares issued and
outstanding, including 13 million and 6 million outstanding shares
subject to repurchase, as of December 31, 2014 and December 31,
2013, respectively…; — —
Additional paid-in capital 30,225 12,297
Accumulated other comprehensive (loss) income (228 ) 14
Retained earnings 6,099 3,159
Total stockholders' equity 36,096 15,470
Total liabilities and stockholders' equity $ 40,184 $ 17,895
See Accompanying Notes to Consolidated Financial Statements

ACCT 610: Goodwill Handout Page 2

Note 2. Acquisitions

WhatsApp

In October 2014, we completed our acquisition of WhatsApp Inc. (WhatsApp), a privately-held cross-
platform mobile messaging company that is expected to provide us with strategic advantages in the mobile
ecosystem and expand our mobile messaging offerings. Pursuant to the merger agreement, we issued
approximately 178 million shares of our Class A common stock and paid $4.59 billion in cash. We also granted 46
million RSUs to WhatsApp employees which are recognized as share-based compensation expense over the
employees' required service periods.

Upon acquisition, WhatsApp became our wholly-owned subsidiary. The acquisition was accounted for as a
business combination. This method requires, among other things, that assets acquired and liabilities assumed in a
business combination be recognized at their fair values as of the acquisition date.

The following table summarizes the components of the preliminary purchase consideration transferred
based on the closing price of $77.56 per share of our common stock as of the acquisition date (in millions):

Cash $ 4,589
Common stock 13,787
Less: post-acquisition share-based compensation and other compensation expense (1,067 )
Less: cash and promissory notes acquired on acquisition date (116 )
Purchase consideration $ 17,193

[DETAIL OMITTED BY INSTRUCTOR]

The following table summarizes the allocation of estimated fair values of the net assets acquired during the
year ended December 31, 2014, including the related estimated useful lives, where applicable:

Useful lives
(in millions) (in years)
Finite-lived intangible assets:
Acquired users $ 2,026 7
Trade names 448 5
Acquired technology 288 5
Other 21 2
IPR&D —
(Liabilities assumed) assets acquired (33 )
Deferred tax liabilities (899 )
Net assets acquired $ 1,851
Goodwill 15,342
Total fair value consideration $ 17,193

Goodwill generated from the WhatsApp acquisition is primarily attributable to expected synergies from
future growth, from potential monetization opportunities, from strategic advantages provided in the mobile
ecosystem, and from expansion of our mobile messaging offerings. Goodwill generated from all other business
acquisitions completed during the year ended December 31, 2014 is primarily attributable to expected synergies
from future growth, from potential monetization opportunities and, also for Oculus, as a potential to expand our
platform. All goodwill generated during this period is not deductible for tax purposes.

ACCT 610: Goodwill Handout Page 3

 MICROSOFT CORPORATION

NOTE 8 — BUSINESS COMBINATIONS

Nuance Communications, Inc.

On March 4, 2022, we completed our acquisition of Nuance Communications, Inc. (“Nuance”) for a total purchase
price of $18.8 billion, consisting primarily of cash. Nuance is a cloud and artificial intelligence (“AI”) software provider
with healthcare and enterprise AI experience, and the acquisition will build on our industry-specific cloud offerings.
The financial results of Nuance have been included in our consolidated financial statements since the date of the
acquisition. Nuance is reported as part of our Intelligent Cloud segment.

The purchase price allocation as of the date of acquisition was based on a preliminary valuation and is subject to
revision as more detailed analyses are completed and additional information about the fair value of assets acquired
and liabilities assumed becomes available.

The major classes of assets and liabilities to which we have preliminarily allocated the purchase price were as follows:

(In millions)

Goodwill (a) $ 16,308

Intangible assets 4,365
Other assets 59
Other liabilities (b) (1,971 )
Total $ 18,761

(a) Goodwill was assigned to our Intelligent Cloud segment and was primarily attributed to increased synergies
that are expected to be achieved from the integration of Nuance. None of the goodwill is expected to be
deductible for income tax purposes.
(b) Includes $986 million of convertible senior notes issued by Nuance in 2015 and 2017, of which $985 million
was redeemed prior to June 30, 2022. The remaining $1 million of notes are redeemable through their
respective maturity dates and are included in other current liabilities on our consolidated balance sheets as of
June 30, 2022.

