Goodwill and Impairment of Asset Essay Assignment.
Aim of the memo is to highlight the issues recently raised by IASB in context of goodwill and impairment. Goodwill is generally reported by the entity while it acquires any other entity and the same is reported to reflect the future profit that is expected to be generated from the assets those are acquired in the process of acquisition or merger not separately identified. Goodwill and Impairment of Asset Essay Assignment. Initially, in accordance with AASB 136 / IAS 36, goodwill used to be tested only for annual impairment. However, owing the users and investor’s concerns regarding the present practice IASB board is considering reintroduction of goodwill amortization in replacement of the existing approach of impairment-only. Hence, the memo will critically analyse the amortization approach as against the impairment only approach.
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As per IAS 36, Para 90, goodwill acquired in the process of business combination shall be annually tested for the purpose of impairment irrespective of whether there is any warning for impairment or not and the same came into force in 2004. Goodwill and Impairment of Asset Essay Assignment. However prior to that period IAS 22 business combination required that the acquired goodwill shall be amortised over the useful life with the assumption that the useful life will not exceed 20 years. In case the assumption invalidates, the goodwill acquired shall be tested for the purpose of impairment at least once at the closing of each financial year regardless of whether there is any warning for impairment or not. However, different issues identified by the board in context of the same are – (i) generally it is impracticable predicting goodwill’s useful life along with the pattern in which the same reduces. Owing to the same, amortisation amount is the best possible way to describe the amount of goodwill consumption in arbitrary manner (ii) amortisation provided in straight line basis over the arbitrary useful life is not able to provide the useful information (iii) in case operational and rigorous impairment test is developed, the entity will be able to offer more useful information to the users of financial statement where amortisation of goodwill is used. Goodwill and Impairment of Asset Essay Assignment.
Hence, number of participants in PIR (post-implementation review) of IFRS 3 suggested reintroduction of goodwill amortisation. Different advantages in context of the same also highlighted are – (i) some of the investors were in the view that impairment-only method is useful for associating price that is paid for acquiring and for computing return on the invested capital, verifying acquisition is performing as per expectation. Further various participants felt that the losses on account of impairment are identified too late or not identified in timely manner. It was felt that the same have only confirmatory value and does not have predictive value (ii) different participants felt that procedure of impairment test is time consuming, expensive, complex and require significant judgements.
Arguments those can be placed for reintroducing the amortisation are – (i) consideration of PIR was contentious or crucial in the development phase of standard and is anticipated to recognise the areas where implementation issues or unexpected costs have been met. Goodwill and Impairment of Asset Essay Assignment.One of these crucial issues is amortisation (ii) decision of the board for implementing the impairment–only approach was established on conclusion that the same will offer more useful information to the financial statement users and impairment test was operational as well as rigorous. Questionable conclusion in context of the same were – (a) though some of the stakeholders feel that impairment test offer useful information, value provided by the same is confirmatory only (b) losses on account of impairment often are not reported in timely manner and it raise doubts regarding whether impairment test is rigorous (iii) feedback specified that impairment test is time consuming, expensive and complex and hence creates doubts whether it is operation to the extent it was considered by the board. Goodwill and Impairment of Asset Essay Assignment.
On the other hand, arguments those can be placed for retaining impairment-only approach are – (i) amortisation charge offers the financial statement users with no useful information in case the useful life is arbitrary (ii) some of the investors informed that impairment-only approach is useful for associating the price that is paid for acquiring and for computing return on the invested capital, verifying acquisition is performing as per expectation.
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They further mentioned that the information offered by impairment test is useful as it has confirmatory value. On the contrary, they feel that goodwill amortisation in subsequent years may provide ambiguous price that is originally paid and hence, become more difficult in analysing the stewardship. In addition, amortisation will reduce opportunity of impairment to take place. Hence, introduction of amortisation will mask the goodwill impairment along with some amortisation charges that will further reduce usefulness of information offered by impairment test. Amortisation reintroduction will lower the information quality and the same can be difficult for supporting re-introduction of amortisation of goodwill if the information is less useful. Goodwill and Impairment of Asset Essay Assignment.
While reviewing both the arguments question that the board was facing is not to access whether the goodwill amortisation is better approach in context of concepts for succeeding accounting for goodwill as against the approach of impairment-only. Rather question here is whether strong case is there for making changes for reintroducing goodwill amortisation approach and whether any benefits will exceed the disruption and cost that will be resulted into for changing again the requirements. Goodwill and Impairment of Asset Essay Assignment.However, it can be concluded that reintroducing the amortisation model will not solve the issue associated with impairment-only approach to recognise the loss in timely manner. In addition while the goodwill’s useful life is arbitrary carrying amount of goodwill acquired after deducting the charges of amortisation will not provide the original benefits from business combination that will considerably be better as compared to impairment-only approach. Hence, these facts shall be kept in mind before reintroducing the amortisation approach. Goodwill and Impairment of Asset Essay Assignment.