Following are the details of the purchase price allocated to the intangible assets acquired:
Weighted
(In millions, except average life) Amount Average Life
Customer-related $ 2,610 9 years
Technology-based 1,540 5 years
Marketing-related 215 4 years
Total $ 4,365 7 years

Activision Blizzard, Inc.

On January 18, 2022, we entered into a definitive agreement to acquire Activision Blizzard, Inc. (“Activision Blizzard”)
for $95.00 per share in an all-cash transaction valued at $68.7 billion, inclusive of Activision Blizzard’s net cash.
Activision Blizzard is a leader in game development and an interactive entertainment content publisher. The
acquisition will accelerate the growth in our gaming business across mobile, PC, console, and cloud and will provide
building blocks for the metaverse. The acquisition has been approved by Activision Blizzard’s shareholders, and we
expect it to close in fiscal year 2023, subject to the satisfaction of certain regulatory approvals and other customary
closing conditions.

ACCT 610: Goodwill Handout Page 4

NOTE 8. GOODWILL AND OTHER INTANGIBLE ASSETS

CHANGES IN GOODWILL BALANCES

2018 2019
Balance at Dispositions and Currency Balance at Dispositions and Currency Balance at
December classifications exchange December classifications to exchange December
(In millions) 31, 2017 to held for sale Impairments and other 31, 2018 held for sale Impairments and other 31, 2019

Power $ 20,855 $ (1,903 ) $ (18,443 ) $ (369 ) $ 139 $ — $ — $ 6 $ 145

Renewable
Energy 7,626 (3 ) (2,859 ) (35 ) 4,730 — (1,486 ) 46 3,290
Aviation 10,008 (12 ) — (158 ) 9,839 — — 20 9,859
Healthcare 17,306 (21 ) — (58 ) 17,226 (5,558 ) — 59 11,728
Capital(a) 984 — — (80 ) 904 (39 ) — (26 ) 839
Corporate(b) 2,042 (81 ) (833 ) 9 1,136 — — (262 ) 873
Total $ 58,821 $ (2,020 ) $ (22,136 ) $ (691 ) $ 33,974 $ (5,597 ) $ (1,486 ) $ (157 ) $ 26,734

(a) Capital balance at December 31, 2019 is our GE Capital Aviation Services (GECAS) business.
(b) Corporate balance at December 31, 2019 is our Digital business.

ACCT 610: Goodwill Handout Page 5

From 2018 10-K (excerpted):

We test goodwill for impairment annually in the third quarter of each year using data as of July 1 of
that year. The impairment test consists of two steps: in step one, the carrying value of the reporting
unit is compared with its fair value; in step two, which is applied when the carrying value is more than
its fair value, the amount of goodwill impairment, if any, is derived by deducting the fair value of the
reporting unit’s assets and liabilities from the fair value of its equity, and comparing that amount with
the carrying amount of goodwill. We determined fair values for each of the reporting units using the
market approach, when available and appropriate, or the income approach, or a combination of both.
We assess the valuation methodology based upon the relevance and availability of the data at the time
we perform the valuation. If multiple valuation methodologies are used, the results are weighted
appropriately.

Valuations using the market approach are derived from metrics of publicly traded companies or
historically completed transactions of comparable businesses. The selection of comparable businesses
is based on the markets in which the reporting units operate giving consideration to risk profiles, size,
geography, and diversity of products and services. A market approach is limited to reporting units for
which there are publicly traded companies that have the characteristics similar to our businesses.

Under the income approach, fair value is determined based on the present value of estimated future
cash flows, discounted at an appropriate risk-adjusted rate. We use our internal forecasts to estimate
future cash flows and include an estimate of long-term future growth rates based on our most recent
views of the long-term outlook for each business. Actual results may differ from those assumed in our
forecasts. We derive our discount rates using a capital asset pricing model and analyzing published rates
for industries relevant to our reporting units to estimate the cost of equity financing. We use discount
rates that are commensurate with the risks and uncertainty inherent in the respective businesses and in
our internally developed forecasts. Discount rates used in our annual reporting unit valuations ranged
from 9.5% to 23.0% .

Based on the results of our annual impairment test, the fair values of each of our reporting units
exceeded their carrying values except for the Power Generation and Grid Solutions reporting units,
within our Power segment. The majority of the goodwill in our Power segment was recognized as a
result of the Alstom acquisition, at which time approximately $15,800 million of goodwill was
attributed to our Power Generation and Grid Solutions reporting units. As previously disclosed, the
power market as well as its operating environment continues to be challenging. Our outlook for Power
has continued to deteriorate driven by the significant overcapacity in the industry, lower market
penetration, uncertain timing of deal closures due to deal financing, and the complexities of working in
emerging markets. In addition, our near-term earnings outlook has been negatively impacted by project
execution and our own underlying operational challenges. Finally, market factors such as increasing
energy efficiency and renewable energy penetration continue to impact our view of long-term demand.
These conditions resulted in downward revisions of our forecasts on current and future projected
earnings and cash flows at these businesses.

Therefore, we conducted step two of the goodwill impairment test for the Power Generation and Grid
Solutions reporting units. Step two requires that we allocate the fair value of the reporting unit to
identifiable assets and liabilities of the reporting unit, including previously unrecognized intangible

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assets. Any residual fair value after this allocation is compared to the goodwill balance and any excess
goodwill is charged to expense.

In performing the second step, we identified significant unrecognized intangible assets primarily related
to customer relationships, backlog, technology, and trade name. The value of these unrecognized
intangible assets is driven by high customer retention rates in our Power business, our contractual
backlog, the value of internally created technology, and the GE trade name. The combination of these
unrecognized intangibles, adjustments to the carrying value of other assets and liabilities, and reduced
reporting unit fair values calculated in step one, resulted in an implied fair value of goodwill substantially
below the carrying value of goodwill for the Power Generation and Grid Solutions reporting units.
Therefore, in the third quarter of 2018, we recorded our best estimate of a non-cash impairment loss
of $21,973 million . We recorded the estimated impairment losses in the caption "Goodwill
impairments" in our consolidated Statement of Earnings (Loss). During the fourth quarter of 2018, we
finalized step two of the impairment analysis, and increased the impairment charge by $69 million
resulting in a final impairment charge of $22,042 million. The impairment loss included $833 million of
goodwill recorded at Corporate associated with our Digital acquisitions that was previously allocated to
our Power Generation and Grid solutions reporting units for goodwill testing purposes.

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ACCT 610
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 WALT DISNEY AND GOODWILL

Critical Audit Matters (Drawn from PwC’s auditor’s report, November 25, 2020)

The critical audit matters communicated below are matters arising from the current period audit of
the consolidated financial statements that were communicated or required to be communicated to the
audit committee and that (i) relate to accounts or disclosures that are material to the consolidated
financial statements and (ii) involved our especially challenging, subjective, or complex judgments. The
communication of critical audit matters does not alter in any way our opinion on the consolidated
financial statements, taken as a whole, and we are not, by communicating the critical audit matters
below, providing separate opinions on the critical audit matters or on the accounts or disclosures to
which they relate.

Goodwill – Interim Impairment Assessment for International Channels Reporting Unit

As described in Notes 2, 4 and 19 to the consolidated financial statements, the Company’s

consolidated goodwill balance was $77.7 billion as of October 3, 2020. Management tests goodwill for
impairment on an annual basis, and if current events or circumstances require, on an interim basis. In
the third quarter of fiscal 2020, management performed an impairment test of the International
Channels’ goodwill. The carrying value of the International Channels exceeded the fair value and
management recorded a non-cash impairment charge of $3.1 billion to fully impair the International
Channels reporting unit goodwill. The fair value was determined using a discounted cash flow
analysis. The determination of fair value required management to make assumptions and estimates
about how market participants would value the International Channels. The more sensitive inputs
used in the discounted cash flow analysis include future revenue growth and projected margins as
well as the discount rates used to calculate the present value of future cash flows.

The principal considerations for our determination that performing procedures relating to the
goodwill interim impairment assessment of the International Channels reporting unit is a critical audit
matter are the significant judgment required of management when determining the fair value of the
International Channels reporting unit, which in turn led to a high degree of auditor judgment,
subjectivity, and effort in performing procedures to evaluate management’s significant assumptions
related to future revenue growth, projected margins, and the discount rates used in the fair value
measurement of the International Channels reporting unit. In addition, the audit effort involved the
use of professionals with specialized skill and knowledge.
Addressing the matter involved performing procedures and evaluating audit evidence in
connection with forming our overall opinion on the consolidated financial statements. These procedures
included testing the effectiveness of controls relating to management’s goodwill interim impairment
assessment, including controls over the valuation of the International Channels reporting unit. These
procedures also included, among others, testing management’s process for determining the fair value
estimates, which included (i) evaluating the appropriateness of the discounted cash flow model; (ii)

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testing the completeness and accuracy of underlying data used in the model; and (iii) evaluating the
significant assumptions used by management related to the future revenue growth, projected margins
and discount rates. Evaluating management’s assumptions related to future revenue growth and
projected margins involved evaluating whether the assumptions used by management were reasonable
considering (i) the current and past performance of the reporting unit, (ii) the consistency with external
market and industry data, and (iii) whether these assumptions were consistent with evidence obtained
in other areas of the audit. Professionals with specialized skill and knowledge were used to assist in the
evaluation of the Company’s discount rates.

/s/ PricewaterhouseCoopers LLP

Los Angeles, California
November 25, 2020
We have served as the Company’s auditor since 1938.

S&P 500 Critical Audit Matters Related to Goodwill:

• 2019: 112
• 2020: 134
• 2021: 93

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 RESPONSE TO SEC COMMENT LETTER

March 23, 2021

By EDGAR Submission

Division of Corporation Finance

Office of Trade & Services
U.S. Securities and Exchange Commission
100 F Street, N.E.
Washington, D.C. 20549

RE: The Walt Disney Company

Form 10-K for the Fiscal Year Ended October 3, 2020 (filed November 25, 2020)
Form 10-Q for the Fiscal Quarter Ended January 2, 2021 (filed February 11, 2021)
File No. 001-38842

Dear Sir/Madam:

This letter responds to the comment contained in your letter dated March 2, 2021 with respect to The
Walt Disney Company’s Annual Report on Form 10-K for the fiscal year ended October 3, 2020 and The
Walt Disney Company’s Quarterly Report on Form 10-Q for the fiscal quarter ended January 2, 2021. For
convenience, we have repeated comments from your letter in bold print. In our response, the terms
“Company,” “our,” and “we” are used interchangeably to refer to the parent company and the
subsidiaries through which our various businesses are actually conducted.

1. Form 10-Q for Fiscal Quarter Ended January 2, 2021

Other Matters
Accounting Policies and Estimates
Goodwill, Other Intangible Assets, Long-Lived Assets and Investments, page 45

In regard to your Disney Parks, Experiences and Products segment, we note the following: (1) over
the last three fiscal quarters through January 2, 2021, revenues are significantly less than those of
the corresponding prior year quarter and segment operating income is negative in each of those
quarters, and (2) disclosures that (i) COVID-19 has most significantly impacted this segment; (ii)
certain parks remain closed or are operating at significantly reduced capacity, and cruise ship
sailings and guided tours have been suspended; (iii) impacts of COVID-19 on your businesses will
continue for an unknown length of time and you expect COVID-19 to adversely impact your
financial results at least through fiscal 2021; and (iv) COVID-19 has adversely impacted your net
cash flows, and projected cash flows you use to assess fair value of your businesses and assets for
purposes of impairment testing are subject to greater uncertainty than normal because of COVID-
19. It appears there is no discussion concerning impairment associated with this segment.
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 In view of the preceding, please explain to us your analysis of impairment of goodwill, other
intangible assets and long-lived assets for this segment pursuant to ASC 350-20-35, 350-30-35 and
360-10-35, as appropriate. In so doing, tell us the reporting units included in this segment and
whether any have been aggregated for purposes of goodwill impairment testing. Additionally,
explain to us the uncertainty associated with the projected cash flows for the total segment and
reporting units therein due to COVID-19 and how this impacted your analysis. If projected cash
flows have been adversely impacted, please tell us the extent and the impact on your analysis.

Company Response

The Company’s Disney Parks, Experiences and Products (DPEP) segment is composed of two reporting
units: Consumer Products and Parks & Experiences. The primary businesses in the Consumer Products
reporting unit are (a) licensing of our intellectual property (IP) for use with consumer merchandise and
(b) sales of branded merchandise at retail. This reporting unit’s primary assets are character/franchise
intangible assets that arose from the Company’s acquisitions of Marvel and Lucasfilm and goodwill. Our
Parks & Experiences reporting unit includes our theme parks and resorts around the world, as well as
our cruise line and Disney Vacation Club businesses. The primary assets in the Parks & Experiences
reporting unit are long-lived tangible assets. A substantial majority of the intangibles and goodwill of the
DPEP segment are in the Consumer Products reporting unit, while substantially all of the long-lived
assets are in the Parks & Experiences reporting unit.

Consumer Products

The Company tests its intangible assets subject to amortization, which includes our character/franchise
intangible assets, for impairment under ASC 350-30-35, Intangibles—goodwill and other, whenever
events or changes in circumstances indicate that their carrying amounts may not be recoverable.
While the Consumer Products business was impacted by the COVID-19 pandemic at its onset, the
severity decreased over the course of fiscal 2020 through our first quarter of fiscal 2021 which ended
January 2, 2021. In fact, the Consumer Products business revenue and operating income for the first
quarter of fiscal 2021 increased compared to the first quarter of 2020 ended December 28, 2019,
which, to a large extent was prior to the onset of the impacts of the COVID-19 pandemic. In addition,
our Consumer Products business is largely driven by licensing revenues generated from third-party
businesses throughout the world, including manufacturers, game developers, publishers and retailers
(both physical and online), which diversifies the impacts of the COVID-19 pandemic on this business.
Further, many of our licensing contracts include a guaranteed minimum amount of revenue.

In consideration of the above, through our first quarter of fiscal 2021, we do not believe there was an
indication that our Marvel and Lucasfilm character/franchise IP intangible assets would not be
recoverable given their long-term nature, diverse monetization channels, and the relatively short-term
adverse impacts the COVID-19 pandemic had on our Consumer Products business.

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In accordance with ASC 350-20-35, Intangibles—goodwill and other, we perform an annual goodwill
impairment test or sooner if an event occurs or circumstances change that would more likely than not
reduce the fair value of a reporting unit below its carrying amount. For fiscal 2020, we performed a
qualitative impairment test of goodwill for the Consumer Products reporting unit to determine if it was
more likely than not that the fair value of the reporting unit was less than its carrying amount.

As part of our assessment for fiscal 2020, we considered that the quantitative goodwill impairment
analysis we performed in fiscal 2019 indicated the fair value of the Consumer Products reporting unit
exceeded its carrying amount by a substantial margin. In light of the fact that we believed the impacts of
the COVID-19 pandemic on our Consumer Products reporting unit would be relatively temporary, as
supported by the recovery we have already seen, we concluded that the expected short-term impact
was not significant enough to reduce the fair value of the reporting unit below its carrying amount.

Parks & Experiences

The Company tests its long-lived assets, which includes our theme parks and resorts and cruise ships for
impairment under ASC 360-10-35, Property, plant, and equipment. Accordingly, we perform an
impairment analysis whenever events or changes in circumstances indicate that their carrying amounts
may not be recoverable.

With the closure of our theme parks and suspended sailing of our cruise ships at the onset of the
COVID-19 pandemic, we reviewed these assets for impairment during fiscal 2020.

Given the unknown duration and severity of the COVID-19 pandemic and its impact on our operations
and ability to forecast cash flows with a normal level of certainty, we performed an impairment analysis
of the assets of each of our theme park and resort businesses and our cruise ship business. This
analysis was based on the amount by which projected cash flows from the Company’s most recent
long-range business plan prepared shortly before the impact of the COVID-19 pandemic exceeded the
book value of the assets of each of the businesses. Given the long-term nature of these assets and the
cash flows these businesses generate, the undiscounted cash flows in this long-range plan significantly
exceeded the carrying amounts of the assets. Based on the level of cushion between the cash flows
and book value of the assets, we determined that all of these businesses could sustain several years of
non-operation before their long-lived assets would not be recoverable. Since the businesses first shut
down we have been able to begin operating under capacity constraints, even prior to the full
distribution of vaccines. As such, we concluded that the severity and duration of the COVID-19 pandemic
was unlikely to reach levels that would result in the carrying amounts of any of these long-lived assets
not being recoverable.

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For the goodwill that is attributable to the Parks & Experiences reporting unit, we also performed a
qualitative assessment under ASC 350-20-35 and considered the significant excess of this reporting
unit’s fair value compared to its book value from the 2019 quantitative test. Given our expectations of
the duration of the impacts of the COVID-19 pandemic on our Parks & Experiences businesses, we
concluded these impacts were not significant enough to reduce the fair value of the reporting unit
below its carrying amount.

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